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, 1999
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
BODDIE-NOELL 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
(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 October 29, 1999 (the latest practicable date).
Common Stock, $.01 par value 5,951,250
(Class) (Number of shares)
Total number of pages: 21
<PAGE>
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 10
3 Quantitative and Qualitative Disclosures
About Market Risk 19
PART II - Other Information
6 Exhibits and Reports on Form 8-K 20
2
<PAGE>
PART I - Financial Information
Item 1. Financial Statements.
BODDIE-NOELL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
Assets
Real estate investments at cost:
Apartment properties $202,755,441 $188,538,645
Restaurant properties 40,544,741 43,205,075
------------------ ------------------
243,300,182 231,743,720
Less accumulated depreciation (24,151,777) (19,552,177)
------------------ ------------------
219,148,405 212,191,543
Cash and cash equivalents 1,243,113 489,694
Other current assets 3,051,808 1,769,934
Investment in and advances to Management Company 458,647 659,715
Notes receivable 625,000 2,536,812
Intangible assets, net of accumulated amortization:
Intangible related to acquisition of management operations 2,029,038 2,333,688
Deferred financing costs 1,014,466 1,139,224
------------------ ------------------
Total assets $227,570,477 $221,120,610
================== ==================
Liabilities and Shareholders' Equity
Mortgage and other notes payable $148,549,444 $134,423,621
Notes payable to affiliates - 6,100,000
Accounts payable and accrued expenses 2,359,050 964,537
Escrowed security deposits and deferred revenue 497,868 352,049
Consideration due for acquisitions 1,300,000 1,849,990
Deferred credit for defeasance of interest,
net of accumulated amortization 875,000 -
------------------ ------------------
Total liabilities 153,581,362 143,690,197
Minority interest in Operating Partnership 20,348,761 20,681,152
Shareholders' equity:
Common stock, $.01 par value, 100,000,000 shares
authorized; issued and outstanding shares--
6,006,950 at September 30, 1999, and
5,977,930 at December 31, 1998 60,069 59,779
Additional paid-in capital 72,441,726 72,117,636
Dividend distributions in excess of net income (18,861,441) (15,428,154)
------------------ ------------------
Total shareholders' equity 53,640,354 56,749,261
------------------ ------------------
Total liabilities and shareholders' equity $227,570,477 $221,120,610
================== ==================
</TABLE>
3
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues
Apartment rental income $7,097,103 $5,888,138 $21,456,542 $15,287,080
Restaurant rental income 1,053,192 1,125,000 3,285,639 3,375,000
Interest and other income 137,265 120,360 446,642 471,914
----------------- ---------------- ----------------- ----------------
8,287,560 7,133,498 25,188,823 19,133,994
Expenses
Depreciation 1,717,891 1,727,695 5,181,524 3,748,726
Amortization of
intangible assets 143,136 132,890 429,408 391,718
Apartment operations 2,473,921 1,875,927 7,432,042 4,915,954
Administrative 442,711 389,828 1,425,975 1,018,928
Interest 2,656,118 2,168,860 8,014,793 5,664,605
----------------- ---------------- ----------------- ----------------
7,433,777 6,295,200 22,483,742 15,739,931
----------------- ---------------- ----------------- ----------------
Income before minority
interest and
extraordinary item 853,783 838,298 2,705,081 3,394,063
Minority interest in
Operating Partnership 179,357 158,623 565,560 523,664
----------------- ---------------- ----------------- ----------------
Income before
extraordinary item 674,426 679,675 2,139,521 2,870,399
Extraordinary item - loss on
early extinguishment of debt - - - 51,335
----------------- ---------------- ----------------- ----------------
Net income $ 674,426 $ 679,675 $ 2,139,521 $ 2,819,064
================= ================ ================= ================
Per share data:
Basic earnings per share -
Income before
extraordinary item $0.12 $0.11 $0.36 $0.49
Extraordinary item - - - (0.01)
----------------- ---------------- ----------------- ----------------
Net income $0.12 $0.11 $0.36 $0.48
================= ================ ================= ================
Diluted earnings per share -
Income before
extraordinary item $0.12 $0.11 $0.36 $0.49
Extraordinary item - - - (0.01)
----------------- ---------------- ----------------- ----------------
Net income $0.12 $0.11 $0.36 $0.48
================= ================ ================= ================
