For the fiscal year ended December 31, 2004
OR
Commission File Number 001-32389
NTS REALTY HOLDINGS LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
| Delaware | 41-2111139 |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
| incorporation or organization) | |
| 10172 Linn Station Road | 40223 |
| Louisville, Kentucky | (Zip Code) |
| (Address of principal executive offices) |
(502) 426-4800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Limited Partnership Units | American Stock Exchange |
| (Title of each class) | (Name of each exchange on which registered) |
Securities pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]
The American Stock Exchange began to list the registrant's limited partnership units on December 29, 2004. Therefore, as of June 30, 2004, the aggregate market value of the registrant's limited partneship units held by non-affilaites was $0. As of March 1, 2005, there were 11,381,608 limited partnership units outstanding.
Documents Incorporated by Reference: Portions of the registrant's proxy statement for the annual meeting of limited partners to be held in 2005 are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14.
TABLE OF CONTENTS
PART I
| Pages | ||||
| Item 1. | Business | 3-8 | ||
| Item 2. | Properties | 9-16 | ||
| Item 3. | Legal Proceedings | 17 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 18 |
PART II
| Item 5. | Market for Registrant's Limited Partnership Units and Related Partner Matters | 19 | ||
| Item 6. | Selected Financial Data | 20-21 | ||
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 22-84 | ||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 85 | ||
| Item 8. | Financial Statements and Supplementary Data | 86-140 | ||
| Item 9. | Change in and Disagreements with Accountants on Accounting and Financial Disclosure | 141 | ||
| Item 9A. | Controls and Procedures | 142 |
PART III
| Item 10. | Directors and Executive Officers of the Registrant | 143 | ||
| Item 11. | Executive Compensation | 143 | ||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management | 143 | ||
| Item 13. | Certain Relationships and Related Transactions | 143 | ||
| Item 14. | Principal Accountant Fees and Services | 143 |
PART IV
| Item 15. | Exhibits and Financial Statement Schedules | 144-147 | ||
| Signatures | 148 |
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Some of the statements included in this Form 10-K, particularly those included in Part I, Items 1 and 2 – Business and Properties, and Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), may be considered “forward-looking statements” because the statements relate to matters which have not yet occurred. For example, phrases such as “we anticipate,” “believe” or “expect” indicate that it is possible that the event anticipated, believed or expected may not occur. If these events do not occur, the result which we expected also may, or may not, occur in a different manner, which may be more or less favorable to us. We do not undertake any obligation to update these forward-looking statements.
Any forward-looking statements included in MD&A, or elsewhere in this report, reflect our managing general partner’s best judgment based on known factors, but involve risks and uncertainties. Actual results could differ materially from those anticipated in any forward-looking statements as a result of a number of factors, including but not limited to those described in our filings with the Securities and Exchange Commission, particularly our registration statement on Form S-4 which became effective October 27, 2004. Any forward-looking information provided by us pursuant to the safe harbor established by the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.
Our Form 10-K for the year ended December 31, 2004 includes predecessor financial statements and information for the period from January 1 to December 27, 2004 and for the years ended December 31, 2003 and 2002. The information for the period ended December 27, 2004 is the equivalent to a full calendar year as our predecessors’ operations were substantially complete for the year 2004 as of that date and as reported herein.
NTS Realty Holdings Limited Partnership (“NTS Realty,” “we,” “us” or “our”) was organized as a limited partnership in the State of Delaware in 2003. The Partnerships were formed between 1982 and 1987 to invest in fixed portfolios of commercial and multifamily properties. Our registration statement on Form S-4 was made effective by the Securities and Exchange Commission (“SEC”) on October 27, 2004 with respect to a proposed merger of NTS-Properties III; NTS-Properties IV; NTS-Properties V, a Maryland limited partnership; NTS-Properties VI, a Maryland limited partnership; and NTS-Properties VII, Ltd. (the “Partnerships”) registered under the Securities Exchange Act of 1934, along with other real estate entities affiliated with their general partners, specifically Blankenbaker Business Center 1A and the NTS Private Group’s assets and liabilities. The merger was completed on December 28, 2004 after a majority of each Partnership’s limited partners voted for the merger. The Partnerships and Blankenbaker Business Center 1A were terminated by the merger and ceased to exist. Concurrent with the merger, ORIG, LLC, a Kentucky limited liability company (“ORIG”), affiliated with the Partnerships’ general partners, contributed substantially all of its assets and liabilities to NTS Realty, including the NTS Private Group properties. The merger was part of a court approved settlement of class action litigation involving the Partnerships. Prior to the merger and contribution, we had no operations and a limited amount of assets.
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Following the merger and contribution and as of December 31, 2004, we own thirty-two properties, comprised of: nine multifamily properties; nineteen office and business centers; three retail properties; and one ground lease. The properties are located in and around Louisville (22) and Lexington (3), Kentucky; Orlando (2) and Fort Lauderdale (3), Florida; Indianapolis (1), Indiana and Atlanta (1), Georgia. Our office and business centers aggregate approximately 1.7 million square feet. We own multifamily properties containing approximately 1,350 units and retail properties containing approximately 210,000 square feet of space, as well as one ground lease associated with a 120-space parking lot attached to one of our properties.
On December 29, 2004, the American Stock Exchange began to list our limited partnership units (the “Units”) for trading. Our Units currently are listed on the American Stock Exchange under the trading symbol “NLP.”
