United
States
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
xQUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
|
For
the
quarterly period ended June 30, 2007
or
_____________________
Commission
File number 001-31659
Berkshire
Income Realty, Inc.
Maryland
|
|
32-0024337
|
(State
of other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
One
Beacon Street, Boston, Massachusetts
|
|
02108
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
(617)
523-7722
|
(Registrants
telephone number, including area
code)
|
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.
Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one):
Indicate
by check mark whether the Registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act).
|
Yes x No
There
were 1,406,196 shares of Class B common stock outstanding as of August 13,
2007.
|
BERKSHIRE
INCOME REALTY, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE
OF CONTENTS
|
|
|
|
ITEM
NO.
|
|
|
PAGE
NO.
|
|
|
|
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
|
|
Item
1.
|
CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED):
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets at June 30, 2007 and December 31, 2006
|
|
|
3
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the three months and six months ended
June
30, 2007 and 2006
|
|
|
4
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders’ Equity / (Deficit) for the six
months ended June 30, 2007
|
|
|
5
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the six months ended June 30, 2007
and
2006
|
|
|
6
|
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
8
|
|
|
|
|
|
|
|
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
21
|
|
|
|
|
|
|
|
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
|
39
|
|
|
|
|
|
|
|
Item
4.
|
CONTROLS
AND PROCEDURES
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Item
1.
|
LEGAL
PROCEEDINGS
|
|
|
40
|
|
|
|
|
|
|
|
Item
1 A.
|
RISK
FACTORS
|
|
|
40
|
|
|
|
|
|
|
|
Item
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
|
40
|
|
|
|
|
|
|
|
Item
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
|
|
40
|
|
|
|
|
|
|
|
Item
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
|
|
40
|
|
|
|
|
|
|
|
Item
5.
|
OTHER
INFORMATION
|
|
|
40
|
|
|
|
|
|
|
|
Item
6.
|
EXHIBITS
|
|
|
40
|
|
Part
I FINANCIAL
INFORMATION
Item
1.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
BERKSHIRE
INCOME REALTY, INC.
CONSOLIDATED
BALANCE SHEETS
(unaudited)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Multifamily
apartment communities, net of accumulated depreciation of $154,430,286
and
$148,670,523, respectively
|
|
$ |
469,746,523
|
|
|
$ |
445,597,599
|
|
Cash
and cash equivalents
|
|
|
8,093,728
|
|
|
|
15,393,249
|
|
Cash
restricted for tenant security deposits
|
|
|
1,791,465
|
|
|
|
1,803,633
|
|
Cash
held in escrow for 1031 exchange
|
|
|
18,487,209
|
|
|
|
-
|
|
Replacement
reserve escrow
|
|
|
7,257,527
|
|
|
|
5,645,565
|
|
Prepaid
expenses and other assets
|
|
|
9,985,449
|
|
|
|
9,013,615
|
|
Investment
in Mortgage Funds
|
|
|
-
|
|
|
|
-
|
|
Investment
in Multifamily Venture and Limited Partnership Venture
|
|
|
12,573,490
|
|
|
|
11,000,949
|
|
Acquired
in place leases and tenant relationships, net of accumulated
amortization
of $6,755,375 and $6,215,155, respectively
|
|
|
582,186
|
|
|
|
718,994
|
|
Deferred
expenses, net of accumulated amortization of $847,921 and $702,730,
respectively
|
|
|
3,454,002
|
|
|
|
3,526,574
|
|
Total
assets
|
|
$ |
531,971,579
|
|
|
$ |
492,700,178
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Mortgage
notes payable
|
|
$ |
477,585,100
|
|
|
$ |
469,378,510
|
|
Note
payable to affiliates
|
|
|
17,500,000
|
|
|
|
-
|
|
Due
to affiliates
|
|
|
1,966,383
|
|
|
|
1,380,472
|
|
Dividend
and distributions payable
|
|
|
1,837,607
|
|
|
|
1,837,607
|
|
Accrued
expenses and other liabilities
|
|
|
12,142,941
|
|
|
|
12,012,347
|
|
Tenant
security deposits
|
|
|
2,187,098
|
|
|
|
2,152,228
|
|
Total
liabilities
|
|
|
513,219,129
|
|
|
|
486,761,164
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Series
A 9% Cumulative Redeemable Preferred Stock, no par value, $25 stated
value, 5,000,000 shares authorized, 2,978,110 shares issued and
outstanding at June 30, 2007 and December 31, 2006,
respectively
|
|
|
70,210,830
|
|
|
|
70,210,830
|
|
Class
A common stock, $.01 par value, 5,000,000 shares authorized, 0
shares
issued and outstanding at June 30, 2007 and December 31, 2006,
respectively
|
|
|
-
|
|
|
|
-
|
|
Class
B common stock, $.01 par value, 5,000,000 shares authorized, 1,406,196
issued and outstanding at June 30, 2007 and December 31, 2006,
respectively
|
|
|
14,062
|
|
|
|
14,062
|
|
Excess
stock, $.01 par value, 15,000,000 shares authorized, 0 shares issued
and
outstanding at June 30, 2007 and December 31, 2006,
respectively
|
|
|
-
|
|
|
|
-
|
|
Accumulated
deficit
|
|
|
(51,472,442 |
) |
|
|
(64,285,878 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
18,752,450
|
|
|
|
5,939,014
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
531,971,579
|
|
|
$ |
492,700,178
|
|
The
accompanying notes are an integral part of these financial
statements.
BERKSHIRE
INCOME REALTY, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three months
ended
Six months ended
June
30,
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
19,770,376
|
|
|
$ |
16,143,991
|
|
|
$ |
38,659,900
|
|
|
$ |
32,412,356
|
|
Interest
|
|
|
213,945
|
|
|
|
241,947
|
|
|
|
410,337
|
|
|
|
440,676
|
|
Utility
reimbursement
|
|
|
426,238
|
|
|
|
249,560
|
|
|
|
647,621
|
|
|
|
520,727
|
|
Other
|
|
|
777,536
|
|
|
|
678,991
|
|
|
|
1,507,256
|
|
|
|
1,264,052
|
|
Total
revenue
|
|
|
21,188,095
|
|
|
|
17,314,489
|
|
|
|
41,225,114
|
|
|
|
34,637,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
5,139,804
|
|
|
|
4,339,920
|
|
|
|
10,889,118
|
|
|
|
9,203,888
|
|
Maintenance
|
|
|
1,573,600
|
|
|
|
1,392,878
|
|
|
|
2,710,639
|
|
|
|
2,382,197
|
|
Real
estate taxes
|
|
|
2,181,202
|
|
|
|
1,921,623
|
|
|
|
4,260,444
|
|
|
|
3,858,961
|
|
General
and administrative
|
|
|
737,566
|
|
|
|
633,292
|
|
|
|
1,540,887
|
|
|
|
1,188,920
|
|
Management
fees
|
|
|
1,233,632
|
|
|
|
1,092,437
|
|
|
|
2,433,005
|
|
|
|
2,176,548
|
|
Depreciation
|
|
|
8,054,096
|
|
|
|
6,481,686
|
|
|
|
15,549,897
|
|
|
|
12,651,367
|
|
Interest
|
|
|
7,028,286
|
|
|
|
4,729,106
|
|
|
|
13,259,150
|
|
|
|
9,322,290
|
|
Amortization of acquired in-place leases and tenant
relationships
|
|
|
380,573
|
|
|
|
213,030
|
|
|
|
751,811
|
|
|
|
541,585
|
|
Total expenses
|
|
|
26,328,759
|
|
|
|
20,803,972
|
|
|
|
51,394,951
|
|
|
|
41,325,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest in properties, equity in income (loss)
of
Multifamily Venture and Limited Partnership Venture, minority common
interest in Operating Partnership and income (loss) from
discontinued operations
|
|
|
(5,140,664 |
) |
|
|
(3,489,483 |
) |
|
|
(10,169,837 |
) |
|
|
(6,687,945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
(1,471,581 |
) |
|
|
(173,861 |
) |
|
|
(1,695,195 |
) |
|
|
(1,213,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Multifamily Venture
and
Limited Partnership Venture
|
|
|
(689,536 |
) |
|
|
9,617,881
|
|
|
|
(1,297,766 |
) |
|
|
9,484,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
(976,100 |
) |
|
|
-
|
|
|
|
(1,952,200 |
) |
|
|
(976,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
|
(8,277,881 |
) |
|
|
5,954,537
|
|
|
|
(15,114,998 |
) |
|
|
606,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(724,895 |
) |
|
|
(87,439 |
) |
|
|
(795,974 |
) |
|
|
(140,989 |
) |
Gain on disposition of real estate assets
|
|
|
32,122,606
|
|
|
|
-
|
|
|
|
32,122,606
|
|
|
|
-
|
|
Income
(loss) from discontinued operations
|
|
|
31,397,711
|
|
|
|
(87,439 |
) |
|
|
31,326,632
|
|
|
|
(140,989 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
23,119,830
|
|
|
$ |
5,867,098
|
|
|
$ |
16,211,634
|
|
|
$ |
465,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Dividend
|
|
|
(1,675,198 |
) |
|
|
(1,675,199 |
) |
|
|
(3,350,398 |
) |
|
|
(3,350,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$ |
21,444,632
|
|
|
$ |
4,191,899
|
|
|
$ |
12,861,236
|
|
|
$ |
(2,884,464 |
) |
Net
income (loss) from continuing operations per common share, basic and
diluted
|
|
$ |
(7.08 |
) |
|
$ |
3.04
|
|
|
$ |
(13.13 |
) |
|
$ |
(1.95 |
) |
Net
income (loss) from discontinued operations per common share, basic
and
diluted
|
|
$ |
22.33
|
|
|
$ |
(0.06 |
) |
|
$ |
22.28
|
|
|
$ |
(0.10 |
) |
Net
income (loss) available to common shareholders, per common share,
basic
and diluted
|
|
$ |
15.25
|
|
|
$ |
2.98
|
|
|
$ |
9.15
|
|
|
$ |
(2.05 |
) |
Weighted
average number of common shares outstanding, basic and
diluted
|
|
|
1,406,196
|
|
|
|
1,406,196
|
|
|
|
1,406,196
|
|
|
|
1,406,196
|
|
Dividend
declared per common share
|
|
$ |
0.03
|
|
|
$ |
-
|
|
|
$ |
0.03
|
|
|
$ |
-
|
|
The
accompanying notes are an integral part of these financial
statements.
BERKSHIRE
INCOME REALTY, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE
SIX MONTHS ENDED JUNE 30, 2007
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Series
A Preferred Stock
|
|
|
Class
B Common Stock
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
2,978,110
|
|
|
$ |
70,210,830
|
|
|
|
1,406,196
|
|
|
$ |
14,062
|
|
|
$ |
(64,285,878 |
) |
|
$ |
5,939,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,211,634
|
|
|
|
16,211,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
to common shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(47,800 |
) |
|
|
(47,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
to preferred shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,350,398 |
) |
|
|
(3,350,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2007
|
|
|
2,978,110
|
|
|
$ |
70,210,830
|
|
|
|
1,406,196
|
|
|
$ |
14,062
|
|
|
$ |
(51,472,442 |
) |
|
$ |
18,752,450
|
|
The
accompanying notes are an integral part of these financial
statements.
