UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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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 ___________
Commission file number: 1-9496
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BNP RESIDENTIAL PROPERTIES, INC.
--------------------------------
(Exact name of Registrant as specified in its charter)
Maryland 56-1574675
-------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3850 One First Union Center, Charlotte, NC 28202-6032
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
704/944-0100
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of November 9, 2001 (the latest practicable date).
Common Stock, $.01 par value 5,726,700
---------------------------- ---------
(Class) (Number of shares)
Total number of pages: 22
TABLE OF CONTENTS
Item No. Page No.
PART I - Financial Information
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
3 Quantitative and Qualitative Disclosures 21
About Market Risk
PART II - Other Information
6 Exhibits and Reports on Form 8-K 21
2
PART I - Financial Information
Item 1. Financial Statements.
BNP RESIDENTIAL PROPERTIES, INC.
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Consolidated Balance Sheets
September 30 December 31
2001 2000
------------------ ------------------
(Unaudited)
Assets
Real estate investments at cost:
Apartment properties $220,531,616 $217,818,208
Restaurant properties 39,158,921 39,702,060
------------------ ------------------
259,690,537 257,520,268
Less accumulated depreciation (38,751,519) (32,815,205)
------------------ ------------------
220,939,018 224,705,063
Cash and cash equivalents 6,955,360 1,056,052
Other current assets 2,459,822 1,510,541
Investment in and advances to Management Company - 714,892
Notes receivable, net of reserve 100,000 100,000
Intangible assets, net of accumulated amortization:
Intangible related to acquisition of management operations 1,216,638 1,521,288
Deferred financing costs 948,974 1,083,560
------------------ ------------------
Total assets $232,619,812 $230,691,396
================== ==================
Liabilities and Shareholders' Equity
Mortgage and other notes payable $169,503,761 $163,611,737
Accounts payable and accrued expenses 1,924,666 944,248
Escrowed security deposits and deferred revenue 1,187,655 1,183,626
Deferred credit for defeasance of interest,
net of accumulated amortization 541,696 666,688
------------------ ------------------
Total liabilities 173,157,778 166,406,299
Minority interest in Operating Partnership 18,567,994 19,737,035
Shareholders' equity:
Common stock, $.01 par value, 100,000,000 shares
authorized; issued and outstanding shares--
5,726,700 at September 30, 2001,
5,706,950 at December 31, 2000 57,267 57,069
Additional paid-in capital 69,912,486 69,707,155
Dividend distributions in excess of net income (29,075,713) (25,216,162)
------------------ ------------------
Total shareholders' equity 40,894,040 44,548,062
------------------ ------------------
Total liabilities and shareholders' equity $232,619,812 $230,691,396
================== ==================
3
BNP RESIDENTIAL PROPERTIES, INC.
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Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
----------------- ---------------- ----------------- ----------------
Revenues
Apartment rental income $7,690,482 $7,341,027 $23,246,419 $21,961,348
Restaurant rental income 1,005,319 1,029,256 3,047,872 3,132,713
Management fee income 93,863 - 310,960 -
Equity in income of
Management Company - 25,741 - 92,670
Interest and other income 362,871 58,471 743,887 204,781
----------------- ---------------- ----------------- ----------------
9,152,535 8,454,495 27,349,138 25,391,512
Expenses
Apartment operations 2,850,283 2,397,150 8,310,186 7,254,484
Apartment administration 227,764 188,392 739,415 612,634
Corporate administration 437,441 387,561 1,453,607 1,289,588
Depreciation 1,946,325 1,784,289 5,827,142 5,347,894
Amortization of intangibles 147,678 144,804 443,079 434,412
Interest 2,769,358 2,815,719 8,565,757 8,324,426
----------------- ---------------- ----------------- ----------------
8,378,849 7,717,915 25,339,186 23,263,438
----------------- ---------------- ----------------- ----------------
Income before
minority interest and
extraordinary item 773,686 736,580 2,009,952 2,128,074
Minority interest in
Operating Partnership 177,835 169,831 462,462 490,883
----------------- ---------------- ----------------- ----------------
Income before
extraordinary item 595,851 566,749 1,547,490 1,637,191
Extraordinary item - loss on
early extinguishment
of debt 99,577 - 99,577 -
----------------- ---------------- ----------------- ----------------
Net income $ 496,274 $ 566,749 $ 1,447,913 $ 1,637,191
================= ================ ================= ================
Per share data:
Basic and diluted earnings per share -
Income before
extraordinary item $0.10 $0.10 $0.27 $0.29
Extraordinary item (0.02) - (0.02) -
----------------- ---------------- ----------------- ----------------
Net income $0.08 $0.10 $0.25 $0.29
================= ================ ================= ================
Dividends declared $0.31 $0.31 $0.93 $0.93
================= ================ ================= ================
Weighted average shares
outstanding 5,717,040 5,706,950 5,710,350 5,707,766
================= ================ ================= ================
4
BNP RESIDENTIAL PROPERTIES, INC.