Dividends declared $0.31 $0.31 $0.93 $0.93
================= ================ ================= ================
Weighted average shares
outstanding 6,006,950 5,960,615 5,996,977 5,907,650
================= ================ ================= ================
</TABLE>
4
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Dividends
Additional Distributed
Common Stock paid-in in excess of
Shares Amount capital net income Total
------------ ----------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 5,977,930 $59,779 $72,117,636 $(15,428,154) $56,749,261
Common stock issued, DRIP 13,621 136 152,931 - 153,067
Dividends paid ($0.31) - - - (1,853,159) (1,853,159)
Net income - - - 810,486 810,486
------------ ----------- --------------- --------------- ---------------
Balance at March 31, 1999 5,991,551 59,915 72,270,567 (16,470,827) 55,859,655
Common stock issued, DRIP 15,399 154 171,159 - 171,313
Dividends paid ($0.31) - - - (1,857,380) (1,857,380)
Net income - - - 654,609 654,609
------------ ----------- --------------- --------------- ---------------
Balance at June 30, 1999 6,006,950 60,069 72,441,726 (17,673,598) 54,828,197
Dividends paid ($0.31) - - - (1,862,269) (1,862,269)
Net income - - - 674,426 674,426
------------ ----------- --------------- --------------- ---------------
Balance at September 30, 1999 6,006,950 $60,069 $72,441,726 $(18,861,441) $53,640,354
============ =========== =============== =============== ===============
</TABLE>
5
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
1999 1998
----------------- ----------------
<S> <C> <C>
Operating activities:
Net income $2,139,521 $2,819,064
Adjustments to reconcile net income to
net cash provided by operations:
Extraordinary item - early
extinguishment of debt - 51,335
Minority interest in Operating Partnership 565,560 523,664
Equity in income of Management Company (128,932) (34,990)
Depreciation and amortization 5,485,940 4,140,444
Changes in operating assets and liabilities:
Other current assets (1,217,943) (1,078,798)
Accounts payable and accrued expenses 1,394,513 656,341
Security deposits and deferred revenue 152,182 (1,062)
----------------- ----------------
Net cash provided by operating activities 8,390,841 7,075,998
Investing activities:
Acquisitions of apartment properties (1,796,746) (41,051,647)
Additions to apartment properties (1,799,344) (955,044)
Sale of restaurant properties 2,079,719 -
Repayment from (advances to)
Management Company 330,000 (330,000)
Reduction (investment) in notes receivable 1,911,812 (361,951)
----------------- ----------------
Net cash provided by (used in)
investing activities 725,441 (42,698,642)
Financing activities:
Net proceeds from issue of common stock 324,380 2,972,667
Distributions to Operating Partnership
minority unitholders (1,447,941) (707,292)
Dividends paid to common shareholders (5,572,808) (5,490,880)
Proceeds from notes payable 2,838,188 48,606,951
Principal payments on notes payable (4,504,682) (10,712,863)
Payment of deferred financing costs - (409,325)
----------------- ----------------
Net cash (used in) provided by
financing activities (8,362,863) 34,259,258
----------------- ----------------
Net increase (decrease) in
cash and cash equivalents 753,419 (1,363,386)
Cash and cash equivalents at
beginning of period 489,694 2,458,565
----------------- ----------------
Cash and cash equivalents at end of period $1,243,113 $1,095,179
================= ================
</TABLE>
6
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - September 30, 1999
(Unaudited)
Note 1. Interim financial statements
Our independent accountants have not audited the accompanying financial
statements of Boddie-Noell Properties, Inc., except for the balance sheet at
December 31, 1998. We derived the amounts in the balance sheet at December 31,
1998, from the financial statements included in our 1998 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 1998 Annual
Report on Form 10-K.
Note 2. Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. Statement
131 uses a management approach to report financial and descriptive information
about a company's operating segments. Operating segments are revenue-producing
components for which separate financial information is produced internally for
the company's management. Under this definition, we operated, for all periods
presented, as a single segment (apartment operations).
Note 3. Property Acquisitions and Sales
Effective January 1, 1999, we acquired Chason Ridge Apartments for a total
acquisition cost of approximately $12.5 million, including cash payments
totaling approximately $1.8 million.