NTS Realty Capital, Inc. (“NTS Realty Capital”) and NTS Realty Partners, LLC serve as our general partners. Our partnership agreement vests principal management discretion in our managing general partner, NTS Realty Capital, which has the exclusive authority to oversee our business and affairs, subject only to the restrictions in our certificate of limited partnership and partnership agreement. NTS Realty Capital has a five-member board of directors, the majority of whom must be considered to be “independent directors” under the standards promulgated by the American Stock Exchange. Our limited partners have the power to elect these directors on an annual basis.
We do not have any employees. We have entered into a management agreement with NTS Development Company (“NTS Development”), an affiliate of our general partners, whereby NTS Development oversees and manages the day-to-day operations of our properties. The initial term of the management agreement is one year, provided that NTS Realty Capital is permitted to terminate the agreement on sixty days’ notice. Under this agreement, NTS Development is responsible for managing each of our properties and in return will receive, in most cases, an annual fee equal to 5% of all gross revenues generated by multifamily properties and 6% of all gross revenues generated by commercial properties. However, we will continue to pay NTS Development a fee equal to 5% of all gross revenues generated by the three properties we acquired in the merger from NTS-Properties III. NTS Development’s management fee is paid monthly. NTS Development is also reimbursed for its direct out-of-pocket expenses incurred in operating our properties, including the cost of any goods or services obtained on our behalf from unaffiliated third parties and the salaries or wages of all property management personnel, excluding the chairman, president and chief executive officer of NTS Realty Capital.
Our executive offices are located at 10172 Linn Station Road, Suite 200, Louisville, Kentucky 40223, and our phone number is (502) 426-4800.
Since our formation, our business and investment objectives have been to:
| • | generate cash flow for distribution; |
| • | obtain long-term capital gain on the sale of any properties; |
| • | make new investments in properties or joint ventures, including by, directly or indirectly, developing new properties; and |
| • | preserve and protect the limited partners' capital. |
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The board of directors of NTS Realty Capital, in the board’s sole discretion, may change these investment objectives as it deems appropriate and in our best interests. Prior to changing any of the investment objectives, the board will consider, among other factors, expectations, changing market trends, management expertise and ability and the relative risks and rewards associated with any change.
We intend to reach our business and investment objectives through our acquisition and operating strategies. Our acquisition and operating strategies are to:
| • | maintain a portfolio which is diversified by property type and to some degree by geographical location; |
| • | achieve and maintain high occupancy and increase rental rates through: (1) efficient leasing strategies, and (2) providing quality maintenance and services to tenants; |
| • | control operating expenses through operating efficiencies and economies of scale; |
| • | attract and retain high quality tenants; |
| • | invest in properties that we believe offer significant growth opportunity; and |
| • | emphasize regular repair and capital improvement programs to enhance the properties’ competitive advantages in their respective markets. |
We compete with other entities both to locate suitable properties for acquisition, to locate purchasers for our properties and to locate tenants to rent space at each of our properties. Although our business is competitive, it is not seasonal. While the markets in which we compete are highly fragmented with no dominant competitors, we face substantial competition. This competition is generally for the retention of existing tenants at lease expiration or for new tenants when vacancies occur. There are numerous other similar types of properties located in close proximity to each of our properties. We maintain the suitability and competitiveness of our properties primarily on the basis of effective rents, amenities and services provided to tenants. The amount of leasable space available in any market could have a material adverse effect on our ability to rent space and on the rents charged. Competition to acquire existing properties from institutional investors and other publicly traded real estate limited partnerships and real estate investment trusts has increased substantially in the past several years. In many of our markets, institutional investors and owners and developers of properties compete vigorously to acquire, develop and lease space. Many of these competitors have substantially more resources than us.
We believe that we have competitive advantages that will enable us to be selective with respect to additional real estate investment opportunities. Our competitive advantages include:
| • | substantial local market expertise where we own properties; |
| • | long standing relationships with tenants, real estate brokers and institutional and other owners of real estate in our markets; and |
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| • | fully integrated real estate operations that allow us to respond quickly to acquisition opportunities. |
We pay distributions if and when authorized by our managing general partner. We are required to pay distributions on a quarterly basis, commencing in the first quarter of 2005, equal to sixty-five percent (65%) of our “net cash flow from operations” as this term is defined in regulations promulgated by the Treasury Department under the Internal Revenue Code of 1986, as amended; provided that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity level taxation for federal, state or local income tax purposes, we will adjust the amount distributed to reflect our obligation to pay tax. Any distribution other than a distribution with respect to the final quarter of a calendar year shall be made no later than forty-five (45) days after the last day of such quarter based on our estimate of “net cash flow from operations” for the year. Any distribution with respect to the final quarter of a calendar year shall be made no later than ninety (90) days after the last day of such quarter based on actual “net cash flow from operations” for the year, adjusted for any excess or insufficient distributions made with respect to the first three quarters of the calendar year. For these purposes, “net cash flow from operations” means taxable income or loss, increased by:
| • | tax-exempt interest; |
| • | depreciation; |
| • | amortization; |
| • | cost recovery allowances; and |
| • | other noncash charges deducted in determining taxable income or loss, and decreased by: |
| • | principal payments on indebtedness; |
| • | property replacement or reserves actually established; |
| • | capital expenditures when made other than from reserves or from borrowings, the proceeds of which are not included in operating cash flow; and |
| • | any other cash expenditures not deducted in determining taxable income or loss. |
As noted above, “net cash flow from operations” is reduced by the amount of reserves as determined by us each quarter. NTS Realty Capital will establish these reserves for, among other things, working capital or capital improvement needs. Therefore, there is no assurance that we will have net cash flow from operations from which to pay distributions in the future. For example, our partnership agreement permits our managing general partner to reinvest sales or refinancing proceeds in new and existing properties or to create reserves to fund future capital expenditures. Because net cash flow from operations is calculated after reinvesting sales or refinancing proceeds or establishing reserves, we may not have any net cash flow from operations from which to pay distributions.