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Consolidated Statement of Shareholders' Equity
(Unaudited)
Dividends
Additional distributed
Common Stock paid-in in excess of
Shares Amount capital net income Total
------------ ----------- --------------- --------------- ---------------
Balance at December 31, 2000 5,706,950 $57,069 $69,707,155 $(25,216,162) $44,548,062
Dividends paid ($0.31) - - - (1,769,155) (1,769,155)
Net income - - - 470,159 470,159
------------ ----------- --------------- --------------- ---------------
Balance at March 31, 2001 5,706,950 57,069 69,707,155 (26,515,158) 43,249,066
Dividends paid ($0.31) - - - (1,769,154) (1,769,154)
Net income - - - 481,480 481,480
------------ ----------- --------------- --------------- ---------------
Balance at June 30, 2001 5,706,950 57,069 69,707,155 (27,802,832) 41,961,392
Common stock issued - DRIP 19,750 198 205,331 - 205,529
Dividends paid ($0.31) - - - (1,769,155) (1,769,155)
Net income - - - 496,274 496,274
------------ ----------- --------------- --------------- ---------------
Balance at September 30, 2001 5,726,700 $57,267 $69,912,486 $(29,075,713) $40,894,040
============ =========== =============== =============== ===============
5
BNP RESIDENTIAL PROPERTIES, INC.
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Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30
2001 2000
----------------- ----------------
Operating activities:
Net income $ 1,447,913 $ 1,637,191
Adjustments to reconcile net income to
net cash provided by operations:
Extraordinary item - loss on early extinguishment of debt 99,577 -
Minority interest in Operating Partnership 462,462 490,883
Equity in income of Management Company - (92,670)
Depreciation and amortization of intangibles 6,270,221 5,782,306
Amortization of defeasance credit (124,992) (124,992)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (967,944) (1,003,023)
Accounts payable and accrued expenses 953,323 1,518,766
Security deposits and deferred revenue 45,934 (58,889)
----------------- ----------------
Net cash provided by operating activities 8,186,494 8,149,572
Investing activities:
Additions to apartment properties, net (2,121,151) (1,563,867)
Proceeds from sale of restaurant properties 405,860 643,598
Acquisition of minority interest in Management Company 372,939 -
Reduction in notes receivable - 525,000
----------------- ----------------
Net cash used in investing activities (1,342,352) (395,269)
Financing activities:
Redemption of Operating Partnership minority units (14,864) (52,214)
Issuance of common stock through DRIP 205,529 -
Repurchase of common stock - (254,750)
Distributions to Operating Partnership minority unitholders (1,586,976) (1,571,592)
Dividends paid to common shareholders (5,307,464) (5,307,464)
Proceeds from notes payable 16,847,999 850,000
Principal payments on notes payable (10,955,975) (871,918)
(Payment) refund of deferred financing costs (133,083) 732
----------------- ----------------
Net cash used in financing activities (944,834) (7,207,206)
----------------- ----------------
Net increase in cash and cash equivalents 5,899,308 547,097
Cash and cash equivalents at beginning of period 1,056,052 431,531
----------------- ----------------
Cash and cash equivalents at end of period $ 6,955,360 $ 978,628
================= ================
6
BNP RESIDENTIAL PROPERTIES, INC.
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Notes to Consolidated Financial Statements - September 30, 2001
(Unaudited)
Note 1. Interim financial statements
Our independent accountants have not audited the accompanying financial
statements of BNP Residential Properties, Inc., except for the balance sheet at
December 31, 2000. We derived the amounts in the balance sheet at December 31,
2000, from the financial statements included in our 2000 Annual Report on Form
10-K. We believe that we have included all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial position
and results of operations for the periods presented.
We have condensed or omitted certain notes and other information from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
You should read these financial statements in conjunction with our 2000 Annual
Report on Form 10-K.
We have reclassified amounts for apartment administration and corporate
administration expense in the 2000 financial statements to conform to our 2001
presentation of these amounts.
Note 2. Basis of Presentation
The consolidated financial statements include the accounts of BNP Residential
Properties, Inc. (the "company") and BNP Residential Properties Limited
Partnership (the "Operating Partnership"). The company is the general partner
and owns a majority interest in the Operating Partnership. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
Effective January 2001, the accounts of the Operating Partnership include BNP
Management, Inc. (the "Management Company"). Prior to January 2001, the
Operating Partnership had a 1% voting interest and 95% economic interest in the
Management Company, and used the equity method to account for this investment.
In January 2001, the Operating Partnership acquired the outstanding 99% voting
interest and 5% economic interest in the Management Company for approximately
$16,000. The impact of this change in basis of presentation on the balance sheet
was to increase cash by approximately $373,000 and apartment properties
equipment, net of depreciation, by approximately $346,000, and to eliminate
approximately $715,000 investment in and advances to the Management Company
previously reflected in our balance sheets.
In addition, we now reflect our third-party management operations, including
management fee income and related administration expenses, directly in our
statements of operations rather than reporting equity in the net income of the
Management Company.