BERKSHIRE
INCOME REALTY, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For
the six months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
16,211,634
|
|
|
$ |
465,933
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
|
223,583
|
|
|
|
226,302
|
|
Amortization
of acquired in-place leases and tenant relationships
|
|
|
751,811
|
|
|
|
556,942
|
|
Depreciation
|
|
|
16,078,805
|
|
|
|
13,200,225
|
|
Loss
on extinguishment of debt
|
|
|
212,195
|
|
|
|
-
|
|
Minority
interest in properties
|
|
|
1,695,195
|
|
|
|
1,213,378
|
|
Equity
in loss of Multifamily Venture and Limited Partnership
Venture
|
|
|
1,297,766
|
|
|
|
(9,484,345 |
) |
Minority
common interest in Operating Partnership
|
|
|
1,952,200
|
|
|
|
976,100
|
|
Interest
earned on 1031 deposits
|
|
|
(93,413 |
) |
|
|
(72,147 |
) |
Gain
on disposition of real estate assets
|
|
|
(32,149,782 |
) |
|
|
-
|
|
Increase
(decrease) in cash attributable to changes in assets and
liabilities:
|
|
|
|
|
|
|
|
|
Tenant
security deposits, net
|
|
|
(184,686 |
) |
|
|
(243,353 |
) |
Prepaid
expenses and other assets
|
|
|
(215,978 |
) |
|
|
(311,286 |
) |
Due
to/from affiliates
|
|
|
585,911
|
|
|
|
116,140
|
|
Accrued
expenses and other liabilities
|
|
|
89,085
|
|
|
|
(1,723,038 |
) |
Net
cash provided by operating activities
|
|
|
6,454,326
|
|
|
|
4,920,851
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
improvements
|
|
|
(7,879,733 |
) |
|
|
(8,507,205 |
) |
Acquisition
of multifamily apartment communities
|
|
|
(45,009,930 |
) |
|
|
-
|
|
Acquisition
of real estate limited partnership interests
|
|
|
-
|
|
|
|
-
|
|
Deposits
to replacement reserve escrow
|
|
|
(1,635,136 |
) |
|
|
(23,830 |
) |
Withdrawals
from replacement reserve escrow
|
|
|
-
|
|
|
|
824,542
|
|
Investment
in Multifamily Venture and Limited Partnership Venture
|
|
|
(2,870,307 |
) |
|
|
(4,514,552 |
) |
Proceeds
from sale of properties
|
|
|
1,238,946
|
|
|
|
-
|
|
Distributions
from Multifamily Venture and Limited Partnership Venture
|
|
|
-
|
|
|
|
692,031
|
|
Net
cash used in investing activities
|
|
|
(56,156,160 |
) |
|
|
(11,529,014 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
from mortgage notes payable
|
|
|
35,050,000
|
|
|
|
19,941,000
|
|
Principal
payments on mortgage notes payable
|
|
|
(1,785,588 |
) |
|
|
(1,129,321 |
) |
Borrowings
from revolving credit facility – affiliate
|
|
|
37,500,000
|
|
|
|
7,000,000
|
|
Principal
payments on revolving credit facility-Affiliate
|
|
|
(20,000,000 |
) |
|
|
(7,000,000 |
) |
Good
faith deposits on mortgage notes payable
|
|
|
(953,300 |
) |
|
|
(2,843,999 |
) |
Deferred
financing costs
|
|
|
(363,206 |
) |
|
|
(520,474 |
) |
Distributions
to minority interest in properties
|
|
|
(1,695,195 |
) |
|
|
(8,105,188 |
) |
Distributions
on common operating partnership units
|
|
|
(2,000,000 |
) |
|
|
(2,000,000 |
) |
Distributions
to preferred shareholders
|
|
|
(3,350,398 |
) |
|
|
(3,350,397 |
) |
Net
cash provided by financing activities
|
|
|
42,402,313
|
|
|
|
1,991,621
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(7,299,521 |
) |
|
|
(4,616,542 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
15,393,249
|
|
|
|
22,134,658
|
|
Cash
and cash equivalents at end of period
|
|
$ |
8,093,728
|
|
|
$ |
17,518,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
13,627,629
|
|
|
$ |
10,266,625
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Capital
improvements included in accrued expenses and other
liabilities
|
|
$ |
151,435
|
|
|
$ |
209,176
|
|
Dividends
declared and payable to preferred shareholders
|
|
|
837,607
|
|
|
|
837,607
|
|
The
accompanying notes are an integral part of these financial
statements.
BERKSHIRE
INCOME REALTY, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(unaudited
|
|
For
the six months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Acquisition
of multifamily apartment communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
purchased:
|
|
|
|
|
|
|
Multifamily
apartment communities
|
|
$ |
(45,137,527 |
) |
|
$ |
(9,602,273 |
) |
Acquired
in-place leases
|
|
|
(615,003 |
) |
|
|
(152,410 |
) |
Accrued
expenses
|
|
|
559,090
|
|
|
|
217,226
|
|
Tenant
security deposit liability
|
|
|
255,078
|
|
|
|
34,407
|
|
Prepaid
expenses
|
|
|
(71,568 |
) |
|
|
1,747
|
|
Use
of cash held in escrow from Section 1031 tax exchange
|
|
|
-
|
|
|
|
9,501,303
|
|
Net
cash used for acquisition of Multifamily apartment
communities
|
|
$ |
(45,009,930 |
) |
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of real estate interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
selling price
|
|
$ |
44,816,664
|
|
|
$ |
19,108,704
|
|
Payoff
of mortgage note payable
|
|
|
(25,057,822 |
) |
|
|
(7,900,784 |
) |
Cost
of sale
|
|
|
(126,100 |
) |
|
|
(134,102 |
) |
Distribution
of minority interests
|
|
|
(1,238,946 |
) |
|
|
-
|
|
Cash
held in escrow for 1031 exchange
|
|
|
(18,393,796 |
) |
|
|
(11,073,818 |
) |
Net
Cash flows from sale of real estate assets
|
|
$ |
-
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
BERKSHIRE
INCOME REALTY, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
|
ORGANIZATION
AND BASIS OF PRESENTATION
|
Berkshire
Income Realty, Inc., (the “Company”), a Maryland corporation, was incorporated
on July 19, 2002 and 100 Class B common shares were issued upon
organization. The Company is in the business of acquiring, owning,
operating and rehabilitating multifamily apartment communities. As of
June 30, 2007, the Company owned, or had an interest in, 27 multifamily
apartment communities consisting of a total 7,895 apartment units.
Discussion
of acquisitions for the six months ended June 30,
2007
The
Company acquired two properties during the six months ended June 30,
2007. The Company has deemed both acquisitions individually
insignificant based on their purchase price of $20,500,000 and $24,250,000,
respectively. Specific details of the acquisition are presented as
follows:
On
March
2, 2007, the operating partnership of the Company, Berkshire Income Realty
– OP,
L.P. (the “Operating Partnership”), through a newly formed and wholly owned
subsidiary, BIR Hampton Manager, LLC. , completed the acquisition of 100%
of the
fee simple interest of Hampton House Apartments, a 222 unit mixed use high-rise
apartment building located in Towson, Maryland, from an unaffiliated third
party. The purchase price was $20,500,000 subject to normal operating
pro rations. The purchase price and related closing costs were funded
through a $20,000,000 advance from the revolving credit facility available
from
an affiliate and available cash. The Company obtained first
mortgage financing, which is collateralized by the property, in the amount
of
$20,000,000 on April 26, 2007 and subsequently used a portion of the proceeds
and the 1031 net proceeds to repay the outstanding advance on the revolving
credit facility. The acquisition of Hampton House is intended to be
the qualified replacement property in connection with the sale of properties
identified for replacement pursuant to a transaction structured to comply
with
the requirements of a reverse Section 1031 tax exchange under the Internal
Revenue Code of 1986, as amended.
On
June
1, 2007, the operating partnership of the Company, Berkshire Income Realty
– OP,
L.P. (the “Operating Partnership”), through a newly formed and wholly owned
subsidiary, BIR Sunfield, LLC. , completed the acquisition of 100% of the
fee
simple interest of Sunfield Lakes Apartments, a 200 unit mixed use high-rise
apartment building located in the City of Sherwood, County of Washington,
Oregon, from an unaffiliated third party. The purchase price was
$24,250,000 subject to normal operating pro rations. The purchase
price and related closing costs were funded through a $17,500,000 advance
from
the revolving credit facility available from an affiliate and available
cash. The Company intends to obtain first mortgage financing, which
is collateralized by the property, in the amount of $19,440,000. The first
mortgage is expected to close on or about August 15, 2007 and a portion of
the
financing and 1031 net proceeds are expected to be used to repay the outstanding
balance on the revolving credit facility. The acquisition of Sunfield Lakes
is
intended to be the qualified replacement property in connection with the
sale of
properties identified for replacement pursuant to a transaction structured
to
comply with the requirements of a reverse Section 1031 tax exchange under
the
Internal Revenue Code of 1986, as amended.
As
of
June 30, 2007, the Company has identified the Dorsey’s Forge (“Dorsey’s”) and
Trellis at Lee’s Mill (“Trellis) properties it intends to relinquish as part of
the 1031 tax-free exchange transaction. As required by the tax code,
qualified 1031 intermediaries have been retained to execute the Hampton House
and Sunfield Lakes acquisitions, and the two relinquished properties
transactions. The sale of Dorsey’s and Trellis have occurred as of
June 30, 2007, however the 1031 tax-free exchange transaction was not settled
until July 13, 2007. As of June 30, 2007, the purchase price
allocations are preliminary and subject to final adjustment, which the Company
expects to be completed in the third quarter of 2007
Discussion
of dispositions for the six months ended June 30,
2007
On
May
30, 2007, the Operating Partnership completed the sale of 100% of its interest
in Trellis in Newport News, Virginia. The Company’s share of the
proceeds from the sale of Trellis at Lee’s Mill were deposited in an escrow
account with a qualified institution pursuant to a transaction structured
to
comply with a Section 1031 tax deferred exchange under the Internal Revenue
Code
of 1986, as amended. The Company intends to reinvest its share of
proceeds from the sale of Trellis by purchasing a qualified replacement
property. The operating results of Trellis have been presented in the
consolidated statement of operations as discontinued operations in accordance
with FAS 144 “Accounting for the Impairment or Disposal of Long Lived
Assets.”
On
June
22, 2007, the Operating Partnership completed the sale of 100% of its interest
in Dorsey’s in Columbia, Maryland. The Company’s share of the
proceeds from the sale of Dorsey’s were deposited in an escrow account with a
qualified institution pursuant to a transaction structured to comply with
a
Section 1031 tax deferred exchange under the Internal Revenue Code of 1986,
as
amended. The Company intends to reinvests its share of the proceeds
from the sale of Dorsey’s by purchasing a qualified replacement
property. The operating results of Dorsey’s have been presented in
the consolidated statement of operations as discontinued operations in
accordance with FAS 144 “Accounting for the Impairment or Disposal of Long Lived
Assets.”
Recent
Accounting Pronouncements
In
June
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes — an Interpretation of FASB Statement 109” (“FIN 48” or the
“Interpretation”), which clarifies the accounting for uncertainty in income
taxes recognized in companies’ financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. The evaluation of a tax position in accordance with FIN
48 is a two-step process. The first step is recognition whereby
companies must determine whether it is more likely than not that a tax position
will be sustained upon examination. The second step is measurement
whereby a tax position that meets the more-likely-than-not recognition threshold
is measured to determine the amount of benefit to recognize in the financial
statements. The Interpretation also provides guidance on
de-recognition of recognized tax benefits, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 as of January 1,
2007. The Company has assessed the impact of FIN 48 and has
determined that the adoption of FIN 48 did not have a material impact on
the
financial position or operating results of the Company.
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS No.
157). SFAS No. 157 provides guidance for, among other things,
the definition of fair value and the methods used to measure fair value.
The
provisions of SFAS No. 157 are effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact that SFAS
No.
157 may have on the financial position, operating results and related
disclosures of the Company.
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115” (SFAS No. 159). SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair
value. The provisions of SFAS No. 159 are effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact that SFAS No. 159 may have on the financial position, operating results
and related disclosures of the Company.
Unaudited
interim consolidated financial statements
The
accompanying interim consolidated financial statements of the Company are
unaudited; however, the consolidated financial statements have been prepared
in
accordance with the accounting principles generally accepted in the United
States of America (“GAAP”) for interim financial information and in conjunction
with the rules and regulations of the SEC. Accordingly, certain disclosures
accompanying annual financial statements prepared in accordance with GAAP
are
omitted. In the opinion of management, all adjustments (consisting solely
of
normal recurring matters) necessary for a fair statement for the interim
periods
have been included. The results of operations for the interim periods are
not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year. The interim financial statements and notes thereto
should be read in conjunction with the Company’s financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006.