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We will consider the acquisition of additional multifamily properties, retail properties, office buildings and business centers from time to time, with our primary emphasis on multifamily and retail properties. These properties may be located anywhere within the continental United States; however, we will continue to focus on the Midwest and Southeast portions of the United States. We will evaluate all new real estate investment opportunities based on a range of factors including, but not limited to: (1) rental levels under existing leases; (2) financial strength of tenants; (3) levels of expense required to maintain operating services and routine building maintenance at competitive levels; (4) levels of capital expenditure required to maintain the capital components of the property in good working order and in conformity with building codes, health, safety and environmental standards. We also plan not to acquire any new properties at a capitalization rate less than five percent (5%). Any properties we acquire in the future would be managed and financed in the same manner as the properties that we acquired in the merger, and we will continue to enforce our policy of borrowing no more than seventy percent (70%) of the sum of: (a) the appraised value of our fully-constructed properties and (b) the appraised value of our properties in the development stage as if those properties were completed and ninety-five percent (95%) leased.
In addition to the foregoing, we may engage in transactions structured as “like kind exchanges” of property to obtain favorable tax treatment under Section 1031 of the Internal Revenue Code. If we are able to structure an exchange of properties as a “like kind exchange,” then any gain we realize from the exchange would not be recognized for federal income tax purposes. The test for determining whether exchanged properties are of “like kind” is whether the properties are of the same nature or character.
We must obtain the approval of the majority of NTS Realty Capital’s independent directors before we may enter into a contract or a transaction with either of our general partners or their respective affiliates. In addition, we are prohibited from:
| • | acquiring or leasing any properties from, or selling any properties to, either of our general partners or their respective affiliates; |
| • | leasing more than fifteen percent (15%) of any property to our general partners or their affiliates; provided further, that any lease that we enter into with our general partners or their affiliates must be on terms and conditions, and at a rental value, no less favorable to us than those which have been determined by arms’ length negotiations with an unaffiliated third party; |
| • | making any loans to our general partners or their affiliates; |
| • | acquiring any properties in exchange for Units; |
| • | paying any insurance brokerage fee to, or obtaining an insurance policy from, our general partners or their affiliates; and |
| • | commingling our funds with funds not belonging to us. |
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NTS Realty Capital, through its board of directors, will determine our distribution, investment, financing and other policies. The board reviews these policies at least annually to determine whether they are being followed and if they are in the best interests of our limited partners. The board may revise or amend these policies at any time without a vote of the limited partners.
Information about our working capital practices is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.
Each of our general partners is controlled directly or indirectly by Mr. J.D. Nichols. Mr. Nichols beneficially owns approximately 56% of our Units. Other entities controlled directly or indirectly by Mr. Nichols have made and may continue to make investments in properties similar to those that we acquired in the merger or contribution. In addition, affiliates of our general partners currently own vacant lots located adjacent to Blankenbaker Business Centers 1A and 1B and Outlets Mall. These affiliates may acquire additional properties in the future which are located adjacent to properties that we acquired in the merger or contribution.
We believe that our portfolio of properties complies in all material respects with all federal, state and local environmental laws, ordinances and regulations regarding hazardous or toxic substances. During approximately the last ten years, independent environmental consultants have conducted Phase I or similar environmental site assessments on a majority of the properties that we acquired in the merger. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments may not, however, have revealed all environmental conditions, liabilities or compliance concerns.
We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (the “SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We make available, free of charge, through our website, and by responding to requests addressed to investor relations department, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. These reports are available as soon as reasonably practical after such material is electronically filed or furnished to the SEC. Our website address is www.ntsdevelopment.com. The information contained on our website, or on other websites linked to our website, is not part of this document.
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As a result of the merger of the Partnerships with and into us and ORIG’s contribution of substantially all of its assets and liabilities, we own fee simple title to nineteen office buildings and business centers, nine multifamily properties, three retail properties and one ground lease. Set forth below is a description of each property
Office Buildings:
| • | NTS Center, which was constructed in 1977, is an office complex with approximately 116,200 net rentable square feet located in Louisville, Kentucky. As of December 31, 2004, there were seven tenants leasing office space aggregating approximately 86,600 square feet. NTS Center’s tenants are professional service entities, principally in real estate and grocery chain management. Two of these tenants individually lease more than 10% of NTS Center’s rentable area. NTS Center was 75% occupied as of December 31, 2004. |
| • | Plainview Center, which was constructed in 1983, is an office complex with approximately 96,100 net rentable square feet located in Louisville, Kentucky. As of December 31, 2004, there were nine tenants leasing office space aggregating approximately 79,600 square feet. The tenants are professional service entities, principally in healthcare and victim notification services. Two of these tenants individually lease more than 10% of Plainview Center’s net rentable area. Plainview Center was 83% occupied as of December 31, 2004. |