We do not expect this change in basis of presentation to have a significant
impact on our financial position, operating results or cash flows.
7
Note 3. Long-term debt refinancing
On September 27, 2001, we issued a note payable in the amount of $16,250,000
secured by a deed of trust and assignment of rents of Paces Commons Apartments.
The note provides for interest at an effective rate of 6.96%. Interest-only
payments of approximately $97,000 are due monthly through October 2002.
Beginning November 2002, monthly payments of principal and interest total
$106,600, with maturity in October 2011. In conjunction with this transaction,
we paid and recorded deferred loan costs of $133,000.
We applied approximately $10.1 million of the refinance proceeds to retire an
existing deed of trust note for Paces Commons. In conjunction with this payoff,
we wrote off unamortized loan costs of $129,000. We have reflected this
write-off, net of minority interests' share, in the financial statements as an
extraordinary item.
Note 4. Shareholders' Equity
We calculated basic and diluted earnings per share using the following amounts:
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
----------------- ---------------- ----------------- ----------------
Numerators:
Numerator for basic
earnings per share -
Income before
extraordinary item $595,851 $566,749 $1,547,490 $1,637,191
Extraordinary item (99,577) - (99,577) -
----------------- ---------------- ----------------- ----------------
Net income $496,274 $566,749 $1,447,913 $1,637,191
================= ================ ================= ================
Numerator for diluted
earnings per share -
Income before
extraordinary item (1) $773,686 $736,580 $2,009,952 $2,128,074
Extraordinary item (1) (129,239) - (129,239) -
----------------- ---------------- ----------------- ----------------
Net income (1) $644,447 $736,580 $1,880,713 $2,128,074
================= ================ ================= ================
8
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
----------------- ---------------- ----------------- ----------------
Denominators:
Denominator for basic
earnings per share -
weighted average shares
outstanding 5,717,040 5,706,950 5,710,350 5,707,766
Effect of dilutive securities:
Convertible Operating
Partnership units 1,705,897 1,710,131 1,706,517 1,711,212
Stock options (2) 4,301 - 2,376 -
----------------- ---------------- ----------------- ----------------
Denominator for diluted
earnings per share - adjusted
weighted average shares and
assumed conversions 7,427,238 7,417,081 7,419,243 7,418,978
================= ================ ================= ================
(1) Assumes conversion of Operating Partnership units to common shares.
(2) We excluded 140,000 options granted in 1994 (exercise price $12.50),
110,000 options granted in 1997 (exercise price $12.25), and 180,000
options granted in 1998 (exercise price $13.125 and $11.25) from the above
calculations for 2001 and 2000 because these options were antidilutive for
all periods shown. In addition, we excluded 47,500 options granted in
February 2000 (exercise price $9.25) from the above calculations for 2000
because these options were antidilutive for the three and nine months ended
September 30, 2000.
Note 5. Related party transactions
Effective July 1, 2001, we modified our participating loan agreement with The
Villages of Chapel Hill Limited Partnership. This modification established a
$950,000 "fixed portion" of our participation in the increase in value of the
property and extended the period for our 25% participation in increased rental
revenue and increase in value of the property to the earlier of July 2011 or
sale or refinance of the property.
Required payment of the fixed portion is subject to cash flow from The Villages
property, as defined in the agreement. Interest on the outstanding fixed portion
accrues at the greater of a prime rate or 8%, payable monthly.
We received $325,883 of the fixed portion in July 2001. Because the
collectibility of the remaining fixed portion is subject to cash flow and
therefore uncertain, we have provided a reserve for collection of this
receivable. At September 30, 2001, we have reflected the principal portion of
notes receivable from The Villages of Chapel Hill Limited Partnership as
follows:
Advances receivable, due February 2004 $100,000
Fixed portion of shared appreciation 624,117
Less reserve for collection of fixed portion (624,117)
----------------
$100,000
================
9
Note 6. Subsequent events
On October 19, 2001, we declared a regular quarterly cash dividend of $0.31 per
share, which we will pay on November 15, 2001, to shareholders of record on
November 1, 2001.
On October 5, 2001, we applied $5.0 million proceeds of the Paces Commons
refinance to reduce the balance of our variable rate line of credit secured by a
deed of trust and assignment of rents of Latitudes Apartments.
Effective October 1, 2001, we entered into third-party management contracts for
the management of 11 communities containing 1,504 units. We expect these
contracts to generate approximately $400,000 in annual management fees and
incremental expenses of approximately $250,000 per year.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion contains forward-looking statements within the
meaning of federal securities law. You can identify such statements by the use
of forward-looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information.