Consolidated
statements of Comprehensive Income (Loss)
For
the
six months ended June 30, 2007 and 2006, comprehensive loss equaled net
loss. Therefore, the Consolidated Statement of Comprehensive Income
and Loss required to be presented has been omitted from the consolidated
financial statements.
2.
|
MULTIFAMILY
APARTMENT COMMUNITIES
|
The
following summarizes the carrying value of the Company’s multifamily apartment
communities:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
63,643,165
|
|
|
$ |
60,024,448
|
|
Buildings,
improvements and personal property
|
|
|
560,533,644
|
|
|
|
534,243,674
|
|
|
|
|
|
|
|
|
|
|
Multifamily
apartment communities
|
|
|
624,176,809
|
|
|
|
594,268,122
|
|
Accumulated
depreciation
|
|
|
(154,430,286 |
) |
|
|
(148,670,523 |
) |
|
|
|
|
|
|
|
|
|
Multifamily
apartment communities, net
|
|
$ |
469,746,523
|
|
|
$ |
445,597,599
|
|
The
Company accounts for its acquisitions of investments in real estate in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, which requires the fair value of the real estate acquired
to be allocated to the acquired tangible assets, consisting of land, building,
furniture, fixtures and equipment and identified intangible assets and
liabilities, consisting of the value of the above-market and below-market
leases, the value of in-place leases and the value of other tenant
relationships, based in each case on their fair values. The value of
in-place leases and tenant relationships are amortized over the specific
expiration dates of the in-place leases over a period of 12 months and the
tenant relationships are based on the straight-line method of amortization
over
a 24-month period.
The
following condensed table provides the amounts assigned to each major balance
sheet asset caption for the 2007 acquisition as of the acquisition date,
which
is included on the Company’s June 30, 2007 consolidated balance
sheet:
|
|
Multifamily
|
|
|
Acquired
|
|
|
|
|
|
Total
|
|
|
|
Apartment
|
|
|
In-Place
|
|
|
Tenant
|
|
|
Recorded
at
|
|
Property
|
|
Communities
|
|
|
Leases
|
|
|
Relationships
|
|
|
Acquisition
Date(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hampton
House
|
|
$ |
20,779,690
|
|
|
$ |
252,390
|
|
|
$ |
65,703
|
|
|
$ |
21,097,783
|
|
Sunfield
Lakes
|
|
|
24,357,837
|
|
|
|
230,205
|
|
|
|
66,705
|
|
|
|
24,654,747
|
|
Total
|
|
$ |
45,137,527
|
|
|
$ |
482,595
|
|
|
$ |
132,408
|
|
|
$ |
45,752,530
|
|
(1)
|
Additional
costs, in excess of the contract sales price, were incurred in
relation to
the acquisition transaction and have been included in the cost
recorded at
acquisition date.
|
Discontinued
Operations
On
May
30, 2007 and June 22, 2007, the Operating Partnership completed the sale
of 100%
of the fee simple interest of Trellis and Dorsey’s, respectively. The
assets and liabilities related to the sale of the properties have been removed
from the accounts of the Company pursuant to the recording of the sale of
the
property. The net proceeds from the sale of Trellis and Dorsey’s, in the amount
of $5,324,664 and $13,137,316, net of the $1,238,946 distribution to the
minority interest holder, respectively, were held in an escrow account at
a
qualified institution pursuant to a transaction structured to comply with
a
Section 1031 tax deferred exchange under the Internal Revenue Code of 1986,
as
amended. The Company reinvested the proceeds from the sale of Trellis and
Dorsey’s in the acquisition of Hampton House Apartments during the quarter ended
March 31, 2007 and Sunfield Lakes Apartments during the quarter ended June
30,
2007.
The
results of operations for Trellis and Dorsey’s Forge properties have been
restated and are presented as results from discontinued operations in the
statement of operations for the three and six months ended June 30, 2007
and
2006, respectively, pursuant to FASB 144 – Accounting for the Impairment or
Disposal of Long-Lived Assets.
The
operating results of discontinued operations for the three and six months
ended
June 30, 2007 and 2006 are presented in the following table.
|
|
Three months
ended
Six months ended
June
30, June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
869,597
|
|
|
$ |
1,023,382
|
|
|
$ |
1,901,641
|
|
|
$ |
2,051,104
|
|
Interest
|
|
|
471
|
|
|
|
1,007
|
|
|
|
1,467
|
|
|
|
1,848
|
|
Utility
reimbursement
|
|
|
25,239
|
|
|
|
18,957
|
|
|
|
29,085
|
|
|
|
40,105
|
|
Other
|
|
|
33,155
|
|
|
|
56,777
|
|
|
|
70,887
|
|
|
|
98,431
|
|
Total
revenue
|
|
|
928,462
|
|
|
|
1,100,123
|
|
|
|
2,003,080
|
|
|
|
2,191,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
245,659
|
|
|
|
299,256
|
|
|
|
518,118
|
|
|
|
581,034
|
|
Maintenance
|
|
|
152,131
|
|
|
|
131,348
|
|
|
|
280,341
|
|
|
|
236,707
|
|
Real
estate taxes
|
|
|
75,187
|
|
|
|
82,863
|
|
|
|
160,255
|
|
|
|
166,476
|
|
General
and administrative
|
|
|
21,690
|
|
|
|
20,838
|
|
|
|
40,514
|
|
|
|
40,820
|
|
Management
fees
|
|
|
39,088
|
|
|
|
38,785
|
|
|
|
81,856
|
|
|
|
85,959
|
|
Depreciation
|
|
|
245,921
|
|
|
|
276,585
|
|
|
|
528,908
|
|
|
|
548,858
|
|
Loss
on early extinguishment of debt
|
|
|
566,290
|
|
|
|
-
|
|
|
|
566,290
|
|
|
|
-
|
|
Interest
|
|
|
307,391
|
|
|
|
330,208
|
|
|
|
622,772
|
|
|
|
657,265
|
|
Amortization
of acquired in-place leases and tenant relationships
|
|
|
-
|
|
|
|
7,679
|
|
|
|
-
|
|
|
|
15,358
|
|
Total
expenses
|
|
|
1,653,357
|
|
|
|
1,187,562
|
|
|
|
2,799,054
|
|
|
|
2,332,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$ |
(724,895 |
) |
|
$ |
(87,439 |
) |
|
$ |
(795,974 |
) |
|
$ |
(140,989 |
) |
3.
|
INVESTMENT
IN MULTIFAMILY VENTURE
|
Effective
May 1, 2004, the Company consummated the Limited Liability Company Agreement
of
JV Marina Mile (“Multifamily Venture”) with a partner, whereby each of the
parties to the agreement agreed to participate, on a pro rata basis, in the
economic benefits of the ownership of The Berkshires at Marina Mile Apartments
(“Marina Mile”). Under the terms of the Multifamily Venture agreement governing
the entity, the partner contributed, in cash, 65% of the total venture equity
in
exchange for a 65% interest in the Multifamily Venture. The Operating
Partnership contributed its interest in Marina Mile, L.L.C., the fee simple
owner of the property, in exchange for a 35% interest in the Multifamily
Venture
and a cash distribution of approximately $3,594,693 net of $387,236 of
additional capital invested by the Operating Partnership. Both parties are
entitled to proportional distributions of available cash up to the effective
10%
Preferred Return. After payment of the Preferred Return and the return of
each
party’s capital contribution, the Operating Partnership is entitled to
additional distributions equal to approximately 30% of the distributions
otherwise payable to the venture partner. The Operating Partnership is the
managing member of the Multifamily Venture. The Company evaluated its investment
in the Multifamily Venture and concluded that the investment did not fall
under
the requirements of FIN 46R as the Multifamily Venture partner retains a
majority control over the Multifamily Venture through the decision-making
authority granted in the Limited Liability Company Agreement consistent with
its
economic interests; therefore, the Company accounted for the investment under
Statement of Position 78-9, Accounting for Investments in Real Estate (“SOP
“78-9”), as an equity method investment.
On
April
18, 2006, Marina Mile was sold to an unrelated party. According to
the provisions of the Limited Liability Company Agreement, the Company’s overall
ownership interest in the proceeds from the sale of Marina Mile increased
from
35.00% to 45.52% and pursuant to additional agreements executed in relation
to
the sale, this increase was effective as of February 1, 2006. The
Company evaluated the change in the ownership interests in the Multifamily
Venture and has determined that the increased ownership interests do not
materially change the economic interests of the Multifamily Venture partners
and
would not result in the Company controlling the Multifamily Venture as
promulgated in EITF 04-05, Determining Whether a General Partner, or the
General
Partners as a Group, Controls a Limited Partnership or Similar Entity When
the
Limited Partners Have Certain Rights.
Pursuant
to the Operating Partnership’s completion of the sale of 100% of the interest in
the Marina Mile property, the net proceeds from the sale in the amount of
$11,073,818 were held in an escrow account at a qualified institution pursuant
to a transaction structured to comply with a Section 1031 tax deferred exchange
under the Code, as amended. As of December 31, 2006, the Company had
reinvested the total proceeds from the sale of interests in Marina Mile of
$11,073,818 in the acquisition of Chisholm Place Apartments and Briarwood
Village Apartments, which were completed on June 28, 2006 and August 30,
2006,
respectively. The Company believes the acquisitions of Chisholm Place
and Briarwood Village fulfill the purchase requirement under the 1031
exchange. The Company expects to receive the final distribution from
the Multifamily Venture during the quarter ended September 30,
2007.
The
summarized balance sheets of the Multifamily Venture are as
follows:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Multifamily
apartment communities, net
|
|
$ |
-
|
|
|
$ |
-
|
|
Cash
and cash equivalents
|
|
|
321,887
|
|
|
|
321,887
|
|
Other
assets
|
|
|
-
|
|
|
|
-
|
|
Total
assets
|
|
$ |
321,887
|
|
|
$ |
321,887
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
|
Mortgage
note payable
|
|
$ |
-
|
|
|
$ |
-
|
|
Other
liabilities
|
|
|
-
|
|
|
|
-
|
|
Owners’
equity
|
|
|
321,887
|
|
|
|
321,887
|
|
Total
liabilities and owners’ equity
|
|
$ |
321,887
|
|
|
$ |
321,887
|
|
|
|
|
|
|
|
|
|
|
Company’s
share of equity (1)
|
|
$ |
146,522
|
|
|
$ |
146,522
|
|
(1)
|
At
June 30, 2007 and December 31, 2006, amount represented the Company’s
carrying values of its share of equity in the Multifamily
Venture. At June 30, 2007 and December 31,2006 the Company’s
carrying value of its share of equity in the Multifamily Venture
was equal
to its ownership interest if computed using the Company’s 45.52% ownership
percentage applied to the Multifamily Venture owner’s equity as presented
in the table above, as of June 30, 2007 and December 31,
2006. Balances remain on the records of the Multifamily Venture
as the entity has not yet made final distributions of the remaining
net
assets.
|
The
summarized statement of operations of the Multifamily Venture for the three
and
six months ended June 30, 2007 and 2006 is as follows:
|
|
Three
months
ended
Six months ended
June
30,
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
$ |
-
|
|
|
$ |
167,668
|
|
|
$ |
-
|
|
|
$ |
1,143,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
-
|
|
|
|
621,177
|
|
|
|
-
|
|
|
|
1,570,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
-
|
|
|
|
(453,509 |
) |
|
|
-
|
|
|
|
(427,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate assets
|
|
|
-
|
|
|
|
19,833,255
|
|
|
|
-
|
|
|
|
19,833,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
-
|
|
|
$ |
19,379,746
|
|
|
$ |
-
|
|
|
$ |
19,406,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of Multifamily
Venture
|
|
$ |
-
|
|
|
$ |
8,821,944
|
|
|
$ |
-
|
|
|
$ |
8,833,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment of carrying value
|
|
|
-
|
|
|
|
1,088,210
|
|
|
|
-
|
|
|
|
1,088,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted equity in income of
Multifamily
Venture
(1)
|
|
$ |
-
|
|
|
$ |
9,910,154
|
|
|
$ |
-
|
|
|
$ |
9,921,847
|
|
|
(1)–
As of June 30, 2007, this amount represented the Company’s share of the
net income of the Multifamily Venture if computed using the Company’s
45.52% ownership percentage, pursuant to the increase in ownership
interest related to the sale of the property. As of June 30,
2006, this amount represents the Company’s share of the net loss of the
Multifamily Venture if computed using the Company’s 35.00% ownership
percentage for the month of January 2006 and the 45.52% ownership
percentage, pursuant to the increase in ownership interest related
to the
sale of the property, for the months of February through June of
2006 as
presented in the table above
|
4.
|
INVESTMENT
IN MULTIFAMILY LIMITED PARTNERSHIP
VENTURE
|
On
August
12, 2005, the Company, together with affiliates and other unaffiliated parties,
entered into a subscription agreement to invest in the Berkshire Multifamily
Value Fund, L.P. (“BVF”), an affiliate of Berkshire Property Advisors, L.L.C.