| • | Plainview Point Office Center Phases I and II, which were constructed in 1983, is an office center with approximately 57,300 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were six tenants leasing office space aggregating approximately 37,800 square feet. The tenants are professional service entities, including a business school and an insurance company. One of these tenants leases more than 10% of rentable area at Plainview Point Office Center Phases I and II. Plainview Point Office Center Phases I and II were 66% occupied as of December 31, 2004. |
| • | Plainview Point Office Center Phase III, which was constructed in 1987, is an office center with approximately 61,700 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were eleven tenants leasing office space aggregating approximately 56,300 square feet. The tenants are professional service entities, principally involved in insurance claim processing, social security program management and consulting services. Three of these tenants individually lease more than 10% of Plainview Point Office Center Phase III. Plainview Point Office Center Phase III was 91% occupied as of December 31, 2004. |
| • | Anthem Office Center, which was constructed in 1995, is an office building with approximately 84,700 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, one tenant leases office space aggregating all 84,700 square feet. The tenant is a professional service entity in the insurance industry. Anthem Office Center was 100% occupied as of December 31, 2004. |
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| • | Atrium Center, which was constructed in 1984, is an office center with approximately 104,200 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were eleven tenants leasing office space aggregating approximately 69,700 square feet. The tenants are professional service entities, principally involved in video and media monitoring services and educational services. Two of these tenants individually lease more than 10% of Atrium Center’s net rentable area. Atrium Center was 67% occupied as of December 31, 2004. |
| • | Springs Medical Office Center, which was constructed in 1988, is a medical office complex with approximately 97,700 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were nineteen tenants leasing office space aggregating approximately 87,100 square feet. The tenants are professional service entities, principally involving physicians and medical services. Three of these tenants individually lease more than 10% of Springs Medical Office Center’s net rentable area. Springs Medical Office Center was 89% occupied as of December 31, 2004. |
| • | Springs Office Center, which was constructed in 1990, is an office center with approximately 125,300 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were eleven tenants leasing office space aggregating approximately 120,100 square feet. The tenants are professional service entities, principally in food service purchasing and insurance. Two of these tenants individually lease more than 10% of Springs Office Center’s net rentable area. Springs Office Center was 96% occupied as of December 31, 2004. |
| • | Sears Office Building, which was constructed in 1987, is an office building with approximately 66,900 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, one tenant leases office space aggregating all 66,900 square feet. The tenant is a professional service entity in the collection call center industry. Sears Office Building was 100% occupied as of December 31, 2004. |
Business Centers. The business center properties are a combination of office and warehouse space including bulk warehouse distribution facilities. The office component is generally 40% or less of the square footage, with the warehouse portion being unfinished and used for storage, distribution or light assembly. The following is a brief description of each of these business center properties:
| • | Blankenbaker Business Center 1A, which was constructed in 1988, is a business center with approximately 100,600 net rentable square feet located in Louisville, Kentucky. As of December 31, 2004, one tenant leases all 100,600 square feet. The tenant is a professional service entity in the insurance industry. Blankenbaker Business Center 1A was 100% occupied as of December 31, 2004. |
| • | Blankenbaker Business Center 1B, which was constructed in 1988, is a business center with approximately 60,000 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, one tenant leases all 60,000 square feet. The tenant is a professional service entity in the insurance industry. Blankenbaker Business Center 1B was 100% occupied as of December 31, 2004. |
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| • | Blankenbaker Business Center II, which was constructed in 1988, is a business center with approximately 74,700 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were five tenants leasing space aggregating approximately 56,600 square feet. The tenants are professional service entities, principally in pharmaceutical distribution and operations, woodworking shop and general office, electronics repairs and construction of communication towers. Four of these tenants individually lease more than 10% of Blankenbaker Business Center II’s net rentable area. Blankenbaker Business Center II was 76% occupied as of December 31, 2004. |
| • | Clarke American, which was constructed in 2000, is a business center with approximately 50,000 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, one tenant leases all 50,000 square feet. The tenant is a professional service entity in the check printing industry. Clarke American was 100% occupied as of December 31, 2004. |
| • | Commonwealth Business Center Phase I, which was constructed in 1984, is a business center with approximately 62,700 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were eight tenants leasing space aggregating approximately 33,300 square feet. The tenants are professional service entities, including a healthcare office, insurance company and a machinery sales and monitoring company. Three of these tenants individually lease more than 10% of the net rentable area at Commonwealth Business Center Phase I. Commonwealth Business Center Phase I was 53% occupied as of December 31, 2004. |
| • | Commonwealth Business Center Phase II, which was constructed in 1985, is a business center with approximately 65,900 net rentable square feet located in Louisville, Kentucky. As of December 31, 2004, there were eight tenants leasing space aggregating approximately 37,200 square feet. The tenants are professional service entities, principally involved in engineering and a switching center. Two of these tenants individually lease more than 10% of Commonwealth Business Center Phase II’s net rentable area. Commonwealth Business Center Phase II was 56% occupied as of December 31, 2004. |
| • | Lakeshore Business Center Phase I, which was constructed in 1986, is a business center with approximately 103,800 net rentable square feet located in Fort Lauderdale, Florida. As of December 31, 2004, there were twenty-seven tenants leasing space aggregating approximately 68,500 square feet. The tenants are professional service entities, principally in engineering, insurance and financial services and dental equipment suppliers. None of the tenants individually lease more than 10% of the net rentable area at Lakeshore Business Center Phase I. Lakeshore Business Center Phase I was 66% occupied as of December 31, 2004. |