Although we believe that our plans, intentions, and expectations reflected in or
suggested by these forward-looking statements are reasonable, we cannot assure
you that we will achieve our plans, intentions or expectations. When you
consider such forward-looking statements, you should keep in mind the following
important factors that could cause our actual results to differ materially from
those contained in any forward-looking statement:
o our markets could suffer unexpected increases in the development
of apartment, other rental, or competitive housing alternatives;
o our markets could suffer unexpected declines in economic growth
or an increase in unemployment rates;
o general economic conditions could cause the financial condition
of a large number of our tenants to deteriorate;
o we may not be able to lease or re-lease apartments quickly or
on as favorable terms as under existing leases;
o we may have incorrectly assessed the environmental condition
of our properties;
o an unexpected increase in interest rates could increase our
debt service costs;
o we may not be able to meet our long-term liquidity requirements
on favorable terms; and
o we could lose key executive officers.
Given these uncertainties, we caution you not to place undue reliance
on forward-looking statements. We undertake no obligation to publicly release
the results of any revision to these forward-looking statements that may be made
to reflect any future events or circumstances or to reflect the occurrence of
unanticipated events.
You should read the discussion in conjunction with the financial
statements and notes thereto included in this Quarterly Report and our Annual
Report on Form 10-K.
Company Profile
BNP Residential Properties, Inc. is a self-administered and self-managed
real estate investment trust with operations in North Carolina, South Carolina
and Virginia. Our primary activity is the ownership and operation of apartment
communities. Including 11 new management contracts entered into on October 1,
2001, we currently manage 29 communities
11
containing 5,898 units. Of these, we own 15 apartment communities, containing
3,681 units. The remaining 14 communities, containing 2,217 units, are owned by
third parties, and we management them on a contract basis.
In addition to our apartment communities, we own 42 properties that are
leased to a third party under a master lease on a triple-net lease basis. The
third party operates these properties as restaurants and, under the terms of the
lease, is totally responsible for the operation and maintenance of the
properties.
We are structured as an UpREIT, or umbrella partnership real estate
investment trust. The company is the sole general partner and owns a controlling
interest in BNP Residential Properties Limited Partnership, through which we
conduct all of our operations. We refer to this partnership as the Operating
Partnership. We refer to the limited partners of the Operating Partnership as
minority unitholders or as the minority interest.
Our executive offices are located at 3850 One First Union Center,
Charlotte, North Carolina 28202-6032, telephone 704/944-0100.
Results of Operations
Revenues
Total revenues for the third quarter of 2001 were $9.2 million, an 8.3%
increase compared to the third quarter of 2000. For the first nine months of
2001, total revenues were $27.3 million, a 7.7% increase compared to the first
nine months of 2000. Our primary source of revenue is apartment rental income,
which generated approximately 84.0% of our total revenues in the third quarter
of 2001, and 85.0% of our total revenues in the first nine months of 2001.
Apartment rental income totaled $7.7 million in the third quarter of 2001,
a 4.8% increase compared to the third quarter of 2000. For the first nine months
of 2001, apartment rental income totaled $23.2 million, a 5.9% increase compared
to the first nine months of 2000. This increase is primarily attributable to
rental income at Oak Hollow Apartments Phase 2 ($431,000 in the third quarter,
and $1,346,000 in the first nine months of 2001), which we acquired in December
2000. On a same units basis (those units that we owned throughout the first nine
months of both years), apartment rental income declined by 1.1% in the third
quarter of 2001, and 0.3% in the first nine months of 2001, compared to 2000.
For the third quarter of 2001, overall average economic occupancy declined
by 3.3%, while average monthly revenue per occupied unit increased by 1.8%,
compared to the third quarter of 2000. For the first nine months of 2001,
overall average economic occupancy declined by 2.1%, while average monthly
revenue per occupied unit increased by 1.5%, compared to the first nine months
of 2000.
On a same units basis, comparisons of average economic occupancy and
average revenue per occupied unit were slightly more favorable for both the
quarter and first nine months. On a same units basis, average economic occupancy
for the third quarter was 93.2% in 2001 compared to 96.1% in 2000, and average
revenue per occupied unit was $755 per month in 2001 compared to $737 per month
in 2000. For the first nine months of 2001, average economic occupancy on a same
units basis was 94.5% compared to 96.3% in 2000, and average revenue per
occupied unit was $748 per month compared to $734 per month in 2000.