(“Berkshire Advisor” or the “Advisor”). Under the terms of the agreement and the
related limited partnership agreement, the Company and its affiliates agreed
to
invest up to $25,000,000, or approximately 7%, of the total capital of the
partnership. The Company’s final commitment under the subscription agreement
with BVF totals $23,400,000. BVF’s investment strategy is to acquire
middle-market properties where there is an opportunity to add value through
repositioning or rehabilitation. Under the terms of the BVF partnership
agreement, the Company’s ability to acquire additional properties is restricted
to the two following conditions: (1) the Company can invest up to $8,000,000
per
year in new properties from available cash or cash generated from the
refinancing of existing properties, for a period of up to thirty-nine months,
at
which time such restriction will lapse, and (2) the Company is
authorized to sell existing properties and reinvest those proceeds through
transactions structured to comply with Section 1031 tax deferred exchanges
under
the Internal Revenue Code of 1986, as amended (“1031 Exchanges”), without
limit.
The
managing partner of BVF is an affiliate of the Company. The Company
has evaluated its investment in BVF and concluded that the investment, although
subject to the requirements of FIN 46R, will not require the Company to
consolidate the activity of BVF as the Company has determined that it is
not the
primary beneficiary of the venture as defined in FIN 46R.
In
relation to its investment in BVF, the Company has elected to adopt a
three-month lag period in which it recognizes its share of the equity earnings
of BVF in arrears. The lag period is allowed under the provisions of
Accounting Principles Board Opinion No. 18 (As Amended) – The Equity Method of
Accounting for Investments in Common Stock Statement of Position 78-9 and
is
necessary in order for the Company to consistently meet it regulatory filing
deadlines. As of June 30, 2007 and December 31, 2006, the Company has
accounted for its share of the equity in BVF operating activity through March
31, 2007 and September 30, 2006, respectively.
On
March
14, 2007, the Company received notice of the sixth capital call by BVF, an
affiliate of the Company. The capital call represented 7.5%, or
$1,750,187, of the total $23,400,000 capital committed to BVF by the
Company. The contribution was paid to BVF on March 27, 2007 and
brought the total direct investment by the Company to $13,931,488 or 59.5%
of
the total committed capital amount of $23,400,000.
On
June
15, 2007, the Company received notice of the seventh capital call by BVF,
an
affiliate of the Company. The capital call represented 4.8%, or
$1,120,120, of the total $23,400,000 capital committed to BVF by the
Company. The contribution was paid to BVF on June 29, 2007 and
brought the total direct investment by the Company to $15,051,608, or 64.3%
of
the total committed capital amount of $23,400,000.
The
summarized statement of assets, liabilities and partners’ capital of BVF is as
follows:
ASSETS
|
|
March
31, 2007
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
Multifamily apartment communities, net
|
|
$ |
687,525,239
|
|
|
$ |
483,237,759
|
|
Cash and cash equivalents
|
|
|
15,843,177
|
|
|
|
4,307,036
|
|
Other assets
|
|
|
22,759,783
|
|
|
|
22,300,247
|
|
Total assets
|
|
$ |
726,128,199
|
|
|
$ |
509,845,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS’ CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable
|
|
$ |
489,034,886
|
|
|
$ |
320,417,900
|
|
Revolving credit facility
|
|
|
52,700,000
|
|
|
|
62,400,000
|
|
Other liabilities
|
|
|
16,165,697
|
|
|
|
19,025,264
|
|
Minority interest
|
|
|
15,351,718
|
|
|
|
14,588,442
|
|
Partners’ capital
|
|
|
152,875,898
|
|
|
|
93,413,436
|
|
Total liabilities and partners’ capital
|
|
$ |
726,128,199
|
|
|
$ |
509,845,042
|
|
|
|
|
|
|
|
|
|
|
Company’s share of partners’ capital
|
|
$ |
10,702,454
|
|
|
$ |
6,539,638
|
|
Basis differential (1)
|
|
|
1,724,514
|
|
|
|
4,314,789
|
|
Carrying value of the Company’s investment in
Multifamily Limited Partnership
|
|
$ |
12,426,968
|
|
|
$ |
10,854,427
|
|
(1)
-
This amount represents the difference between the Company’s investment in BVF
and its share of the underlying equity in the net assets of BVF (adjusted
to
conform with GAAP) including the timing of the lag period, as described
above. At March 31, 2007 and September 30, 2006, the differential
related mainly to the contribution of capital made by the Operating Partnership,
in the amount of $1,120,120 and $3,710,396, to BVF during the second quarter
of
2007 and the fourth quarter of 2006, respectively. Additionally,
$583,240 represents the Company’s share of syndication costs incurred by BVF of
which the Company was not required to fund via a separate capital
call.
The
summarized statement of operations of BVF for the three and six months ended
March 31, 2007 and 2006 is as follows:
|
|
Three months
ended Six
months ended
June
30,
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
19,775,271
|
|
|
$ |
7,351,093
|
|
|
$ |
37,177,544
|
|
|
$ |
8,589,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
(30,747,970 |
) |
|
|
(11,525,972 |
) |
|
|
(57,943,992 |
) |
|
|
(14,838,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
1,123,231
|
|
|
|
-
|
|
|
|
2,228,910
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to investment
|
|
$ |
(9,849,468 |
) |
|
$ |
(4,174,879 |
) |
|
$ |
(18,537,538 |
) |
|
$ |
(6,249,357 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in loss of Multifamily
Limited
Partnership
|
|
$ |
(689,536 |
) |
|
$ |
(292,273 |
) |
|
$ |
(1,297,766 |
) |
|
$ |
(437,502 |
) |
5. MORTGAGE
NOTES PAYABLE
On
March
30, 2007, the Company, through its wholly owned subsidiary BIR Yorktowne,
L.L.C., executed a non-recourse second mortgage note payable on Yorktowne
Apartments for $7,050,000, which is collateralized by the related property.
The
interest rate on the note is fixed at 6.12% and is coterminous with the existing
first mortgage note, which matures on February 1, 2015.
On
April
26, 2007, the Company, through its wholly owned subsidiary, BIR Hampton,
LLC.,
executed a non-recourse mortgage note payable on the Hampton House Apartments
for $20,000,000 which is collateralized by the related property. The interest
rate on the note is fixed at 5.77% for a term of 10 years. The note
requires interest payments for 60 months and matures on April 01, 2017, at
which
time the remaining principal and accrued interest is due. The note may be
prepaid, subject to a prepayment penalty, at anytime with 30 days of
notice.
On
May 10, 2007, the Company, through its wholly owned subsidiary, BIR Westchester
Limited Partnership, executed a non-recourse second mortgage note payable
on the
Westchester West Apartments for $8,000,000, which is collateralized by the
related property. The interest rate on the note is fixed at 5.89% and
is coterminous with the existing first mortgage note, which matures on March
1,
2015.
The
combined aggregate principal maturities of mortgage notes payable at June
30,
2007 are as follows:
2007
|
|
$ |
1,620,084
|
|
2008
|
|
|
13,027,490
|
|
2009
|
|
|
20,319,044
|
|
2010
|
|
|
4,844,279
|
|
2011
|
|
|
5,156,323
|
|
Thereafter
|
|
|
432,617,880
|
|
|
|
$ |
477,585,100
|
|
6. REVOLVING
CREDIT FACILITY - AFFILIATE
On
June
30, 2005, the Company obtained new financing in the form of a revolving credit
facility. The revolving credit facility in the amount of $20,000,000 was
provided by an affiliate of the Company. The facility provides for interest
on
borrowings at a rate of 5% above the 30 day LIBOR rate, as announced by
Reuter’s, and fees based on borrowings under the facility and various
operational and financial covenants, including a maximum leverage ratio and
a
maximum debt service ratio. The revolving credit agreement (the “Agreement”) has
a maturity date of December 31, 2006, with a one-time six-month extension
available at the option of the Company. The terms of the facility were agreed
upon through negotiations and were approved by the Audit Committee of the
Board
of Directors of the Company (the “Board”), which is comprised solely of
directors who are independent under applicable rules and regulations of the
Securities and Exchange Commission and the American Stock Exchange. On
October 30, 2006, the Company exercised its contractual option to extend
the
maturity date on the revolving credit facility available from the
affiliate. The Company sent notice to the affiliate of its intent,
pursuant to the credit agreement, to extend the maturity date of the revolving
credit facility by six months, until June 30, 2007.
On
May
31, 2007, the Company executed an amendment to the Agreement. The
amendment provides for an extension of the maturity date by replacing the
current maturity date of June 30, 2007 with a 60-day notice of termination
provision by which the lender can affect a termination of the commitment
under
the Agreement and render all outstanding amounts due and payable. The
amendment also adds a clean-up requirement to the Agreement, which requires
the
borrower to repay in full all outstanding loans and have no outstanding
obligations under the Agreement for a 14 consecutive day period during each
365-day period.
During
the six months ended June 30, 2007 and 2006, the Company borrowed $37,500,000
and $0, respectively, related to the acquisition activities of the Company
and
repaid advances of $20,000,000 and $0, respectively, during the same
periods. There was $17,500,000 and $0 of borrowings outstanding as of
June 30, 2007 and December 31, 2006, respectively. The Company
incurred interest and fees of $560,300 and $3,860 related to the facility
during
the six months ended June 30, 2007 and 2006, respectively.
7. STOCKHOLDERS’
EQUITY
On
March
25, 2003, the Board declared a dividend at an annual rate of 9%, on the stated
liquidation preference of $25 per share of the outstanding Preferred Shares
which is payable quarterly in arrears, on February 15, May 15, August 15,
and
November 15 of each year to shareholders of record in the amount of $0.5625
per
share per quarter. The first quarterly dividend paid on May 15, 2003
was prorated to reflect the issue date of the Preferred Shares. For
the six months ended June 30, 2007 and 2006, the Company’s aggregate dividends
totaled $3,350,398 and $3,350,397, respectively, of which $837,607 was payable
and included on the balance sheet in Dividends and Distributions Payable
as of
June 30, 2007 and December 31, 2006.
On
November 8, 2006, the Board authorized the general partner of the Operating
Partnership to distribute quarterly distributions of $1,000,000 each, in
the
aggregate, from its operating cash flows to common general and common limited
partners, payable on February 15, 2007 and May 15, 2007. On the same day,
the
Board also declared a common dividend of $0.016996 per share on the Company’s
Class B common stock payable concurrently with the Operating Partnership
distributions.
On
May
16, 2007, the Board authorized the general partner of the Operating Partnership
to distribute two quarterly distributions of $1,000,000 each, in the aggregate,
from its operating cash flows to common general and common limited partners,
payable on August 15, 2007 and November 15, 2007. On the same day, the Board
also declared a common dividend of $0.016996 per share on the Company’s Class B
common stock payable concurrently with the Operating Partnership
distributions.