| • | Lakeshore Business Center Phase II, which was constructed in 1989, is a business center with approximately 97,000 net rentable square feet located in Fort Lauderdale, Florida. As of December 31, 2004, there were seventeen tenants leasing space aggregating approximately 71,300 square feet. The tenants are professional service entities, principally in medical equipment sales, financial and engineering services and technology. One of these tenants individually leases more than 10% of the net rentable area at Lakeshore Business Center Phase II. Lakeshore Business Center Phase II was 75% occupied as of December 31, 2004. |
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| • | Lakeshore Business Center Phase III, which was constructed in 2000, is a business center with approximately 38,900 net rentable square feet located in Fort Lauderdale, Florida. As of December 31, 2004, there were five tenants leasing space aggregating all 38,900 square feet. The tenants are professional service entities, principally insurance services, telecommunications, real estate development and engineering. Four of these tenants individually lease more than 10% of the net rentable area at Lakeshore Business Center Phase III. Lakeshore Business Center Phase III was 100% occupied as of December 31, 2004. |
| • | Peachtree Corporate Center, which was constructed in 1979, is a business park with approximately 191,300 net rentable square feet located in Atlanta, Georgia. As of December 31, 2004, there were fifty-three tenants leasing space aggregating approximately 171,400 square feet. The tenants are professional service entities, principally in sales-related services. None of these tenants individually lease more than 10% of Peachtree’s net rentable area. Peachtree was 90% occupied as of December 31, 2004. |
Multifamily Properties:
| • | Golf Brook Apartments, which was constructed in 1988 and 1989, is a 195-unit luxury apartment complex located on a 16.5-acre tract in Orlando, Florida. As of December 31, 2004, the property was 98% occupied. |
| • | The Park at the Willows, which was constructed in 1988, is a 48-unit luxury apartment complex located on a 2.8-acre tract in Louisville, Kentucky. As of December 31, 2004, the property was 94% occupied. |
| • | Park Place Apartments Phase I, which was constructed in 1987, is a 180-unit luxury apartment complex located on an 18-acre tract in Lexington, Kentucky. As of December 31, 2004, the property was 86% occupied. |
| • | Park Place Apartments Phase II, which was constructed in 1989, is a 132-unit luxury apartment complex located on an 11-acre tract in Lexington, Kentucky. As of December 31, 2004, the property was 88% occupied. |
| • | Park Place Apartments Phase III, which was constructed in 2000, is a 152-unit luxury apartment complex located on a 15-acre tract in Lexington, Kentucky. As of December 31, 2004, the property was 85% occupied. |
| • | Sabal Park Apartments, which was constructed in 1987, is a 162-unit luxury apartment complex located on a 13-acre tract in Orlando, Florida. As of December 31, 2004, the property was 99% occupied. |
| • | The Willows of Plainview Phase I, which was constructed in 1985, is a 118-unit luxury apartment complex in Louisville, Kentucky. As of December 31, 2004, the property was 80% occupied. |
| • | The Willows of Plainview Phase II, which was constructed in 1985, is a 144-unit luxury apartment complex in Louisville, Kentucky. As of December 31, 2004, the property was 74% occupied. |
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| • | Willow Lake Apartments, which was constructed in 1985, is a 207-unit luxury apartment complex located on an 18-acre tract in Indianapolis, Indiana. As of December 31, 2004, the property was 87% occupied. |
Retail Properties:
| • | Bed, Bath & Beyond, which was constructed in 1999, is a 35,000 square foot facility located in Louisville, Kentucky, all of which is leased to Bed, Bath & Beyond. |
| • | Outlets Mall, which was constructed in 1983, is a 162,600 square foot mall located in Louisville, Kentucky which as of December 31, 2004 was 100% occupied. The property is occupied by Garden Ridge L.P. and three subtenants. |
| • | Springs Station, which was constructed in 2001, is a retail facility with approximately 12,000 net rentable square feet located in Louisville, Kentucky. As of December 31, 2004, there were five tenants leasing space aggregating approximately 11,000 square feet. The tenants who occupy Springs Station are professional service entities whose principal businesses are occupational therapy, staffing and retail jewelry. Three of these tenants individually lease more than 10% of Springs Station’s rentable area. Springs Station was 92% occupied as of December 31, 2004. |
Ground Lease:
| • | We own the ground lease relating to a 120-space parking lot located in Louisville, Kentucky and leased to ITT Educational Services, Inc. The ITT Parking Lot is attached to Plainview Point Office Center Phases I and II. The lease expires July 30, 2009. |
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The table below sets forth the average occupancy rate for each of the past three years with respect to each of our properties.
Years Ended December 31,
-------------------------------------------------------
2004 2003 2002
----------------- --------------- ---------------
OFFICE BUILDING OCCUPANCY
NTS Center 74% 76% 87%
Plainview Center 80% 70% 70%
Plainview Point Office Center Phases I and II 73% 84% 86%
Plainview Point Office Center Phase III 74% 50% 55%
Anthem Office Center 100% 100% 100%
Atrium Center 55% 66% 80%
Springs Medical Office Center 93% 91% 96%
Springs Office Center 97% 90% 91%
Sears Office Building 100% 100% 100%
BUSINESS CENTER OCCUPANCY
Blankenbaker Business Center 1A 100% 100% 100%
Blankenbaker Business Center 1B 100% 100% 100%
Blankenbaker Business Center II 78% 90% 95%
Clarke American 100% 100% 100%
Commonwealth Business Center Phase I 82% 91% 87%
Commonwealth Business Center Phase II 60% 67% 77%
Lakeshore Business Center Phase I 71% 70% 80%
Lakeshore Business Center Phase II 77% 81% 84%
Lakeshore Business Center Phase III 91% 59% 36%
Peachtree Corporate Center 87% 84% 84%
MULTI-FAMILY OCCUPANCY
Golf Brook Apartments 96% 93% 91%
The Park at The Willows 90% 81% 83%
Park Place Apartments Phase I 83% 88% 79%
Park Place Apartments Phase II 84% 89% 82%
Park Place Apartments Phase III 90% 93% 83%
Sabal Park Apartments 96% 93% 93%
The Willows of Plainview Phase I 86% 93% 85%
The Willows of Plainview Phase II 80% 85% 85%
Willow Lake Apartments 86% 85% 88%
RETAIL OCCUPANCY
Bed, Bath & Beyond 100% 100% 100%
Outlets Mall 100% 100% 100%
Springs Station 97% 94% 62%
GROUND LEASE
ITT Parking Lot (1) N/A N/A N/A
(1) The ground lease expires July 30, 2009 and is leased by one tenant in Plainview Point Office Center Phases I and II.