12
Summary amounts for our apartment communities' occupancy and revenue per
occupied unit for the third quarter and first nine months of 2001 follow:
Three months ended September 30 Nine months ended September 30
------------------------------------ -----------------------------------
Average Average
monthly monthly
Number revenue revenue
of Average Average per Average Average per
apartment physical economic occupied physical economic occupied
units occupancy occupancy unit occupancy occupancy unit
----------- ------------ ----------- ----------- ----------- ----------- -----------
Abbington Place 360 94.1% 95.5% $803 95.0% 96.1% $785
Allerton Place 228 95.4% 95.8% 787 94.7% 95.7% 775
Chason Ridge 252 95.1% 96.2% 682 94.7% 95.8% 679
Harris Hill 184 90.6% 92.6% 711 93.0% 94.8% 724
Latitudes 448 96.6% 96.7% 779 96.3% 97.1% 772
Madison Hall 128 89.1% 91.4% 612 92.0% 93.9% 604
Oakbrook 162 89.3% 89.3% 786 91.8% 92.3% 784
Oak Hollow 221 83.9% 84.6% 734 88.2% 89.6% 739
Oak Hollow Ph2* 240 86.2% 87.2% 688 88.6% 89.0% 700
Paces Commons 336 89.3% 90.9% 715 90.9% 91.9% 712
Paces Village 198 94.1% 94.6% 695 93.4% 93.9% 687
Pepperstone 108 92.9% 93.5% 704 96.4% 96.9% 696
Savannah Place 172 90.4% 90.5% 718 92.1% 93.2% 713
Summerlyn Place 140 91.0% 92.6% 821 91.7% 93.2% 803
Waterford Place 240 91.9% 93.2% 869 93.0% 94.4% 860
Woods Edge 264 93.2% 94.3% 776 95.3% 96.3% 774
All apartments 3,681
- 2001 91.9% 92.8% 750 93.2% 94.2% 745
- 2000 94.8% 96.1% 737 95.3% 96.3% 734
Same units 3,440
- 2001 92.3% 93.2% 755 93.5% 94.5% 748
- 2000 94.8% 96.1% 737 95.3% 96.3% 734
*Acquired December 2000
With the exception of Virginia Beach, Virginia, our apartment markets
remain weak. For both the quarter and year-to-date periods, slight increases in
revenue per occupied unit were insufficient to overcome the impact of declines
in occupancy. While we remain confident in the long-term prospects for our
markets and our properties, we do not foresee any significant improvement in
apartment operations over the near term.
The weakness in the markets is largely the result of overbuilding. While
construction activity has slowed recently, it will take some time for the excess
supply of new apartments to be absorbed. Until then, the competition for
residents will remain intense.
Declining interest rates and, more recently, a general economic slowdown
have also had an impact on apartment occupancy and rental rates. For those with
jobs, lower interest rates have made single-family home ownership far more
affordable. On the other hand, the general economic slowdown has led to
significant job losses. While the underlying explanation as to why declining
interest rates or a general economic slowdown impact apartment operations is
quite
13
different, both have the effect of reducing the pool of potential apartment
residents, which, in turn, puts negative pressure on occupancy and rental rates.
Restaurant rental income was $1.0 million in the third quarter of 2001, a
2.3% decrease compared to the third quarter of 2000. For the first nine months
of 2001, restaurant rental income was $3.0 million, a 2.7% decrease compared to
the first nine months of 2000. This decrease is due to the sale of one
restaurant property in June 2000, and another in April 2001. Through September
30, 2001, we have sold five of the original 47 restaurants to Boddie-Noell
Enterprises, Inc. ("Enterprises"), the lessee, under the non-economic clause of
the agreement that allows Enterprises to close up to seven restaurants and buy
them back for no less than net carrying value.
Restaurant rental income during the first nine months of both 2001 and
2000 was the minimum rent specified in the lease agreement. Under our master
lease with Enterprises, restaurant rental income payments are the greater of a
specified minimum rent or 9.875% of food sales. The minimum rent is reduced by
approximately $8,000 per month, or $96,000 per year, for each restaurant that is
sold.
"Same store" sales (for the 42 restaurants that were open throughout the
first nine months of both 2001 and 2000) declined by 2.1% in the third quarter,
and 3.8% in the first nine months, of 2001 compared to 2000. Sales at these
restaurants would have to increase by approximately 10% before we would receive
rent exceeding the minimum rent.
As we discussed in the notes to our financial statements, effective
January 1, 2001, we acquired the minority 5% economic interest and 99% voting
interest in BNP Management, Inc. (the "Management Company"). We now include the
revenues from our third-party management activities in our consolidated revenue
amounts. In 2000, we reported (net) equity income related to activities of the
Management Company. This change in basis of presentation has not had a
significant impact on our financial position, overall operating results or cash
flows.
Management fee income totaled $94,000 for the third quarter and $311,000
for the first nine months of 2001. If these activities had been reflected on a
consolidated basis in our 2000 financial statements, equity income would have
been replaced with management fee income of approximately $80,000 for the third
quarter and $309,000 for the first nine months of 2000.
Effective October 1, 2001, we entered into additional third-party
management contracts for management of 11 apartment communities containing 1,504
units. We estimate that, going forward, these contracts will generate
approximately $400,000 additional management fee income per year.
Interest and other income includes approximately $326,000 in non-routine
income in the third quarter of 2001, and approximately $537,000 non-routine
income through the first nine months of 2001. Recurring interest and other
income was generally comparable to 2000 amounts. The non-routine income items
are as follows:
o $326,000 shared appreciation, recorded July 2001, related to our
participating loan agreement with The Villages of Chapel Hill Limited
Partnership, discussed below;
o $70,000 fee income, recorded June 2001, for arranging refinancing at
The Villages of Chapel Hill and The Villages of Chapel Hill - Phase 5,
two managed apartment properties;
o $141,000 miscellaneous income, recorded June 2001, for refund of 1997
and 1998 state franchise taxes.