In June 1999, we sold three restaurant properties to the lessee (who is an
affiliate) for their net carrying value of $2.1 million.
Note 4. Notes payable
We funded cash payments for the acquisition of Chason Ridge with draws from our
line of credit totaling $1.75 million. In May 1999, we retired a $6.1 million
note payable to an affiliate with a $6.1 million draw from our line of credit.
In June 1999, we applied $2.1 million proceeds from the sale of three
restaurants to reduce our line of credit.
In conjunction with the acquisition of Chason Ridge Apartments in January 1999,
we assumed a HUD-insured loan in the amount of $9.7 million, payable in monthly
installments of $72,000 including principal and interest at 8.5%. In addition,
the note provides for payment of mortgage insurance with a premium of 0.5% of
the loan balance. A deed of trust on and assignment of rents of Chason Ridge
Apartments secure the loan. The interest rate on this loan exceeded current
market rates at that time, and the note may not be prepaid until January 2005.
Accordingly, the seller gave a $1.0 million credit for defeasance of
above-market interest, which we will apply to reduce recorded interest expense
monthly through 2004.
7
<PAGE>
In February 1999, The Villages of Chapel Hill Limited Partnership reduced the
outstanding principal balance of its note payable to us to $625,000. We applied
the $1.9 million proceeds to reduce our variable-rate note payable to a bank to
$625,000.
Note 5. Shareholders' Equity
We calculated basic and diluted earnings per share using the following amounts:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Numerators:
For basic earnings per share -
Income before
extraordinary item $674,426 $679,675 $2,139,521 $2,870,399
Extraordinary item - - - (51,335)
----------------- ---------------- ----------------- ----------------
Net income $674,426 $679,675 $2,139,521 $2,819,064
================= ================ ================= ================
For diluted earnings per share -
Income before
extraordinary item (1) $853,783 $838,298 $2,705,081 $3,394,063
Extraordinary item (1) - - - (59,682)
----------------- ---------------- ----------------- ----------------
Net income (1) $853,783 $838,298 $2,705,081 $3,334,381
================= ================ ================= ================
Denominators:
Denominator for basic
earnings per share -
weighted average shares
outstanding 6,006,950 5,960,615 5,996,977 5,907,650
Effect of dilutive securities:
Contingent stock, acquisition - - - 2,387
Convertible Operating
Partnership units 1,594,969 1,288,598 1,584,399 1,085,120
Stock options (2) - 9,012 - 26,120
----------------- ---------------- ----------------- ----------------
1,594,969 1,297,610 1,584,399 1,113,627
----------------- ---------------- ----------------- ----------------
Denominator for diluted
earnings per share - adjusted
weighted average shares and
assumed conversions 7,601,919 7,258,225 7,581,376 7,021,227
================= ================ ================= ================
<FN>
(1) Assumes conversion of Operating Partnership units to common shares; minority
interest in income before extraordinary item and minority interest in
extraordinary item have been eliminated. (2) We excluded 430,000 options granted
in 1994 (exercise price $12.50), 1997 (exercise price $12.25), and 1998
(exercise price $13.125 and $11.25) from the 1999 calculations because they were
antidilutive at September 30, 1999. We also excluded 120,000 options granted in
1998 (exercise price $13.125) from the 1998 calculations because they were
antidilutive at September 30, 1998.
</FN>
</TABLE>
8
<PAGE>
Note 6. Subsequent events
During October 1999 we repurchased and retired 55,700 shares of our common stock
at a total cost of $538,466.
On October 20, 1999, we declared a regular quarterly cash dividend of $0.31 per
share, which we will pay on November 16, 1999, to shareholders of record on
November 1, 1999.
9
<PAGE>
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. Such statements are subject to
various risks and uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors identified in our Annual
Report on Form 10-K for the year ending December 31, 1998. You should read the
following 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
Boddie-Noell Properties, Inc. is a self-administered and self-managed real
estate investment trust that owns and operates apartment communities in North
Carolina and Virginia. We currently own and operate 15 apartment communities
containing 3,440 units and have the right to acquire one additional apartment
community containing 108 units. We also own 44 restaurant properties, which we
lease to a third party under a master lease on a triple-net basis. We manage
four other apartment communities and one shopping center through an
unconsolidated subsidiary. Our executive offices are located at 3850 One First
Union Center, Charlotte, North Carolina 28202-6032, telephone 704/944-0100.