14
We are not dependent upon any tenant for 10% or more of our revenues. The loss of any one tenant should not have a material adverse effect on our business or financial performance. The following table sets forth our ten largest tenants based on annualized base rent as of December 31, 2004.
Percentage of
Total Leased Annualized Base Annualized Base Lease
Tenant Square Feet Rent (1) Rent (1) Expiration
- ------ ------------- ----------------- ---------------- ------------
SHPS/Prudential Service Bureau 160,689 $1,712,843 5.48% 01/11/16
Anthem, Inc. 84,717 810,692 2.59% 08/31/05
Appriss, Inc. 53,605 919,752 2.94% 07/31/07
Food Service Purchasing Coop. 52,263 807,221 2.58% 02/28/13
Citicorp North America, Inc. 66,905 802,191 2.57% 07/15/05
Garden Ridge Corp. 162,617 731,777 2.34% 03/12/10
Kroger Company 53,435 695,489 2.23% 06/30/06
Clarke American Checks, Inc. 50,000 512,500 1.64% 08/31/10
Acordia of Kentucky 22,642 399,621 1.28% 04/18/10
Bed, Bath & Beyond 34,953 367,007 1.17% 01/31/15
| (1) | Annualized Base Rent means annual contractual rent. |
The table below reflects the outstanding indebtedness from mortgages and notes payable for our properties as of December 31, 2004. Properties that are not encumbered by mortgages or notes are not listed below. Some of our mortgages and notes bear interest in relation to the Libor Rate. As of December 31, 2004, the Libor Rate was 2.400%. The Libor Rate is a variable rate of interest that is adjusted from time to time based on interest rates set by London financial institutions.
Interest Maturity Balance on
Property Rate Date December 31, 2004
- ---------------------------------------------------- ------------------- -------------- -----------------
NTS Realty (1) Libor + 1.75% 06/28/05 $ 14,971,350
Lakeshore Business Center Phases I, II and III (2) Libor + 2.5% 01/01/08 14,000,000
NTS Realty Multifamily Properties 5.98% 01/15/15 75,000,000
Bed, Bath & Beyond (3) 9.00% 08/01/10 2,806,142
Clarke American 8.45% 11/01/15 3,101,366
Plainview Point Office Center Phase III (4) 8.375% 12/01/10 2,905,604
-----------------
$ 112,784,462
=================
| (1) | This note was replaced in March 2005 with a $30 million loan secured by Atrium Center, Blankenbaker Business Center 1A and 1B and Blankenbaker Business Center II, Springs Medical Office Center, Springs Office Center and Springs Station. The mortgage bears interest at a fixed rate of 5.07% per annum and matures March 15, 2015. |
| (2) | This note is guaranteed individually and severally by Mr. Nichols and Mr. Brian F. Lavin in the prorata amounts of 75% and 25%, respectively. |
| (3) | A balloon payment of $2,213,097 is due upon maturity. |
| (4) | A balloon payment of $2,243,300 is due upon maturity. |
Our mortgages may be prepaid but are generally subject to a yield-maintenance premium.
15
The following table sets forth for each property that we own, the property tax rate and annual property taxes.
Property Gross Amount
Tax Rate Annual Property
State Property (per $100) Taxes (1)
- ----- ----------------------------------------------------- --------------- -------------------
FL Golf Brook Apartments 1.69 $ 233,100
FL Lakeshore Business Center Phase I 2.47 185,563
FL Lakeshore Business Center Phase II 2.47 211,703
FL Lakeshore Business Center Phase III 2.47 66,356
FL Sabal Park Apartments 1.69 159,846
GA Peachtree Corporate Center 3.20 102,630
IN Willow Lake Apartments 2.66 236,614
KY Anthem Office Center 1.11 53,949
KY Atrium Center 1.11 64,487
KY Bed, Bath & Beyond 1.11 22,439
KY Blankenbaker Business Center 1A 1.11 53,786
KY Blankenbaker Business Center 1B 1.11 33,851
KY Blankenbaker Business Center II 1.11 42,353
KY Clarke American 1.11 25,952
KY Commonwealth Business Center I 1.11 46,805
KY Commonwealth Business Center II 1.11 39,414
KY ITT Parking Lot 1.11 1,613
KY NTS Center 1.11 76,512
KY Outlets Mall 1.11 52,052
KY The Park at the Willows 1.11 14,554
KY Park Place Apartments Phase I 0.97 76,472
KY Park Place Apartments Phase II 0.97 64,856
KY Park Place Apartments Phase III 0.97 70,664
KY Plainview Center 1.11 30,704
KY Plainview Point Office Center Phases I & II 1.11 19,161
KY Plainview Point Office Center Phase III 1.11 36,554
KY Sears Office Building 1.11 48,781
KY Springs Medical Office Center 1.11 79,726
KY Springs Office Center 1.11 95,414
KY Springs Station 1.11 10,141
KY The Willows of Plainview I 1.11 53,716
KY The Willows of Plainview II 1.11 58,698
-------------------
$ 2,368,466
===================
| (1) | Does not include any offset for property tax reimbursed by tenants. Property taxes in Jefferson County, Kentucky are discounted by approximately 2% if they are paid prior to the due date. Discounts for early payment in other states generally provide no discount to the gross amount of property tax. |
16
On May 6, 2004, the Superior Court of the State of California for the County of Contra Costa granted its final approval of the settlement agreement jointly filed by the general partners (the “General Partners”) of the Partnerships, along with certain of their affiliates, with the class of plaintiffs in the action originally captioned Buchanan, et al. v. NTS-Properties Associates, et al. (Case No. C 01-05090) on December 5, 2003. At the final hearing, any member of the class of plaintiffs was given the opportunity to object to the final approval of the settlement agreement, the entry of a final judgment dismissing with prejudice the Buchanan litigation, or an application of an award for attorneys’ fees and expenses to plaintiffs’ counsel. The Superior Court’s order provided, among other things, that: (1) the settlement agreement, and all transactions contemplated thereby, including the merger of the Partnerships into us, are fair, reasonable and adequate, and in the best interests of the class of plaintiffs; (2) the plaintiffs’ complaint and each and every cause of action and claim set forth therein is dismissed with prejudice; (3) each class member is barred from transferring, selling or otherwise disposing of (other than by operation of law) their interests until the earlier of the closing date of the merger, the termination of the settlement or June 30, 2004; and (4) each class member who requested to be excluded from the settlement released their claims in the Bohm litigation.