14
Effective July 1, 2001, we modified our participating loan agreement with
The Villages of Chapel Hill Limited Partnership. This modification established a
$950,000 "fixed portion" of our participation in the increase in value of the
property and extended the period for our 25% participation in increased rental
revenue and increase in value of the property to the earlier of July 2011 or
sale or refinance of the property. Required payment of the fixed portion is
subject to cash flow from The Villages property, as defined in the agreement.
Interest on the outstanding fixed portion accrues at the greater of a prime rate
or 8%, payable monthly. We received payment of $325,883 of the fixed portion in
July 2001, which we reflected in the financial statements as other income.
Because the collectibility of the remaining fixed portion is subject to cash
flow and therefore uncertain, we have provided a reserve for collection of this
receivable, and we will recognize revenue as it is realized.
Expenses
Total expenses for the third quarter of 2001 were $8.4 million, an 8.6%
increase compared to the third quarter of 2000. For the first nine months of
2001, total expenses were $25.3 million, an 8.9% increase compared to the first
nine months of 2000.
Apartment operations expense for the third quarter of 2001 totaled $2.9
million, an 18.9% increase compared to the third quarter of 2000. For the first
nine months of 2001, apartment operations expense totaled $8.3 million, a 14.6%
increase compared to the first nine months of 2000. These increases are
primarily attributable to the addition of Oak Hollow Apartments Phase 2
($204,000 for the third quarter of 2001 and $542,000 for the first nine months
of 2001), along with the impact of higher costs for on-site compensation,
property taxes and insurance, and property administration and turnover costs.
During the third quarter of 2001, we experienced a significant increase in
redecoration and turnover expense at our apartment communities. Intense
competition due to overbuilding, home purchases due to declining interest rates,
and job losses due to the current economic slowdown have all contributed to
higher turnover of residents at the apartment communities. As a result, we have
spent more in turnover expense and, in an effort to attract and retain
residents, more in redecoration expense. We expect that turnover and
redecoration expense will remain at relatively high levels for as long as
current market conditions persist.
Apartment operations expense includes only direct costs of on-site
operations. Apartment operations expense for the third quarter of 2001
represented 37.1% of related apartment rental income, compared to 32.7% in the
third quarter of 2000. For the first nine months of 2001, apartment operations
expense represented 35.7% of related apartment rental income, compared to 33.0%
in the first nine months of 2000.
Operating expenses for restaurant properties are insignificant because the
triple-net lease arrangement requires the lessee to pay virtually all of the
expenses associated with the restaurant properties.
We are now able to identify and compare apartment administration expenses
for 2001 and 2000. These costs include our property management activities as
well as accounting and support activities directly related to apartment
management, and were previously included in our line item for administrative
expenses that included both apartment and corporate administration costs. In
addition, we now include the expenses of our third-party management activities
in these consolidated expense amounts.
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Apartment administration expense totaled $228,000 for the third quarter of
2001 and $739,000 for the first nine months of 2001. If these activities had
been reflected on a consolidated basis in our 2000 financial statements,
apartment administration expense would have been approximately $236,000 for the
third quarter and $686,000 for the first nine months of 2000. The increase in
apartment administration expense on a year-to-date basis is primarily
attributable to increased property management supervisory compensation and
travel expenditures. In addition, these expenses are impacted by the increase in
the number of units under management.
As previously noted, effective October 1, 2001, we entered into additional
third-party management contracts for management of 11 communities containing
1,504 units. We estimate that, going forward, we will incur incremental costs of
approximately $250,000 per year to provide these services. These costs will be
included in apartment administration expense on our financial statements.
Corporate administration expense totaled $438,000 for the third quarter of
2001 and $1,454,000 for the first nine months of 2001. If these activities had
been reflected on a consolidated basis in our 2000 financial statements,
corporate administration expense would have been approximately $380,000 for the
third quarter and $1,370,000 for the first nine months of 2000. The increases in
corporate administration expense are primarily attributable to increased
executive and corporate office staff compensation.
Depreciation expense totaled $1.9 million in the third quarter of 2001, a
9.1% increase compared to the third quarter of 2000. For the first nine months
of 2001, depreciation expense totaled $5.8 million, a 9.0% increase compared to
the first nine months of 2000. This increase is attributable to the addition of
Oak Hollow Apartments Phase 2 ($99,000 in the third quarter of 2001 and $290,000
in the first nine months of 2001) along with the impact of additions and
replacements at other apartment communities (we have generally assigned shorter
lives to these specifically identifiable assets than the composite lives
initially recorded at acquisitions). Amortization expense was essentially the
same in the third quarter and first nine months of 2001 compared to 2000.
Interest expense totaled $2.8 million in the third quarter of 2001, a
1.6% decline compared to the third quarter of 2000. For the first nine months of
2001, interest expense totaled $8.6 million, a 2.9% increase compared to the
first nine months of 2000. While long-term debt increased by approximately $12.5
million, or 8%, between the third quarters of 2000 and 2001, variable interest
rates have declined approximately 4.1% during this period, particularly during
the second and third quarters of 2001. Overall, weighted average interest rates
were 6.8% for the third quarter and 7.0% for the first nine months of 2001,
compared to 7.5% for the third quarter and 7.4% for the first nine months of
2000.