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 Boddie-Noell Properties Limited Partnership, or the "Operating
Partnership," through which we conduct all of our operations.
Overview
This discussion analyzes our operations for the third quarter and first
nine months of 1999 compared to the third quarter and first nine months of 1998.
In reading this discussion, it may help if you keep certain factors in mind:
o Throughout the first five months of 1998, we owned and operated nine
apartment communities containing 2,208 units.
o During the period June 1 through September 9, 1998, we acquired five
apartment communities containing 980 units. We issued Operating Partnership
units in conjunction with these acquisitions. You should read our annual
report on Form 10-K for the year ended December 31, 1998, for a detailed
discussion of these acquisitions and related financing transactions.
Effective January 1, 1999, we acquired one additional apartment community
containing 252 units in a cash purchase.
o Throughout the first nine months of 1999, we owned and operated 15
apartment communities containing 3,440 units.
10
<PAGE>
Results of Operations
Revenues
Total revenue for the third quarter of 1999 was $8.3 million, a 16.2%
increase over the third quarter of 1998. For the first nine months of 1999,
total revenue was $25.2 million, a 31.6% increase over the first nine months of
1998. The increase in total revenue is attributable to a significant increase in
apartment rental income. We have two principal sources of revenue: apartment
rental income and restaurant rental income.
Apartment rental income for the third quarter of 1999 was $7.1 million, a
20.5% increase over the third quarter of 1998. For the first nine months of
1999, apartment rental income was $21.5 million, a 40.4% increase over the first
nine months of 1998. This increase is principally due to the acquisition of six
apartment communities during 1998 and the first quarter of 1999.
For the third quarter of 1999, overall average economic occupancy was
94.7%, with average monthly revenue per occupied unit of $726. For the first
nine months of 1999, overall average economic occupancy was 95.0%, with average
monthly revenue per occupied unit of $730.
Rental income for the nine apartment communities we owned throughout the
first nine months of both 1999 and 1998 (apartment communities owned as of
January 1, 1998) totaled $4.6 million for the third quarter of 1999, a 1.4%
decrease compared to the third quarter of 1998. For this "same-unit" comparison,
rental income totaled $13.9 million for the first nine months of 1999, a 0.1%
decrease compared to the first nine months of 1998.
For the third quarter of 1999, same-unit average economic occupancy
decreased 0.2%, while average monthly revenue per occupied unit decreased by
1.1%, compared to the third quarter of 1998. For the first nine months of 1999,
same-unit average economic occupancy increased 0.6%, while average monthly
revenue per occupied unit decreased by 0.5%, compared to the first nine months
of 1998.
Summary amounts for our apartment communities' occupancy and revenue per
occupied unit for the third quarter and first nine months of 1999 follow:
<TABLE>
<CAPTION>
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
----------- ------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Abbington Place 360 89.3% 89.9% $734 91.8% 93.0% $755
Allerton Place (1) 228 94.8% 94.0% 782 95.1% 95.2% 782
Chason Ridge (2) 252 95.7% 95.5% 653 95.5% 95.3% 665
Harris Hill 184 96.4% 97.5% 732 96.3% 97.0% 735
Latitudes 448 97.9% 98.1% 688 97.2% 97.8% 682
Madison Hall (3) 128 94.9% 93.6% 632 93.0% 92.6% 647
Oakbrook 162 95.7% 95.2% 783 95.1% 95.3% 780
Oak Hollow (4) 220 96.6% 96.5% 726 95.2% 95.6% 720
Paces Commons 336 93.9% 95.4% 714 95.1% 96.1% 708
Paces Village 198 97.3% 95.8% 650 93.2% 92.5% 658
Pepperstone 108 94.7% 95.5% 690 96.5% 96.6% 683
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
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
----------- ------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Savannah Place 172 92.9% 93.7% 764 93.6% 93.1% 774
Summerlyn Place (5) 140 92.1% 92.2% 789 92.2% 91.9% 811
Waterford Place 240 95.1% 95.7% 845 94.2% 95.1% 848
Woods Edge (6) 264 91.8% 91.5% 734 94.0% 94.2% 727
All apartments
- 1999 3,440 94.6% 94.7% 726 94.7% 95.0% 730
Same units (7)
- 1999 2,208 94.7% 95.1% 730 94.8% 95.3% 733
- 1998 2,208 95.4% 95.3% 738 94.6% 94.7% 737
<FN>
(1) Acquired September 1998.