On June 11, 2004, Joseph Bohm and David Duval, class members who objected to the settlement agreement but whose objections were overruled by the Superior Court (the “Appellants”), filed an appeal in the Court of Appeals of the State of California, First Appellate District. The Appellants filed their opening appellate brief on October 22, 2004. The General Partners and the Partnerships, as well as the class representatives, filed their respective responses on February 14, 2005, and Appellants filed their reply. The appellate court is in the process of scheduling oral arguments on this matter.
On February 27, 2003, two individuals filed a class and derivative action in the Circuit Court of Jefferson County, Kentucky captioned Bohm, et al. v. J.D. Nichols, et al. (Case No. 03-CI-01740) against certain of the General Partners and several individuals and entities affiliated with us. The complaint was amended to include the general partner of NTS-Properties III and the general partner of NTS-Properties Plus Ltd., which is no longer in existence. In the amended complaint, the plaintiffs purport to bring claims on behalf of a class of limited partners and derivatively on behalf of us and the Partnerships based on alleged overpayment of fees, prohibited investments, improper failures to make distributions, purchases of limited partnerships interests at insufficient prices and other violations of the limited partnership agreements. The plaintiffs are seeking, among other things, compensatory and punitive damages in an unspecified amount, an accounting, the appointment of a receiver or liquidating trustee, the entry of an order of dissolution against the Partnerships, a declaratory judgment and injunctive relief. No amounts have been accrued for the settlement of this action in our financial statements. The General Partners and their legal counsel believe that this action is without merit and are vigorously defending it.
On March 2, 2004, the General Partners filed a motion to dismiss the Bohm litigation. After the motion to dismiss was fully briefed, the settlement agreement in the Buchanan litigation received final court approval. The Circuit Court of Jefferson County, Kentucky, instructed the plaintiffs in the Bohm litigation to file an amended complaint in light of the approved settlement of the Buchanan litigation. The plaintiffs in the Bohm litigation filed a corrected second amended complaint on August 11, 2004. The General Partners, along with all defendants, filed a motion to strike the corrected second amended complaint. On February 9, 2005, the Circuit Court instructed the defendants to file a responsive pleading only as to direct claims asserted by the individual plaintiffs. On March 9, 2005, the General Partners, along with all of the defendants, filed: (1) a motion to dismiss and (2) a joint motion to dismiss the “corrected” second amended complaint. A hearing on these motions likely will occur during the second or third quarter of 2005. The General Partners believe that the claims asserted in the corrected second amended complaint have no merit.
17
From October 27, 2004, through December 27, 2004, the general partners of the Partnerships solicited the vote of their respective limited partners to approve the merger of the Partnerships and us. In addition, the general partners of NTS-Properties III and NTS-Properties IV solicited the vote of their respective limited partners to approve the amendment of each such Partnership’s limited partnership agreement. These amendments were necessary to permit the merger to occur. Each of the foregoing solicitations was approved by the requisite number of limited partnership units of the applicable Partnerships. Set forth below are the results of each solicitation.
Interests % of Interests Interests Voted % of Interests
Partnership Voted For Voted For Against Voted Against
- ----------------------- ------------------ ------------------- ------------------ -------------------
NTS-Properties III 9,026 71.81% 805 6.40%
NTS-Properties IV 17,038 70.67% 915 3.80%
NTS-Properties V 21,579 70.70% 1,457 4.77%
NTS-Properties VI 27,003 69.44% 910 2.34%
NTS Properties VII 367,298 66.51% 10,195 1.85%
Interests % of Interests Interests Voted % of Interests
Partnership Voted For Voted For Against Voted Against
- ----------------------- ------------------ ------------------- ------------------ -------------------
NTS-Properties III 9,026 71.8% 805 6.40%
Interests % of Interests Interests Voted % of Interests
Partnership Voted For Voted For Against Voted Against
- ----------------------- ------------------ ------------------- ------------------ -------------------
NTS-Properties IV 17,013 70.57% 915 3.80%
18
Beginning December 29, 2004, our units were listed for trading on the American Stock Exchange (the “Exchange”) under the symbol NLP. The approximate number of record holders of our units at December 31, 2004 was 5,839.