In late September 2001, we refinanced long-term debt related to Paces
Commons Apartments. (This refinance is described below in our discussion of
Capital Resources and Liquidity.) In conjunction with this transaction, we wrote
off unamortized loan costs of $129,000. We have reflected this write-off, net of
minority interests' share, with a charge of $100,000 as an extraordinary item in
the financial statements.
Net income
Net income available to common shareholders in the third quarter of 2001
was $496,000, a 12.4% decline compared to the third quarter of 2000. For the
first nine months of 2001, net
16
income available to common shareholders was $1,448,000, an 11.6% decline
compared to the first nine months of 2000. These comparisons reflect the
favorable effects of non-routine revenue and declining interest rates in the
second and third quarters of 2001 discussed above; offset by the extraordinary
charge to earnings, the impact of interest on increasing debt, and increased
non-cash charges for depreciation and amortization. Operating Partnership
earnings before interest, depreciation and amortization, and the extraordinary
item increased by 2.8% for the third quarter, and 3.8% for the first nine
months, of 2001 compared to 2000. Operating Partnership earnings before
interest, depreciation and amortization, and the extraordinary item, excluding
non-routine revenue, declined by 3.1% for the third quarter, and increased by
0.5% for the first nine months, of 2001 compared to 2000.
Funds from Operations
Funds from operations 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."
We calculate funds available for distribution as funds from operations
plus non-cash expense for amortization of loan costs, less recurring capital
expenditures.
We consider funds from operations and funds available for distribution to
be useful in evaluating potential property acquisitions and measuring the
operating performance of an equity REIT. We believe that, together with net
income and cash flows, funds from operations and funds available for
distribution provide investors with additional measures to evaluate the ability
of the REIT to incur and service debt and to fund acquisitions and other capital
expenditures. Funds from operations and funds available for distribution do not
represent net income or cash flows from operations as defined by generally
accepted accounting principles. You should not consider funds from operations or
funds available for distribution:
o to be alternatives to net income as reliable measures of our
operating performance, or
o to be alternatives to cash flows as measures of liquidity.
Funds from operations and funds available for distribution do not measure
whether cash flow is sufficient to fund all of our cash needs, including
principal amortization, capital improvements and distributions to shareholders.
Funds from operations and funds available for distribution do not represent cash
flows from operating, investing or financing activities as defined by generally
accepted accounting principles. Further, funds from operations and funds
available for distribution as disclosed by other REITs might not be comparable
to our calculation of funds from operations or funds available for distribution.
Funds from operations of the Operating Partnership increased by 7.6% for
the third quarter and by 4.6% for the first nine months of 2001 compared to
2000. These increases are primarily attributable to non-routine revenue and
declines in variable interest rates.
17
We calculated funds from operations of the Operating Partnership as
follows (all amounts in thousands):
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Income before minority interest
and extraordinary item $ 774 $ 737 $ 2,010 $ 2,128
Depreciation 1,946 1,784 5,827 5,348
Amortization of
management intangible 102 102 305 305
--------------- --------------- --------------- ---------------
Funds from operations -
Operating Partnership $ 2,822 $ 2,622 $ 8,142 $ 7,781
=============== =============== =============== ===============
A reconciliation of funds from operations to funds available for
distribution follows (all amounts in thousands):
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Funds from operations -
Operating Partnership $ 2,822 $ 2,622 $ 8,142 $ 7,781
Amortization of loan costs 46 43 138 130
Recurring capital expenditures (418) (242) (972) (665)
--------------- --------------- --------------- ---------------
Funds available for distribution $ 2,450 $ 2,423 $ 7,309 $ 7,244
=============== =============== =============== ===============
A further reconciliation of funds from operations of the Operating
Partnership to basic funds from operations available to common shareholders
follows (all amounts in thousands):
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Funds from operations -
Operating Partnership $ 2,822 $ 2,622 $ 8,142 $ 7,781
Minority interest in
funds from operations (648) (605) (1,873) (1,795)
--------------- --------------- --------------- ---------------
Basic funds from operations
available to common shareholders $ 2,173 $ 2,018 $ 6,268 $ 5,986
=============== =============== =============== ===============
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Other information about our historical cash flows follows (all amounts in
thousands):
Three months ended Nine months ended
September 30 September 30
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Net cash provided by (used in):
Operating activities $ 2,898 $ 2,788 $ 8,186 $ 8,150
Investing activities (829) (354) (1,342) (395)
Financing activities 4,221 (2,383) (945) (7,207)
Dividends and distributions paid to:
Shareholders $ 1,769 $ 1,769 $ 5,307 $ 5,307
Minority unitholders in
Operating Partnership 529 530 1,587 1,572
Scheduled debt principal payments $ 98 $ 84 $ 285 $ 247
Non-recurring capital expenditures 413 113 1,154 900
Weighted average common
shares outstanding 5,717 5,707 5,710 5,708
Weighted average Operating
Partnership minority units
outstanding 1,706 1,710 1,707 1,711
Capital Resources and Liquidity
Capital Resources
On September 27, 2001, we issued a $16.25 million note payable, secured by
a deed of trust and assignment of rents of Paces Commons Apartments. The note
provides for interest at an effective rate of 6.96%, payable in interest-only
monthly installments of approximately $97,000 for one year, then monthly
installments of $106,600 principal and interest, with maturity in October 2011.