(2) Acquired January 1999.
(3) Acquired August 1998.
(4) Acquired July 1998.
(5) Acquired September 1998.
(6) Acquired June 1998.
(7) Includes nine apartment communities owned as of January 1, 1998
</FN>
</TABLE>
During the third quarter of 1999 we continued to experience some weakness
in the majority of our apartment markets. This weakness appears to be the result
of new apartment construction and robust home sales. While we have been able to
maintain high occupancy levels, we have not been able to achieve the rental
rates we would like. As a result, apartment rental income was lower for the
third quarter than expected.
We have begun to see what we believe are signs of improving market
conditions, most notably in Greensboro, but we do not expect any significant
improvement in our apartment markets for the remainder of the year. In light of
this, we will continue to emphasize occupancy as a means of maximizing cash flow
from our properties. We will also strive to maintain our competitive position by
keeping the apartment communities in an excellent state of repair and by making
selective improvements. We have excellent properties in good locations, and we
believe we are well positioned to compete effectively in our markets.
In June 1999, we sold three restaurants to Boddie-Noell Enterprises, the
lessee, under the non-economic clause of the restaurant master lease. Under the
terms of this clause, the lessee may close up to seven restaurants and buy them
back for no less than net carrying value. Following the sale of these
properties, the annual minimum rent on the remaining 44 restaurants will be
approximately $4.3 million in 1999, and $4.2 million per year thereafter,
compared to $4.5 million minimum rent on 47 restaurants in 1998. We applied the
$2.1 million proceeds from the sale to reduce our line of credit. We expect the
sale of these restaurants to reduce funds from operations for 1999 by
approximately $80,000.
12
<PAGE>
Restaurant rental income for the third quarter and first nine months of
both 1999 and 1998 was the minimum rent. The actual restaurant rental income for
the third quarter of 1999 declined by 6.4% compared to 1998, and by 2.6% for the
first nine months of 1999 compared to 1998, due to the sale of the three
restaurant properties in June 1999. Restaurant rental income is the greater of
the minimum rent or 9.875% of food sales. Sales at the 44 restaurant properties
that we owned throughout the first nine months of both 1999 and 1998 declined by
3.6% for the third quarter, and 2.6% for the first nine months, compared to 1998
amounts.
Expenses
Total expense for the third quarter of 1999 was $7.4 million, an increase
of 18.1% over the third quarter of 1998. For the first nine months of 1999,
total expense was $22.5 million, an increase of 42.8% over the first nine months
of 1998. These increases are primarily attributable to the acquisition of six
apartment communities during 1998 and the first quarter of 1999.
Apartment operations expense for the third quarter was $2.5 million, an
increase of 31.9% over the third quarter of 1998. For the first nine months of
1999, apartment operations expense was $7.4 million, an increase of 51.2% over
the first nine months of 1998. Apartment operations expense represented 34.9% of
related rental income for the third quarter of 1999 compared to 31.9% in the
third quarter of 1998. For the first nine months of 1999, apartment operations
expense represented 34.6% of related rental income, compared to 32.2% for the
first nine months of 1998.
Apartment operations expense for the nine apartment communities we owned
throughout the first nine months of both 1999 and 1998 (apartment communities
owned as of January 1, 1998) totaled $1.6 million for the third quarter of 1999,
a 1.8% increase compared to the third quarter of 1998. For this same-unit
comparison, apartment operations expense totaled $4.7 million for the first nine
months of 1999, a 2.5% increase compared to the first nine months of 1998. For
these nine same-unit communities, apartment operations expense represented 34.4%
of related rental income for the third quarter of 1999 compared to 33.4% in the
third quarter of 1998. For the first nine months of 1999, same-unit apartment
operations expense represented 34.0% of related rental income compared to 33.1%
for the first nine months of 1998.
Apartment operations expenses were generally in line with management's
expectations. The increase in apartment operations expense as a percent of
related income is primarily attributable to shortfalls in rental income.
Increases in non-executive compensation, taxes and insurance further increased
apartment operations expense as a percent of related income.