The
Company’s policy to provide for common distributions is based on available cash
and Board approval.
8. EARNINGS
PER SHARE
Net
income (loss) per common share, basic and diluted, is computed as net income
(loss) available to common shareholders divided by the weighted average number
of common shares outstanding during the applicable period, basic and
diluted. For the six months ended June 30, 2007 and 2006, the Company
did not have any common stock equivalents therefore basic and dilutive earnings
per share were the same.
The
reconciliation of the basic and diluted earnings per common share for the
three
and six months ended June 30, 2007 and 2006 follows:
|
|
Three
months
ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
(8,277,881 |
) |
|
$ |
5,954,537
|
|
|
$ |
(15,114,998 |
) |
|
$ |
606,922
|
|
Less:
Preferred dividends
|
|
|
(1,675,198 |
) |
|
|
(1,675,199 |
) |
|
|
(3,350,398 |
) |
|
|
(3,350,397 |
) |
Net
income (loss) from continuing operations available to common
shareholders
|
|
$ |
(9,953,079 |
) |
|
$ |
4,279,338
|
|
|
$ |
(18,465,396 |
) |
|
$ |
(2,743,475 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from discontinued operations
|
|
$ |
31,397,711
|
|
|
$ |
(87,439 |
) |
|
$ |
31,326,632
|
|
|
$ |
(140,989 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$ |
21,444,632
|
|
|
$ |
4,191,899
|
|
|
$ |
12,861,236
|
|
|
$ |
(2,884,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and
diluted
|
|
|
1,406,196
|
|
|
|
1,406,196
|
|
|
|
1,406,196
|
|
|
|
1,406,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations per common share available
to
common shareholders, basic and diluted
|
|
$ |
(7.08 |
) |
|
$ |
3.04
|
|
|
$ |
(13.13 |
) |
|
$ |
(1.95 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from discontinued operations per common share available
to
common shareholders, basic and diluted
|
|
$ |
22.33
|
|
|
$ |
(0.06 |
) |
|
$ |
22.28
|
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share available to common shareholders, basic and
diluted
|
|
$ |
15.25
|
|
|
$ |
2.98
|
|
|
$ |
9.15
|
|
|
$ |
(2.05 |
) |
9. COMMITMENTS
AND CONTINGENCIES
The
Company is party to certain legal actions arising in the ordinary course
of its
business, such as those relating to tenant issues. All such proceedings taken
together are not expected to have a material adverse effect on the Company.
While the resolution of these matters cannot be predicted with certainty,
management believes that the final outcome of such legal proceedings and
claims
will not have a material adverse effect on the Company’s liquidity, financial
position or results of operations.
10. MINORITY
INTERESTS
Minority
Interest in Properties
Two
of
the Company’s properties, Hannibal Grove Apartments and Century II Apartments,
are owned with a third party. A third property, Dorsey’s Forge
Apartments, was sold on June 22, 2007. The Company’s interest in
Hannibal Grove Apartments is 91.382% and its interest in Century II Apartments
is 75.82%.
Effective
September 24, 2004, the Company consummated the JV BIR/ERI, L.L.C. multifamily
venture agreement (“JV BIR/ERI”) with Equity Resources Investments, L.L.C.
(“ERI”), an unrelated third party, whereby each of the parties to the agreement
agreed to participate, on a pro rata basis, in the economic benefits of the
venture. Under the terms of the limited liability company agreement, the
Company
owns a 58% interest as the managing member and ERI owns the remaining 42%
interest. The Company evaluated its investment in JV BIR/ERI and concluded
that
the investment did not fall under the requirements of FIN 46R because it
did not
meet the conditions set forth in the FASB interpretation. Therefore
the Company accounted for the investment under Accounting Research Bulletin
51,
Consolidated Financial Statements based on its controlling interest in the
subsidiary.
Minority
interest in the properties is carried at zero on the balance sheet due to
the
minority interest having no obligation to fund losses/deficits.
Minority
Common Interest in Operating Partnership
The
following table sets forth the calculation of minority common interest in
the
Operating Partnership for the six months ended June 30:
|
|
2007
|
|
|
2006
|
|
Net
income
|
|
$ |
16,211,634
|
|
|
$ |
465,933
|
|
Add:
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
1,952,200
|
|
|
|
976,100
|
|
Net
income before minority interest in Operating Partnership
|
|
|
18,163,834
|
|
|
|
1,442,033
|
|
Preferred
dividend
|
|
|
(3,350,398 |
) |
|
|
(3,350,397 |
) |
Income
(loss) available to common equity
|
|
|
14,813,436
|
|
|
|
(1,908,364 |
) |
Common
Operating Partnership units of minority interest
|
|
|
97.61 |
% |
|
|
97.61 |
% |
Minority
common interest in Operating Partnership
|
|
$ |
14,459,396
|
|
|
$ |
(1,862,754 |
) |
In
the
six months ended June 30, 2007, the Operating Partnership incurred net
income. The net income was not sufficient to create positive basis in
the Operating Partnership and therefore no allocation was made to the minority
common interest in Operating Partnership at June 30, 2007, except to the
extent
distributions were paid or accrued. In the six months ended June 30,
2006, the Operating Partnership incurred a net loss and therefore no allocation
was made to the minority common interest in Operating Partnership at June
30,
2006, except to the extent distributions were paid or accrued.
The
following table sets forth a summary of the items affecting the minority
common
interest in the Operating Partnership:
|
|
Minority
|
|
|
Company’s
|
|
|
|
|
|
|
Common
Interest
|
|
|
Interest
in
|
|
|
|
|
|
|
in
Operating
|
|
|
Operating
|
|
|
Total
Common
|
|
|
|
Partnership
|
|
|
Partnership
|
|
|
Owners’
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$ |
(64,701,866 |
) |
|
$ |
250,546
|
|
|
$ |
(64,451,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating
Partnership
|
|
|
14,459,396
|
|
|
|
354,040
|
|
|
|
14,813,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
to common interest
in Operating Partnership
|
|
|
(1,952,200 |
) |
|
|
(47,800 |
) |
|
|
(2,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2007 (1)
|
|
$ |
(52,194,670 |
) |
|
$ |
556,786
|
|
|
$ |
(51,637,884 |
) |
(1) Minority
common interest in Operating Partnership is carried at zero on the balance
sheet
due
to
the
minority interest having no obligation to fund losses/deficits.
As
of
June 30, 2007 and December 31, 2006, respectively, the minority interest
in the
Operating Partnership consisted of 5,242,223 Operating Partnership units
held by
parties other than the Company.
11. RELATED
PARTY TRANSACTIONS
Amounts
accrued or paid to the Company’s affiliates are as follows:
|
|
Three
months
ended Six
months ended
June
30,
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
management fees
|
|
$ |
854,361
|
|
|
$ |
712,863
|
|
|
$ |
1,678,141
|
|
|
$ |
1,425,781
|
|
Expense
reimbursements
|
|
|
62,739
|
|
|
|
79,002
|
|
|
|
125,478
|
|
|
|
158,136
|
|
Salary
reimbursements
|
|
|
2,267,783
|
|
|
|
1,994,788
|
|
|
|
4,800,110
|
|
|
|
4,020,772
|
|
Asset
management fees
|
|
|
418,359
|
|
|
|
418,359
|
|
|
|
836,720
|
|
|
|
836,726
|
|
Construction
management fees
|
|
|
254,405
|
|
|
|
196,378
|
|
|
|
316,663
|
|
|
|
395,756
|
|
Acquisition
fees
|
|
|
242,250
|
|
|
|
96,250
|
|
|
|
447,250
|
|
|
|
96,250
|
|
Interest
on revolving credit
facility
|
|
|
331,100
|
|
|
|
3,860
|
|
|
|
560,300
|
|
|
|
3,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4,430,997
|
|
|
$ |
3,501,500
|
|
|
$ |
8,764,662
|
|
|
$ |
6,937,281
|
|
Amounts
due to affiliates of $2,561,203 and $1,916,315 are included in Due to affiliates
at June 30, 2007 and December 31, 2006, respectively, in the accompanying
Consolidated Balance Sheets.
Amounts
due from affiliates of $594,820 and $535,843 are included in Due to affiliates
at June 30, 2007 and December 31, 2006, respectively, in the accompanying
Consolidated Balance Sheets.
Amounts
due to affiliates of $1,966,383 and $1,380,472 at June 30, 2007 and December
31,
2006, respectively, represent intercompany development fees and related party
reimbursements.
Of
the
$8,764,662 related party fees and interest incurred in the six months ended
June
30, 2007, $6,319,806 remained outstanding of which $1,456,958 is included
in
accrued expenses and other liabilities and $4,862,848 is included in due
to
affiliates in the accompanying Consolidated Balance Sheets.
The
Company pays property management fees to an affiliate for property management
services. The fees are payable at a rate of 4% of gross
income.
The
Company pays asset management fees to an affiliate for asset management
services. These fees are payable quarterly, in arrears, and may be
paid only after all distributions currently payable on the Company’s Preferred
Shares have been paid. Effective April 4, 2003, under the advisory
services agreement, the Company will pay Berkshire Advisor an annual asset
management fee equal to 0.40%, up to a maximum of $1,600,000 in any calendar
year, as per an amendment to the management agreement, of the purchase price
of
real estate properties owned by the Company, as adjusted from time to time
to
reflect the then current fair market value of the properties. The
purchase price is defined as the capitalized basis of an asset under GAAP,
including renovation or new construction costs, costs of acquisition or other
items paid or received that would be considered an adjustment to
basis. Annual asset management fees earned by the affiliate in excess
of the $1,600,000 maximum payable by the Company represent fees incurred
and
paid by the minority partners in the properties. The Company also
reimburses affiliates for certain expenses incurred in connection with the
operation of the properties, including administrative expenses and salary
reimbursements.
The
Company pays acquisition fees to an affiliate for acquisition
services. These fees are payable upon the closing of an acquisition
of real property. The fee is equal to 1% of the purchase price of any
new property acquired directly and indirectly by the Company. The
purchase price is defined as the capitalized basis of an asset under GAAP,
including renovations or new construction costs, cost of acquisition or other
items paid or received that would be considered an adjustment to
basis. The purchase price does not include acquisition fees and
capital costs of a recurring nature. During the three and six months
ended June 30, 2007 and 2006, the Company incurred fees on the following
acquisitions:
|
|
Three
months ended Six months
ended
June
30,
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Chisholm Place
|
|
$ |
-
|
|
|
$ |
96,250
|
|
|
$ |
-
|
|
|
$ |
96,250
|
|
Hampton
House
|
|
|
-
|
|
|
|
-
|
|
|
|
205,000
|
|
|
|
-
|
|
Sunfield
Lakes
|
|
|
242,250
|
|
|
|
-
|
|
|
|
242,250
|
|
|
|
-
|
|
Total
|
|
$ |
242,250
|
|
|
$ |
96,250
|
|
|
$ |
447,250
|
|
|
$ |
96,250
|
|
During
the six months ended June 30, 2007 and 2006, the Company borrowed $37,500,000
and $0 respectively, related to the acquisition activities of the Company
and
repaid advances of $20,000,000 and $0 respectively, during the same
periods. There was $17,500,000 and $0 of borrowings outstanding
as of June 30, 2007 and December 31, 2006, respectively. The Company
incurred interest and fees of $560,300 and $3,860 related to the facility
during
the six months ended June 30, 2007 and 2006, respectively.
On
March
14, 2007, the Company received notice of the sixth capital call by BVF, an
affiliate of the Company. The capital call represented 7.5%, or
$1,750,187, of the total $23,400,000 capital committed to BVF by the
Company. The contribution was paid to BVF on March 27, 2007 and
brought the total direct investment by the Company to $13,931,488 or 59.5%
of
the total committed capital amount of $23,400,000.