We applied approximately $10.1 million of these proceeds to retire an existing
8.125% deed of trust note for the same property.
Paces Commons was our first apartment community. We acquired Paces Commons
in June 1993 for an initial acquisition cost of $14.3 million. Since then, we
have made additional capital expenditures for this community of approximately
$1.3 million.
At September 30, 2001, total long-term debt was $169.5 million, including
$122.2 million of notes payable at fixed interest rates ranging from 6.345% to
8.55%, and $47.3 million at variable rates indexed on 30-day LIBOR rates.
On October 4, 2001, we applied $5.0 million of proceeds from the Paces
Commons refinance to reduce the balance of our variable rate line of credit
secured by a deed of trust and assignment of rents of Latitudes Apartments. We
currently have approximately $6 million additional borrowings available under
our line of credit arrangements.
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The weighted average interest rate on debt outstanding at September 30,
2001, adjusted for the October 4 paydown of variable-rate debt, was 6.4%,
compared to 7.5% at December 31, 2000, and 7.4% at September 30, 2000. This
reduction is primarily attributable to declines in variable rates during the
last nine months. A 1% fluctuation in variable interest rates would increase or
decrease our annual interest expense by approximately $430,000.
In August 2001, we issued 19,750 shares of our common stock through our
Dividend Reinvestment and Stock Purchase Plan, with proceeds totaling
approximately $206,000.
Cash flows and liquidity
Net cash flows from operating activities were $8.2 million during the
first nine months of 2001, a 0.5% increase compared to 2000.
Effective January 1, 2001, we acquired the minority 5% economic interest
and 99% voting interest in BNP Management, Inc. (the "Management Company"). We
now include the assets and liabilities related to our third-party management
operations in our consolidated balance sheet. The effect of this transaction and
change in basis of presentation was to increase cash by approximately $373,000
and apartment properties equipment, net of depreciation, by approximately
$346,000.
Effective April 30, 2001, we sold a restaurant property for its net book
value of approximately $406,000. We applied these proceeds, along with a draw of
$137,000 against our line of credit secured by Latitudes Apartments, to pay down
approximately $543,000 of our line of credit secured by restaurant properties.
During the first nine months of 2001, we have expended approximately
$717,000 for renovations at Oak Hollow Apartments Phase 2. In September 2001, we
drew $172,000 against the $2.0 million available under a variable rate note
secured by Oak Hollow Apartments Phase 2.
In October 2001, we paid approximately $370,000 to acquire vacant land
adjacent to our Chason Ridge Apartments.
Other investing and financing activities during 2001 focused on capital
expenditures at apartment communities, along with payments of dividends and
distributions.
To date we have produced sufficient cash flow to fund our regular dividend
and recurring capital expenditures. We have announced that the company will pay
a regular quarterly dividend of $0.31 per share on November 15, 2001, to
shareholders of record on November 1, 2001.
We capitalize non-recurring expenditures for additions and betterments to
buildings and land improvements. In addition, we generally capitalize recurring
capital expenditures for 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 capitalize all
floor covering, appliance, and HVAC replacements, and depreciate them using a
straight-line, group method over estimated useful lives of 5-10 years.
We 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
20
term and the long term. We anticipate funding our future acquisition activities
primarily by using short-term credit facilities as an interim measure, to be
replaced by funds from equity offerings, long-term debt, or joint venture
investments. We expect to meet our long-term liquidity requirements, such as
scheduled debt maturities and repayment of short-term financing of possible
property acquisitions, through long-term secured and unsecured borrowings and
the issuance of debt securities or additional equity securities. We believe we
have sufficient resources to meet our short-term liquidity requirements.
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.
Recently Issued Accounting Standards
We adopted Financial Accounting Standards Board Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
Statements No. 137 and No. 138, effective January 2001. This Statement requires
the recognition of all derivatives on our consolidated balance sheet at fair
value. This adoption had no impact on our results of operations or financial
position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in information that would be provided
under Item 305 of Regulation S-K since December 31, 2000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Capital Resources and Liquidity" above.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
None
b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BNP RESIDENTIAL PROPERTIES, INC.
(Registrant)
November 13, 2001 /s/ Philip S. Payne
------------------------------------------
Philip S. Payne
Executive Vice President and
Chief Financial Officer
(Duly authorized officer)
November 13, 2001 /s/ Pamela B. Bruno
------------------------------------------
Pamela B. Bruno
Vice President, Controller and
Chief Accounting Officer
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