Operating expenses for restaurant properties are insignificant because the
restaurant properties' triple-net lease arrangement requires the lessee to pay
virtually all of the expenses associated with the restaurant properties.
The increases in depreciation and amortization expense are attributable to
the addition of apartment communities.
Administrative costs increased by 13.6% for the third quarter of 1999 and
39.9% for the first nine months of 1999 compared to 1998. The increase in
administrative costs is generally attributable to additional corporate level
staff and overhead costs corresponding to the addition of six apartment
communities. In addition, legal and professional fees expense totaled $235,000
through the first nine months of 1999, compared to $146,000 through the first
nine months of 1998, reflecting the increased complexity and costs associated
with administration of our
13
<PAGE>
UPREIT structure. We expect that administrative costs will continue to increase,
but at a slower rate, as and when we acquire additional apartment communities.
Interest expense was $2.7 million for the third quarter of 1999, an
increase of 22.5% over the third quarter of 1998. For the first nine months of
1999, interest expense totaled $8.0 million, an increase of 41.5% compared to
the first nine months of 1998. These increases are attributable to long-term
debt issued in conjunction with apartment acquisitions. Weighted average
interest rates were 7.2% in the third quarter and first nine months of 1999
compared to 7.5% in the third quarter and first nine months of 1998.
Net income
Net income available to common shareholders was $674,000 for the third
quarter of 1999, a decrease of 0.8% compared to the third quarter of 1998. For
the first nine months of 1999, net income available to common shareholders
totaled $2.1 million, a decrease of 24.1% compared to the first nine months of
1998. These variances are primarily attributable to the effect of non-cash
charges for depreciation and increases in minority interest in the Operating
Partnership.
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 debt
restructuring and 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 may not be comparable to
our calculation of funds from operations or funds available for distribution.
14
<PAGE>
Funds from operations of the Operating Partnership increased by 0.2% for
the third quarter and 10.0% for the first nine months of 1999 compared to 1998
amounts.
We calculated funds from operations of the Operating Partnership as
follows (all amounts in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income before minority interest and
extraordinary item $ 854 $ 838 $2,705 $3,394
Depreciation 1,718 1,728 5,182 3,749
Amortization of
management intangible 102 102 305 305
--------------- --------------- --------------- ---------------
Funds from operations -
Operating Partnership $2,673 $2,668 $8,191 $7,447
=============== =============== =============== ===============
</TABLE>
A reconciliation of funds from operations to funds available for
distribution follows (all amounts in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Funds from operations -
Operating Partnership $2,673 $2,668 $8,191 $7,447
Amortization of loan costs 42 31 125 87
Recurring capital expenditures (339) (258) (859) (569)
--------------- --------------- --------------- ---------------
Funds available for distribution $2,376 $2,441 $7,457 $6,965
=============== =============== =============== ===============
</TABLE>
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):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Funds from operations -
Operating Partnership $2,673 $2,668 $8,191 $7,447
Minority interest in
funds from operations (561) (468) (1,713) (1,151)
--------------- --------------- --------------- ---------------
Basic funds from operations
available to common shareholders $2,112 $2,200 $6,479 $6,296
=============== =============== =============== ===============
</TABLE>
15
<PAGE>
Other information about our historical cash flows follows (all amounts in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities $ 2,575 $ 2,492 $ 8,391 $ 7,076
Investing activities (334) (39,895) 725 (42,699)
Financing activities (1,490) 36,775 (8,363) 34,259
Dividends and distributions paid to:
Shareholders $ 1,862 $ 1,846 $ 5,573 $ 5,491
Minority unitholders in
Operating Partnership 489 314 1,448 707
Scheduled debt principal payments $ 139 $ 123 $ 405 $ 365
Non-recurring capital expenditures 326 169 942 389
Weighted average common
shares outstanding 6,007 5,961 5,997 5,908
Weighted average Operating
Partnership minority units
outstanding 1,595 1,284 1,584 1,084
</TABLE>
Effective with this Quarterly Report on Form 10-Q, we have revised our
calculation of funds available for distribution to conform to the prevalent
industry practice. We will no longer deduct scheduled debt principal payments
from funds from operations in calculating funds available for distribution.