On
June
15, 2007, the Company received notice of the seventh capital call by BVF,
an
affiliate of the Company. The capital call represented 4.8%, or
$1,120,120, of the total $23,400,000 capital committed to BVF by the
Company. The contribution was paid to BVF on June 29, 2007 and
brought the total direct investment by the Company to $15,051,608 or 64.3%
of
the total committed capital amount of $23,400,000.
12. LEGAL
PROCEEDINGS
The
Company is currently party to a legal proceeding initiated by a seller/developer
from whom the Company acquired a property in 2005. The dispute
involves the interpretation of certain provisions of the purchase and sales
agreement related to post acquisition construction activities. The
Company intends to vigorously defend against this litigation.
The
Company and our properties are not subject to any other material pending
legal
proceedings and we are not aware of any such proceedings contemplated by
governmental authorities.
13. SUBSEQUENT
EVENTS
On
July
13, 2007, the Company rate locked $19,440,000 of fixed rate mortgage debt
to be
collateralized by the Sunfield Lakes property, a 200-unit multifamily apartment
community. The loan will be an unsecured first mortgage note
collateralized by the property with a fixed interest rate of 6.29% and a
term of
10 years of which interest only payments are due for the first 60 months
of the
loan. The loan is expected to close in the third quarter of
2007.
On
July
19, 2007, the Company repaid $15,000,000 of the outstanding balance on the
revolving credit facility available to it from an affiliate. The
outstanding balance remaining after the payment was $2,500,000.
On
July
13, 2007, the Company completed the 1031 exchange involving the sale of Dorsey’s
and Trellis and the acquisition of Hampton House and Sunfield
Lakes. Upon completion of the transaction, the net proceeds of
$18,487,209 from the sale of Dorsey’s and Trellis, held in escrow by the
qualified 1031 exchange intermediary at June 30, 2007, were released to the
Company.
|
Item
2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF BERKSHIRE INCOME REALTY,
INC
|
You
should read the following discussion in conjunction with Berkshire Income
Realty, Inc’s (the “Company”) consolidated financial statements and their
related notes and other financial information included in this report. For
further information please refer to the Company’s consolidated financial
statements and footnotes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2006.
Forward
Looking Statements
Certain
statements contained in this report, including information with respect to
our
future business plans, constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed
to be
forward-looking statements, subject to a number of risks and uncertainties
that
could cause actual results to differ significantly from those described in
this
report. These forward-looking statements include statements
regarding, among other things, our business strategy and operations, future
expansion plans, future prospects, financial position, anticipated revenues
or
losses and projected costs, and objectives of management. Without
limiting the foregoing, the words “may,” “will,” “should,” “could,” “expects,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or
“continue” or the negative of such terms and other comparable terminology are
intended to identify forward-looking statements. There are a number
of important factors that could cause our results to differ materially from
those indicated by such forward-looking statements. These factors
include, but are not limited to, changes in economic conditions generally
and
the real estate and bond markets specifically, legislative/regulatory changes
(including changes to laws governing the taxation of real estate investment
trusts (“REITs”)), possible sales of assets, the acquisition restrictions placed
on the Company by its investment in Berkshire Multifamily Value Fund, LP,
(“BVF”
or the “Fund”) availability of capital, interest rates and interest rate
spreads, changes in generally accepted accounting principles and policies
and
guidelines applicable to REITs, those factors set forth herein in Part I,
Item
1A. entitled “Risk Factors” to the Company’s Form 10-K for the fiscal year ended
December 31, 2006 as filed with the Securities and Exchange Commission (the
“SEC”) on March 27, 2007 and other risks and uncertainties as may be detailed
from time to time in our public announcements and our reports filed with
the
SEC.
The
risks
here are not exhaustive. Other sections of this report may include
additional factors that could adversely affect our business and financial
performance. Moreover, we operate in a competitive and rapidly
changing environment. New risk factors emerge from time to time and
it is not possible for management to predict all such risks factors, nor
can it
assess the impact of all such risk factors on our business or the extent
to
which any factor, or combination of factors, may cause actual results to
differ
materially from those contained in any forward-looking
statements. Given these risks and uncertainties, undue reliance
should not be placed on forward-looking statements as a prediction of actual
results.
As
used
herein, the terms “we”, “us” or the “Company” refer to Berkshire Income Realty,
Inc. (the “Company”), a Maryland corporation, incorporated on July 19,
2002. The Company is in the business of acquiring, owning, operating
and renovating multifamily apartment communities. Berkshire Property
Advisors, L.L.C. (“Berkshire Advisor” or “Advisor”) is an affiliated entity we
have contracted with to make decisions relating to the day-to-day management
and
operation of our business, subject to the Board of Directors (“Board”)
oversight. Refer to the Notes to the Consolidated Financial
Statements, Note 11 –Related Party Transactions of this Form 10-Q for
additional information about the Advisor.
Overview
The
Company is engaged primarily in the ownership, acquisition, operation and
rehabilitation of multifamily apartment communities in the Baltimore/Washington
D.C., Southeast, Southwest, Northwest and Midwest areas of the United States.
We
conduct substantially all of our business and own, either directly or through
subsidiaries, substantially all of our assets through Berkshire Income Realty
–
OP, L.P. (the “Operating Partnership”), a Delaware limited partnership. The
Company’s wholly owned subsidiary, BIR GP, L.L.C., a Delaware limited liability
company, is the sole general partner of the Operating Partnership. As
of August 14, 2007, the Company is the owner of 100% of the preferred limited
partner units of the Operating Partnership, whose terms mirror the terms
of the
Company’s Series A 9% Cumulative Redeemable Preferred Stock and, through BIR GP,
L.L.C., owns 100% of the general partner interest of the Operating Partnership,
which represents approximately 2.39% of the common economic interest of the
Operating Partnership.
Our
general and limited partner interests in the Operating Partnership entitle
us to
share in cash distributions from, and in the profits and losses of, the
Operating Partnership in proportion to our percentage interest therein. The
other partners of the Operating Partnership are affiliates who contributed
their
direct or indirect interests in certain properties to the Operating Partnership
in exchange for common units of limited partnership interest in the Operating
Partnership.
Our
highlights of the six months ended June 30, 2007 included the
following:
•
|
On
March 2, 2007, the Company acquired Hampton House Apartments for
$20,500,000, from an unaffiliated seller. The high rise mixed
use property is located in the Baltimore suburb of Towson, Maryland
and
has 222 units, 196 residential and 26 commercial units. The
purchase price was paid with a combination of proceeds from the
advance of
$20,000,000 on the revolving credit facility available from an
affiliate,
and cash from available working capital. The property has been
designated as a qualified replacement property in a transaction
structured
to comply with a Section 1031 tax deferred reverse exchange under
the
Internal Revenue Code of 1986, as amended.
|
•
|
On
March 30, 2007, the Company closed on $7,050,000 of supplemental
fixed
rate financing on the Yorktowne property. The loan is a
non-recourse mortgage note with a fixed interest rate of
6.12%. The loan is coterminous with the existing first mortgage
on the property.
|
•
|
On
April 26, 2007, the Company closed on $20,000,000 of fixed rate
financing
on the Hampton House property. The loan is a non-recourse
mortgage note with a fixed interest rate of 5.77% and a term of
10
years. The loan is to repay the $20,000,000 of revolving credit
used to purchase the property initially.
|
•
|
On
June 1, 2007, the Company acquired Sunfield Lakes Apartments for
$24,250,000, from an unaffiliated seller. The high rise mixed
use property is located in the City of Sherwood, Oregon and has
200
units. The purchase price was paid with a combination of
proceeds from the advance of $17,500,000 on the revolving credit
facility
available from an affiliate, and cash from available working
capital. The property has been designated as a qualified
replacement property in a transaction structured to comply with
a Section
1031 tax deferred reverse exchange under the Internal Revenue Code
of
1986, as amended.
|
•
|
On
May 10, 2007, the Company closed on $8,000,000 of supplemental
fixed rate
financing on the Westchester West property. The loan is a
non-recourse mortgage note with a fixed interest rate of
5.89%. The loan is coterminous with the existing first mortgage
on the property.
|
•
|
On
May 30, 2007, the Company completed the sale of Trellis at Lee’s Mill
(“Trellis”), a 176-unit multifamily apartment community located in Newport
News, Virginia, to an unaffiliated buyer. The sale price of the
property was $12,200,000 and was subject to normal operating prorations
and adjustments as provided for in the purchase and sale
agreement. The Company has structured the transaction to comply
with the requirements of a Section 1031 tax deferred exchange under
the
Internal Revenue Code of 1986, as amended. The Company has reinvested
its
entire share of the proceeds from the sale of Trellis at Lee’s Mill and
the proceeds from sale of Dorsey’s Forge in the purchase of two qualified
replacement properties, Hampton House and Sunfield Lakes
Apartments.
|
•
|
On
June 22, 2007, the Company completed the sale of Dorsey’s Forge
(“Dorsey’s”), a 251-unit multifamily apartment community located in
Columbia, Maryland, to an unaffiliated buyer. The sale price of
the property was $33,250,000 and was subject to normal operating
prorations and adjustments as provided for in the purchase and
sale
agreement. The Company has structured the transaction to comply
with the requirements of a Section 1031 tax deferred exchange under the
Internal Revenue Code of 1986, as amended. The Company has reinvested
its
entire share of the proceeds from the sale of Dorsey’s Forge and the
proceeds from sale of Trellis at Lee’s Mill in the purchase of two
qualified replacement properties, Hampton House and Sunfield Lakes
Apartments. Dorsey’s Forge was one of the three properties
owned with a third party. The Company’s interest in Dorsey’s
Forge was 91.382%.
|
General
The
Company detailed a number of significant trends and specific factors affecting
the real estate industry in general and the Company’s business in particular in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” Item 7 of our Annual Report on Form 10-K for the year ended December
31, 2006. The Company believes those trends and factors continue to be relevant
to the Company’s performance and financial condition.
Recent
Accounting Pronouncements
In
June
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes — an Interpretation of FASB Statement 109” (“FIN 48” or the
“Interpretation”), which clarifies the accounting for uncertainty in income
taxes recognized in companies’ financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. The evaluation of a tax position in accordance with FIN
48 is a two-step process. The first step is recognition whereby
companies must determine whether it is more likely than not that a tax position
will be sustained upon examination. The second step is measurement
whereby a tax position that meets the more-likely-than-not recognition threshold
is measured to determine the amount of benefit to recognize in the financial
statements. The Interpretation also provides guidance on
derecognition of recognized tax benefits, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 as of January 1,
2007. The Company has assessed the impact of FIN 48 and has
determined that the adoption of FIN 48 did not have a material impact on
the
financial position or operating results of the Company.
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS No.
157). SFAS No. 157 provides guidance for, among other things,
the definition of fair value and the methods used to measure fair value.
The
provisions of SFAS No. 157 are effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact that SFAS
No.
157 may have on the financial position, operating results and related
disclosures of the Company.
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115” (SFAS No. 159). SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair
value. The provisions of SFAS No. 159 are effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact that SFAS No. 159 may have on the financial position, operating results
and related disclosures of the Company.
Liquidity
and Capital Resources
Cash
and Cash Flows
As
of
June 30, 2007 and December 31, 2006, the Company had $8,093,728 and $15,393,249
of cash and cash equivalents, respectively. Cash provided and used by
the Company for the three and six month periods ended June 30, 2007 and 2006
are
as follows:
|
|
Three months
ended Six
months ended
June
30,
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$ |
5,017,601
|
|
|
$ |
3,541,942
|
|
|
$ |
6,454,326
|
|
|
|
4,920,851
|
|
Cash
used in investing activities
|
|
|
(31,988,288 |
) |
|
|
(5,641,367 |
) |
|
|
(56,156,160 |
) |
|
|
(11,529,014 |
) |
Cash
provided by financing activities
|
|
|
18,651,802
|
|
|
|
2,479,927
|
|
|
|
42,402,313
|
|
|
|
1,991,621
|
|
During
the six months ended June 30, 2007, cash decreased by $7,299,521. The main
component of the overall decrease was $56,156,160 used in the investing
activities of the Company. The activities relate mainly to the acquisition
of
the Hampton House and Sunfield Lakes properties for $21,097,783 and $24,654,747,
respectively, capital expenditures related to the rehabilitation of the
Company’s properties of $7,879,733 and additional investments of capital in BVF
of $2,870,307. The decreases from the investing activities were
partially offset by $42,402,313 of cash provided by the Company’s financing
activities, which include proceeds from a draw on the revolving credit facility
available from an affiliate of $17,500,000, new first and second mortgage
debt
on various properties totaling $35,050,000. The increases from the
credit activities were offset by payments of principal on existing mortgage
loans, distributions to common and preferred shareholders and distributions
to
minority owners in the properties. Additionally, the net cash used by
the investing and financing activities of the Company was further offset
by an
increase in cash of $6,454,326 provided by the operating activities of the
Company.