High and low unit prices on the Exchange for the period December 29, 2004 through December 31, 2004 were $5.50 to $5.00. No dividends were declared or paid in 2004.
We have a policy of paying regular cash dividends, although there is no assurance as to the payment of future dividends because they depend on future earnings, capital requirements and financial condition. In addition, the payment of dividends is subject to the restrictions described in Part II, Item 8, Note 2 – Section J, to the financial statements and discussed in Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
19
The following table sets forth selected historical combined condensed financial and operating data as if NTS-Properties III, NTS-Properties IV, NTS-Properties V, NTS-Properties VI, NTS-Properties VII, Ltd. (the “Partnerships”) and NTS Private Group were combined on a historical basis. This historical combined presentation reflects adjustments to the actual historical data to: 1) include a previously unconsolidated joint venture (Blankenbaker Business Center 1A); 2) eliminate the equity investment and minority interests in wholly combined joint ventures in the historical financial information of the applicable partnership; and 3) include any debt used by ORIG and its related interest cost to acquire interests in the Partnerships which was assumed by NTS Realty in the merger.
We have derived the combined condensed statement of operations and balance sheet data as of and for the year ended December 31, 2000 with respect to the Partnerships from the audited financial statements of said Partnerships and with respect to the NTS Private Group from its unaudited combined financial statements. We have derived the combined condensed statement of operations and balance sheet data as of and for the period from January 1, 2004 to December 27, 2004 and for the years ended December 31, 2003, 2002 and 2001 from the audited financial statements of the Partnerships and the NTS Private Group. We have derived the combined condensed statement of operations data consisting of interest expense relating to ORIG’s debt from the unaudited financial statements of ORIG for each of the five years ended December 31, 2004. In the opinion of management, our unaudited financial statements have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of our financial condition and the results of operations as of such date and for such periods under U.S. generally accepted accounting principles.
20
Period Ended
December 27, Year Ended December 31,
---------------- -----------------------------------------------------------
2004 2003 2002 2001 2000
---------------- -------------- -------------- -------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
STATEMENT OF OPERATIONS DATA
Rental income $ 31,245,985 $ 31,762,268 $ 32,014,147 $ 32,414,553 $ 30,814,831
Tenant reimbursements 2,384,764 2,371,880 2,374,347 2,330,607 2,170,390
---------------- -------------- -------------- -------------- -------------
TOTAL REVENUES 33,630,749 34,134,148 34,388,494 34,745,160 32,985,221
Operating expenses and operating
expenses - affiliated 12,523,948 11,409,356 11,804,936 12,202,657 11,078,609
Management fees 1,829,000 1,854,917 1,876,685 1,900,161 1,831,860
Real estate taxes 1,993,251 2,422,711 2,267,523 2,332,384 2,214,205
Professional and administrative and
professional and administrative
- affiliated 4,816,931 3,517,787 1,839,931 1,564,025 1,618,543
Depreciation and amortization 8,239,203 8,006,076 8,370,527 8,318,800 7,507,502
---------------- -------------- -------------- -------------- -------------
TOTAL OPERATING EXPENSES 29,402,333 27,210,847 26,159,602 26,318,027 24,250,719
OPERATING INCOME 4,228,416 6,923,301 8,228,892 8,427,133 8,734,502
Interest and other income and
interest and other
income - affiliated 1,608,418 364,683 299,326 563,354 1,118,519
Interest expense and interest
expense - affiliated (13,408,912) (8,185,284) (8,763,601) (9,274,001) (9,283,010)
Loss on disposal of assets (74,452) (303,906) (132,478) (178,522) (1,061,224)
Settlement charge (2,896,259) - - - -
---------------- -------------- -------------- -------------- -------------
NET LOSS $ (10,542,789) $ (1,201,206) $ (367,861) $ (462,036) $ (491,213)
================ ============== ============== ============== =============
BALANCE SHEET DATA (end of period)
Land, buildings and amenities, net N/A $ 120,994,416 $125,902,043 $ 132,277,155 $ 137,888,786
Total assets N/A 129,831,524 141,020,277 147,246,636 151,960,898
Mortgages and notes payable N/A 109,258,373 122,391,250 123,937,185 123,993,289
21
This section provides the Historical Combined Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) as if the Partnerships, ORIG and the NTS Private Group were combined on a historical basis. See Item 6 — Selected Financial Data for a description of certain assumptions made in the combined presentation.
The following discussion should be read in conjunction with the historical and proforma financial statements appearing in Part II – Item 8. This discussion is based primarily on our statements of operations and cash flow information for the years ended December 31, 2004, 2003 and 2002 as if it were combined with our predecessors.
General
A critical accounting policy is one that would materially affect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances. These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. The following disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.
Impairment and Valuation
Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets,” specifies circumstances in which certain long lived assets must be reviewed for impairment. If this review indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset’s carrying value must be written down to fair value. In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates. The capitalization rate used to determine property valuation is based on among others, the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition. All of these factors are considered by management in determining the value of any particular investment property. The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole. If the actual results differ from management’s judgment, the valuation could be negatively or positively affected.
22
The merger was accounted for using the purchase method of accounting in accordance with SFAS No. 141 “Business Combinations.” NTS Realty was treated as the purchasing entity. The portion of each partnership’s assets and liabilities acquired from unaffiliated third parties was adjusted to reflect its fair market value. That portion owned by affiliates of the general partners of the Partnerships was reflected at historical cost. The assets and liabilities contributed by NTS Private Group were adjusted to reflect their fair market value, except for that portion owned by Mr. Nichols which was reflected at historical cost due to his common control over the contributing entities.