Restated amounts for funds available for distribution follow:
<TABLE>
<CAPTION>
Amounts Scheduled Amounts
as Debt as
Previously Principal Currently
Reported Payments Reported
------------------ ------------------- ------------------
<S> <C> <C> <C>
Three months ended June 30, 1999 $2,215 $135 $2,350
Three months ended March 31, 1999 2,600 131 2,731
Three months ended September 30, 1998 2,318 123 2,441
Three months ended June 30, 1998 2,119 112 2,231
Three months ended March 31, 1998 2,163 129 2,292
</TABLE>
Capital Resources and Liquidity
Capital Resources
Effective January 1, 1999, we acquired Chason Ridge Apartments, a 252-unit
community located in Fayetteville, North Carolina. The total acquisition cost
was approximately $12.5 million, including cash payments totaling approximately
$1.8 million. We funded cash payments for the acquisition of Chason Ridge with
draws from our line of credit totaling $1.75 million.
16
<PAGE>
In conjunction with the acquisition of Chason Ridge Apartments, we assumed
a HUD-insured loan in the amount of $9.7 million, payable in monthly
installments of $72,000 including principal and interest at 8.5%. In addition,
the note provides for payment of mortgage insurance with a premium of 0.5% of
the loan balance. A deed of trust on and assignment of rents of Chason Ridge
Apartments secure the loan. When we acquired Chason Ridge, the interest rate on
this loan exceeded current market rates, and the note may not be prepaid until
January 2005. Accordingly, the seller gave a $1.0 million credit to offset the
cost of the above-market interest rate, which we will apply to reduce recorded
interest expense monthly through 2004. We estimate the effective interest rate
on this note to be approximately 7.3%.
In February 1999, The Villages of Chapel Hill Limited Partnership reduced
the outstanding principal balance of its note payable to us to $625,000. We
applied the $1.9 million proceeds to reduce our variable-rate note payable to a
bank to $625,000.
In May 1999, we retired a $6.1 million note payable to an affiliate with a
$6.1 million draw from our line of credit. In June 1999, we applied $2.1 million
proceeds from the sale of three restaurants to reduce our line of credit.
At September 30, 1999, total long-term debt was $148.5 million, including
$129.2 million of notes payable at fixed interest rates ranging from 6.345% to
8.55%, and $19.3 million at variable rates indexed on 30-day LIBOR rates. The
weighted average interest rate on debt outstanding was 7.2% at September 30,
1999, compared to 7.2% at December 31, 1998, and September 30, 1998. A 1%
fluctuation in variable interest rates would increase or decrease our annual
interest expense by approximately $196,000.
A note payable secured by a deed of trust on Latitudes Apartments matures
in January 2000. The balance of this note at September 30, 1999, was $12.6
million, with interest at 8.45%. The note may be prepaid in the fourth quarter
of 1999 without penalty. We have a commitment to refinance this loan with an
$18.0 million line of credit, with interest at LIBOR plus 2.0% and principal
repayment due in five years. We expect to close on this refinancing before the
end of December 1999.
In December 1998, we established a share buy-back program that authorized
the repurchase and retirement of up to 300,000 shares of our common stock.
During October 1999, we repurchased and retired approximately 56,000 shares of
our common stock at a cost of approximately $538,000.
Cash flows and liquidity
Net cash flows from operating activities for the third quarter of 1999
were $2.6 million, compared to $2.5 million for the third quarter of 1998. Net
cash flows from operating activities were $8.4 million through the first nine
months of 1999, compared to $7.1 million through the first nine months of 1998.
These increases reflect our growth in apartment operations. Investing and
financing activities focused primarily on apartment acquisitions and
improvements, along with payments of dividends and distributions.
We continue to produce sufficient cash flow to fund our regular dividend.
We have announced that the company will pay a regular quarterly dividend of
$0.31 per share on November 16, 1999, to shareholders of record on November 1,
1999.
17
<PAGE>
We capitalize our expenditures relating to acquiring new assets,
materially enhancing the value of existing assets, or substantially extending
the useful life of existing assets. All carpet and vinyl replacements are
capitalized. Additions to owned apartment communities are generally funded from
cash provided by operating activities. During the third quarter of 1999, we drew
$1.0 million from our line of credit to fund capital improvements projects.
These were primarily improvements that we planned as part of the acquisition of
six apartment communities during 1998 and early 1999.