During
the six months ended June 30, 2007, the Company sold two properties but did
not
recognize the $18,393,796 in cash these sales generated as the funds were
held
in restricted escrow accounts pending the settlement of the related 1031
exchange transaction. The transaction was completed on July 13, 2007
and the Company will recognize those cash flows in the third quarter of
2007.
The
Company’s principal liquidity demands are expected to be distributions to our
preferred and common shareholders and Operating Partnership unitholders,
capital
improvements, rehabilitation projects and repairs and maintenance for the
properties, acquisition of additional properties within the investment
restrictions placed on it by BVF, debt repayment and investment in the
affiliated BVF. (See footnote 4 to the consolidated financial statements
in Part
I, Item I herein for additional information).
The
Company intends to meet its short-term liquidity requirements through net
cash
flows provided by operating activities, cash distributions from its investments,
including the Company’s investments in the Multifamily Venture, and advances
from the revolving credit facility. The Company considers its ability to
generate cash to be adequate to meet all operating requirements and make
distributions to its stockholders in accordance with the provisions of the
Internal Revenue Code of 1986, as amended, applicable to REITs. Funds
required to make distributions to our preferred and common shareholders and
Operating Partnership unitholders that are not provided by operating activities
will be supplemented by property debt financing and refinancing
activities.
The
Company intends to meet its long-term liquidity requirements through property
debt financing and refinancing. The Company may seek to expand its
purchasing power through the use of venture relationships with other
companies.
As
of
June 30, 2007, the Company has obtained fixed interest rate mortgage financing
on all of the properties in the portfolio with the exception of the Arboretum
Land, a parcel of vacant land adjacent to the Arboretum Place Apartments,
and
Sunfield Lakes, a property acquired late in the second quarter, for which
the
financing is currently in the process of being finalized and expected to
close
in the third quarter of 2007. The Company does not have current plans
to obtain financing on the Arboretum Land. Supplemental fixed
interest rate mortgage financing on the Yorktowne and Westchester West
properties was completed during the six months ended on June 30, 2007 and
provided $15,050,000 of additional liquidity during the period.
The
Company has a $20,000,000 revolving credit facility in place with an affiliate
of the Company. During the six months ended June 30, 2007, the Company borrowed
$20,000,000, which it later repaid and an additional $17,500,000 from the
credit
facility for the acquisition of properties that were acquired prior to obtaining
financing. The Company used the proceeds of the borrowing to acquire
the Hampton House and Sunfield Lakes properties, and intends to repay the
outstanding borrowings upon completion of the financing on the Sunfield Lakes
property. There was $17,500,000 of borrowings outstanding on the
credit facility as of June 30, 2007. The Company currently expects
that repayment of the advances from the credit facility will be funded by
proceeds from conventional mortgages on newly acquired properties, proceeds
from
1031 exchanges and potential re-financing of existing properties, including
those properties undergoing substantial rehabilitation projects where resulting
increases in value, if any, would allow refinancing of the properties at
increased levels from the existing mortgages currently outstanding on the
rehabilitated properties.
Capital
Expenditures
The
Company incurred $1,583,341 and $2,021,345 in recurring capital expenditures
during the six months ended June 30, 2007 and 2006, respectively. Recurring
capital expenditures typically include items such as appliances, carpeting,
flooring, HVAC equipment, kitchen and bath cabinets, site improvements and
various exterior building improvements.
The
Company incurred $6,296,392 and $6,485,860 in renovation-related capital
expenditures during the six months ended June 30, 2007 and 2006, respectively.
Renovation related capital expenditures generally include capital expenditures
of a significant non-recurring nature, including construction management
fees
payable to an affiliate of the Company, where the Company expects to see
a
financial return on the expenditure or where the Company believes the
expenditure preserves the status of a property within its
sub-market.
In
January 2004, the Company authorized the renovation of 252 apartment units
at
its Berkshires of Columbia (formerly Hannibal Grove property (“Columbia”) to
provide for in-unit washer and dryer hookups. The total cost of the project
was
estimated to be approximately $1,455,000, or $5,775 per apartment
unit. The Company believes the renovations are necessary to maintain
the property’s competitiveness in its sub-market and that the property will also
achieve significant growth in rental rates as a result of the
renovations. In September 2005, in addition to the washer and dryer
program, the Company approved, after a successful trial project on a limited
number of units, the interior renovation of all 252 units at Columbia, including
the in-unit washer and dryer hookups in units not yet converted, at an
anticipated total cost of $5,292,000, or $21,000 per unit. As of June
30, 2007, 201 units, or 80%, of 252 apartment units at Columbia have been
renovated, of which 189 units, or 94%, of those completed units have been
leased. The Company currently anticipates spending, and has budgeted in 2007,
approximately $2,600,000 for continued renovations at Hannibal and currently
anticipates completing the project in the fourth quarter of
2007. Total costs committed to date are below original estimates and
are anticipated to remain under budget through the remainder of the
project.
In
May
2005, the Company authorized the renovation of its Berkshires on Brompton
property. The renovations at the 362-unit property include significant
rehabilitation to the interior and exterior common areas as well as individual
interior unit renovations. The total cost of the project, including interior
and
exterior renovations, is currently estimated at approximately
$6,800,000. The Company initially tested the interior rehabilitation
plan on 100 units, at a cost of approximately $6,300 per unit or $630,000,
and
has determined that the financial returns estimated in the plan are
achievable. Based on the successful financial returns of the 100-unit
test, the Company decided to move forward with the renovation of the remaining
262 units. The costs associated with the renovation of the remaining
262 units were approved as part of the 2006 capital budget, which included
a
per-unit estimated cost of $7,300 or $1,912,600. As of June 30, 2007,
approximately all 362 units, or 100%, including the 100 test units, have
been
renovated, of which 343 units, or 95%, of those completed units have been
leased.
In
December 2006, the Company, as part of the decision to acquire the Standard
at
Lenox Park property, approved a rehabilitation project at the 375-unit property
of approximately $5,000,000 for interior and exterior
improvements. As of June 30, 2007, the project, which includes
rehabilitation of the kitchens, bathrooms, lighting and fixtures, was 35%
complete as 130 of the 375 units had been completed, of which 120 units,
or 92%
have been leased.
Other
properties are undergoing limited-scope interior renovation projects during
2007. The decision to undertake these renovations was also made as
part of the decision to acquire the respective properties. The
projects include rehabilitation of the kitchens; bathrooms, lighting and
fixtures included exterior renovations of the Chisholm Place and Briarwood
Apartments properties. Both projects were complete as of June 30,
2007.
The
Company owns two parcels of vacant land, which are contiguous with other
properties the Company currently owns. The Company continues to
assess the viability of developing additional apartment units on those
parcels. A tentative decision to move forward with the development of
one parcel, the Arboretum Land, which is contiguous with the Arboretum Place
Apartments, has been made by the Company. Development plans are
currently being assessed and permitting of the anticipated project is in
process. Estimated cost of the project has not been finalized as of
June 30, 2007. No decision to proceed nor have any funds been
committed to the development of the other parcel of vacant land as of June
30,
2007.
The
Company’s capital budgets for 2007 anticipate spending approximately $20,092,718
for ongoing rehabilitation and development of current portfolio properties
during the year. As of June 30, 2007, the Company has not committed
to any new significant rehabilitation projects.
Acquisitions
On
March
2, 2007, the operating partnership of the Company, Berkshire Income Realty
– OP,
L.P. (the “Operating Partnership”), through a newly and wholly owned subsidiary,
BIR Hampton Manager, LLC. , completed the acquisition of 100% of the fee
simple
interest of Hampton House Apartments, a 222 unit mixed use high-rise apartment
building located in Towson, Maryland, from an unaffiliated third
party. The purchase price was $20,500,000 subject to normal operating
pro rations. The purchase price and related closing costs were funded
through a $20,000,000 advance from the revolving credit facility available
from
an affiliate and available cash. The Company obtained first
mortgage financing, which is collateralized by the property, in the amount
of
$20,000,000 on April 26, 2007 and subsequently used a portion of the proceeds
and the 1031 net proceeds to repay the outstanding advance on the revolving
credit facility. The acquisition of Hampton House is intended to be
the qualified replacement property in connection with the sale of properties
identified for replacement pursuant to a transaction structured to comply
with
the requirements of a reverse Section 1031 tax exchange under the Internal
Revenue Code of 1986, as amended. As required by the tax code, a
qualified 1031 intermediary was retained to execute the Hampton House
acquisition and relinquished properties transactions. As of June 30,
2007, the purchase price allocation is preliminary and subject to final
adjustment, which the Company expects to be completed in the third quarter
of
2007.
On
June
1, 2007, the operating partnership of the Company, Berkshire Income Realty
– OP,
L.P. (the “Operating Partnership”), through a newly and wholly owned subsidiary,
BIR Sunfield, LLC. , completed the acquisition of 100% of the fee simple
interest of Sunfield Lakes Apartments, a 200 unit mixed use high-rise apartment
building located in the City of Sherwood, County of Washington, Oregon, from
an
unaffiliated third party. The purchase price was $24,250,000 subject
to normal operating pro rations. The purchase price and related
closing costs were funded through a $17,500,000 advance from the revolving
credit facility available from an affiliate and available cash. The
Company intends to obtain first mortgage financing, which is collateralized
by
the property, in the amount of $19,440,000. The first mortgage is expected
to
close on or about August 15, 2007 and a portion of the financing and 1031
net
proceeds are expected to be used to repay the outstanding balance on the
revolving credit facility. The acquisition of Sunfield Lakes is
intended to be the qualified replacement property in connection with the
sale of
properties identified for replacement pursuant to a transaction structured
to
comply with the requirements of a reverse Section 1031 tax exchange under
the
Internal Revenue Code of 1986, as amended.
As
of
June 30, 2007, the Company has identified the Dorsey’s Forge (“Dorsey’s”) and
Trellis at Lee’s Mill (“Trellis) properties it intends to relinquish as part of
the 1031 tax-free exchange transaction. As required by the tax code,
qualified 1031 intermediaries have been retained to execute the Hampton House
and Sunfield Lakes acquisitions, and the two relinquished properties
transactions. The sale of Dorsey’s and Trellis have occurred as of
June 30, 2007, however the 1031 tax-free exchange transaction was not settled
until July 13, 2007. As of June 30, 2007, the purchase price
allocations are preliminary and subject to final adjustment, which the Company
expects to be completed in the third quarter of 2007
Discussion
of dispositions for the six months ended June 30,
2007
On
May
30, 2007, the Operating Partnership completed the sale of 100% of its interest
in Trellis in Newport News, Virginia. The Company’s share of the
proceeds from the sale of Trelis at Lee’s Mill were deposited in an escrow
account with a qualified institution pursuant to a transaction structured
to
comply with a Section 1031 tax deferred exchange under the Internal Revenue
Code
of 1986, as amended, and intends to reinvest its share of proceeds from sale
of
Trellis in purchase of a qualified replacement property. The
operating results of Trellis have been presented in the consolidated statement
of operations as discontinued operations in accordance with FAS 144 “Accounting
for the Impairment or Disposal of Long Lived Assets” as those results were
previously reported as part of continuing operations.