We generally expect to meet our short-term liquidity requirements through
net cash provided by operations and utilization of credit facilities. We believe
that net cash provided by operations is, and will continue to be, adequate to
meet the REIT operating requirements in both the short term and the long term.
We anticipate funding our future acquisition activities primarily by using
short-term credit facilities as an interim measure, to be replaced by funds from
equity offerings or long-term debt. 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.
Year 2000 Issues
The Year 2000 issue refers to the inability of certain computer systems to
accurately store and use dates after 1999. If not corrected, this could result
in failure of the information technology systems that we use in our business
operations, such as computer programs related to property management, leasing,
financial reporting and employee benefits. In addition, computerized systems and
microprocessors are embedded in a variety of products used in our operations and
properties, such as HVAC controls, thermostats, elevators, alarms, smoke
detectors, sprinklers and phones.
Our remediation plan has three phases:
o Assessment (inventory and testing of computer systems and inquiries
regarding Year 2000 readiness of significant vendors and suppliers);
o Renovation (repairing or replacing non-compliant systems); and
o Validation (testing of repaired or replaced systems).
The following chart shows our progress with respect to our remediation
plan:
Information Technology Other Systems
--------------------------- -------------------------
Assessment Phase
% complete 100% 100%
Completion date 4th quarter 1998 1st quarter 1999
18
<PAGE>
Information Technology Other Systems
--------------------------- -------------------------
Renovation Phase
% complete 100% not applicable
Completion date 4th quarter 1998 not applicable
Validation Phase
% complete 100% not applicable
Completion date 4th quarter 1998 not applicable
With respect to our material third-party relationships, i.e., our utility
providers, our significant vendors and suppliers and our restaurant tenant, we
made written inquiries of their Year 2000 readiness. To date, none have
indicated Year 2000 issues that could materially impact our operations.
The cost of our remediation efforts to date and the estimated cost of our
future remediation efforts are not material.
Based on our assessment of the Year 2000 readiness of our significant
vendors, suppliers and tenant, as well as the status of our remediation plan, we
do not expect Year 2000 issues to have a material impact on the company. As a
result, we have not created, and we do not expect to create, a contingency plan
for Year 2000 failures. Nevertheless, this assessment, which is a
forward-looking statement, depends on the accuracy of the information we have
received from third parties with respect to their Year 2000 readiness.
Various of our disclosures and announcements concerning our Year 2000
programs are intended to constitute "Year 2000 Readiness Disclosures" as defined
in the recently enacted Year 2000 Information and Readiness Disclosure Act. The
Act provides added protection from liability for certain public and private
statements concerning an entity's Year 2000 readiness and the Year 2000
readiness of its products and services. The Act also potentially provides added
protection from liability for certain types of Year 2000 disclosures made after
January 1, 1996, and before the date of enactment of the Act.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
Statement, as amended by Statement No. 137, must be adopted in years beginning
after June 15, 2000. The Statement will require the recognition of all
derivatives on our consolidated balance sheet at fair value. We do not
anticipate that the adoption of this Statement will have a material 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, 1998.
19
<PAGE>
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27 Financial data schedule (electronic filing)
b) Reports on Form 8-K:
None.
20
<PAGE>
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.
BODDIE-NOELL PROPERTIES, INC.
(Registrant)
November 10, 1999 /s/ Philip S. Payne
---------------------------------------
Philip S. Payne
Executive Vice President and
Chief Financial Officer
(Duly authorized officer)
November 10, 1999 /s/ Pamela B. Bruno
---------------------------------------
Pamela B. Bruno
Vice President, Controller and
Chief Accounting Officer
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BODDIE-NOELL
PROPERTIES, INC. FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,243,113
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,294,921
<PP&E> 243,300,182
<DEPRECIATION> (24,151,777)
<TOTAL-ASSETS> 227,570,477
<CURRENT-LIABILITIES> 2,856,918
<BONDS> 148,549,444
0
0
<COMMON> 72,501,795
<OTHER-SE> (18,861,441)
<TOTAL-LIABILITY-AND-EQUITY> 227,570,477
<SALES> 0
<TOTAL-REVENUES> 25,188,823
<CGS> 0
<TOTAL-COSTS> 12,613,566
<OTHER-EXPENSES> 1,855,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,014,793
<INCOME-PRETAX> 2,139,521
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,139,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,139,521
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.36
</TABLE>