On
June
22, 2007, the Operating Partnership completed the sale of 100% of its interest
in Dorsey’s in Columbia, Maryland. The Company’s share of the
proceeds from the sale of Dorsey’s Forge were deposited in an escrow account
with a qualified institution pursuant to a transaction structured to comply
with
a Section 1031 tax deferred exchange under the Internal Revenue Code of 1986,
as
amended, and intends to reinvests its share of proceeds from sale of Dorsey’s
Forge in purchase of a qualified replacement property. The operating
results of Dorsey’s Forge have been presented in the consolidated statement of
operations as discontinued operations in accordance with FAS 144 “Accounting for
the Impairment or Disposal of Long Lived Assets” as those results were
previously reported as part of continuing operations.
The
gain
from the sale of Dorsey’s and Trellis is reflected, on a combined basis, as gain
on disposition on real estate assets in the discontinued operations section
of
the Consolidated Statements of Operations.
Declaration
of Dividends and Distributions
On
March
25, 2003, the Board declared a dividend at an annual rate of 9% on the stated
liquidation preference of $25 per share of the outstanding shares of the
Company’s 9% Cumulative Redeemable Preferred Stock, which is payable quarterly
in arrears, on February 15, May 15, August 15, and November 15 of each year
to
shareholders of record in the amount of $0.5625 per share per
quarter.
On
November 8, 2006, the Board authorized the general partner of the Operating
Partnership to distribute two quarterly distributions of $1,000,000 each,
in
aggregate, from its operating cash flows to common general and common limited
partners, payable on February 15, 2007 and May 15, 2007. On the same day,
the
Board also declared a common dividend of $0.016996 per share on the Company’s
Class B common stock payable concurrently with the Operating Partnership
distributions.
On
May
16, 2007, the Board authorized the general partner of the Operating Partnership
to distribute quarterly distributions of $1,000,000 each, in the aggregate,
from
its operating cash flows to common general and common limited partners, payable
on August 15, 2007 and November 15, 2007. On the same day, the Board also
declared a common dividend of $0.016996 per share on the Company’s Class B
common stock payable concurrently with the Operating Partnership
distributions.
Results
of Operations and Financial Condition
During
the six months ended June 30, 2007, the Company’s portfolio (the “Total Property
Portfolio”), which consists of all properties acquired or placed in service and
owned through June 30, 2007, remains the same in total number as two properties
were acquired and two properties were sold during the
period. As a result of changes in property holdings in the
Total Portfolio over the six-month period ended June 30, 2007, the consolidated
financial statements show considerable changes in revenue and expenses from
period to period. The Company does not believe that its period-to-period
financial data are comparable. Therefore, the comparison of operating results
for the six months ended June 30, 2007 and 2006 reflects the changes
attributable to the properties owned by the Company throughout each period
presented (the “Same Property Portfolio”).
“Net
Operating Income (“NOI”) falls within the definition of a “non-GAAP financial
measure” as stated in Item 10(e) of Regulation S-K promulgated by the
SEC. The Company believes NOI is a measure of operating results that
is useful to investors to analyze the performance of a real estate company
because it provides a direct measure of the operating results of the Company’s
multifamily apartment communities. The Company also believes it is a useful
measure to facilitate the comparison of operating performance among
competitors. The calculation of NOI requires classification of income
statement items between operating and non-operating expenses, where operating
items include only those items of revenue and expense which are directly
relate
to the income producing activities of the properties. We believe that
to achieve a more complete understanding of the Company’s performance, NOI
should be compared with our reported net income (loss). Management
uses NOI to evaluate the operating results of properties without reflecting
the
effect of capital decisions such as the issuance of mortgage debt and
investments in capital items, in turn these capital decisions have an impact of
interest expense and depreciation and amortization.
The
most
directly comparable financial measure of our NOI, calculated and presented
in
accordance with GAAP, is net income, shown on the statement of
operations. For the three month period ended June 30, 2007 and 2006,
net income was $23,119,830 and $5,867,098, respectively. For the six
month period ended June 30, 2007 and 2006, net income was $16,211,634 and
$465,933, respectively. A reconciliation of our NOI to net income for
the three and six month periods ended June 30, 2007 and 2006 are presented
as
part of the following tables on page 27 and 28, and 31 and 32.
Comparison
of the three months ended June 30, 2007 to the three months ended June 30,
2006.
The
table
below reflects selected operating information for the Same Property Portfolio
and the Total Property Portfolio. The Same Property Portfolio
consists of the 23 properties acquired or placed in service on or prior to
January 1, 2006 and owned through June 30 2007. The Total Property
Portfolio includes the effect of the additional rental properties acquired
after
January 1, 2005. (The 2007 and 2006 activity for the Dorsey’s and
Trellis properties have been removed from the presentation as the results
have
been reflected as discontinued operations in the consolidated statements
of
operations.)
|
|
Same
Property Portfolio
|
|
|
|
Three
months ended June 30,
|
|
|
|
|
|
|
|
|
|
Increase
/
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
17,322,264
|
|
|
$ |
16,075,171
|
|
|
$ |
1,247,093
|
|
|
|
7.76 |
% |
Interest,
utility reimbursement and other
|
|
|
1,068,217
|
|
|
|
954,053
|
|
|
|
114,164
|
|
|
|
11.97 |
% |
Total
revenue
|
|
|
18,390,481
|
|
|
|
17,029,224
|
|
|
|
1,361,257
|
|
|
|
7.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
4,209,641
|
|
|
|
4,236,720
|
|
|
|
(27,079 |
) |
|
|
(0.64 |
)% |
Maintenance
|
|
|
1,407,838
|
|
|
|
1,391,029
|
|
|
|
16,809
|
|
|
|
1.21 |
% |
Real
estate taxes
|
|
|
1,855,082
|
|
|
|
1,920,706
|
|
|
|
(65,624 |
) |
|
|
(3.42 |
)% |
General
and administrative
|
|
|
359,906
|
|
|
|
291,293
|
|
|
|
68,613
|
|
|
|
23.55 |
% |
Management
fees
|
|
|
717,967
|
|
|
|
662,075
|
|
|
|
55,892
|
|
|
|
8.44 |
% |
Total
operating expenses
|
|
|
8,550,434
|
|
|
|
8,501,823
|
|
|
|
48,611
|
|
|
|
0.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Income
|
|
|
9,840,047
|
|
|
|
8,527,401
|
|
|
|
1,312,646
|
|
|
|
15.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,704,048
|
|
|
|
6,211,687
|
|
|
|
492,361
|
|
|
|
7.93 |
% |
Interest
|
|
|
5,686,255
|
|
|
|
4,725,073
|
|
|
|
961,182
|
|
|
|
20.34 |
% |
Amortization
of acquired in-place leases and tenant relationships
|
|
|
27,225
|
|
|
|
213,030
|
|
|
|
(185,805 |
) |
|
|
(87.22 |
)% |
Total
non-operating expenses
|
|
|
12,417,528
|
|
|
|
11,149,790
|
|
|
|
1,267,738
|
|
|
|
11.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest in properties, equity in income (loss)
of
Multifamily Venture and Limited Partnership venture, minority common
interest in Operating Partnership and income (loss) from discontinued
operations
|
|
|
(2,577,481 |
) |
|
|
(2,622,389 |
) |
|
|
44,908
|
|
|
|
1.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Multifamily Venture and
Limited
Partnership Venture
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,577,481 |
) |
|
$ |
(2,622,389 |
) |
|
$ |
44,908
|
|
|
|
1.71 |
% |
|
|
Total
Property Portfolio
|
|
|
|
Three
months ended June 30,
|
|
|
|
|
|
|
|
|
|
Increase
/
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
19,770,376
|
|
|
$ |
16,143,991
|
|
|
$ |
3,626,385
|
|
|
|
22.46 |
% |
Interest,
utility reimbursement and other
|
|
|
1,417,719
|
|
|
|
1,170,498
|
|
|
|
247,221
|
|
|
|
21.12 |
% |
Total
revenue
|
|
|
21,188,095
|
|
|
|
17,314,489
|
|
|
|
3,873,606
|
|
|
|
22.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
5,139,804
|
|
|
|
4,339,920
|
|
|
|
799,884
|
|
|
|
18.43 |
% |
Maintenance
|
|
|
1,573,600
|
|
|
|
1,392,878
|
|
|
|
180,722
|
|
|
|
12.97 |
% |
Real
estate taxes
|
|
|
2,181,202
|
|
|
|
1,921,623
|
|
|
|
259,579
|
|
|
|
13.51 |
% |
General
and administrative
|
|
|
737,566
|
|
|
|
631,093
|
|
|
|
106,473
|
|
|
|
16.87 |
% |
Management
fees
|
|
|
1,233,632
|
|
|
|
1,092,437
|
|
|
|
141,195
|
|
|
|
12.92 |
% |
Total
operating expenses
|
|
|
10,865,804
|
|
|
|
9,377,951
|
|
|
|
1,487,853
|
|
|
|
15.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Income
|
|
|
10,322,291
|
|
|
|
7,936,538
|
|
|
|
2,385,753
|
|
|
|
30.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
8,054,096
|
|
|
|
6,483,885
|
|
|
|
1,570,211
|
|
|
|
24.22 |
% |
Interest
|
|
|
7,028,286
|
|
|
|
4,729,106
|
|
|
|
2,299,180
|
|
|
|
48.62 |
% |
Amortization
of acquired in-place leases and tenant relationships
|
|
|
380,573
|
|
|
|
213,030
|
|
|
|
167,543
|
|
|
|
78.65 |
% |
Total
non-operating expenses
|
|
|
15,462,955
|
|
|
|
11,426,021
|
|
|
|
4,036,934
|
|
|
|
35.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest in properties, equity in income (loss)
of
Multifamily Venture and Limited Partnership venture, minority common
interest in Operating Partnership and income (loss) from discontinued
operations
|
|
|
(5,140,664 |
) |
|
|
(3,489,483 |
) |
|
|
(1,651,181 |
) |
|
|
47.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
(1,471,581 |
) |
|
|
(173,861 |
) |
|
|
(1,297,720 |
) |
|
|
746.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Multifamily Venture and
Limited Partnership Venture
|
|
|
(689,536 |
) |
|
|
9,617,881
|
|
|
|
(10,307,417 |
) |
|
|
(107.17 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
(976,100 |
) |
|
|
-
|
|
|
|
(976,100 |
) |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
31,397,711
|
|
|
|
(87,439 |
) |
|
|
31,485,150
|
|
|
|
36008.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
23,119,830
|
|
|
$ |
5,867,098
|
|
|
$ |
17,252,732
|
|
|
|
294.06 |
% |
Comparison
of the three months ended June 30, 2007 to the three months ended June 30,
2006.
(Same
Property Portfolio)
Revenue
Rental
Revenue
Rental
revenue of the Same Property Portfolio increased for the three-month period
ended June 30, 2007 in comparison to the similar period of 2006. The majority
of
the increase is attributable mainly to properties that have completed major
renovations in late 2006 and early 2007 and are leasing the newly renovated
units at premium rent levels and are raising the occupancy levels at the
properties following the completion of the rehabilitation
projects. Properties experiencing increased post rehabilitation rent
levels include the Seasons property in Maryland and the Berkshires on Brompton
property in Texas. Market conditions remain favorable in the majority
of the sub-markets in which the Company operates. The Company
continues to benefit from ongoing property rehabilitation projects at various
properties in the Same Property Portfolio where successful results benefit
the
Company by yielding enhanced rental revenues as rehabilitated units are placed
back into service with incrementally higher rental rates than pre-rehabilitation
levels.
Interest,
utility reimbursement and other revenue
Same
Property Portfolio interest, utility reimbursement and other revenues increased
for the three-month period ended June 30, 2007 as compared to the three-month
period ended June 30, 2006. Utility reimbursements increased, mainly
due to increased usage of bill back programs to tenants, period over period
and
were partially offset by decreases in interest and other miscellaneous revenues.
Miscellaneous revenues consist primarily of the fees charged to tenants and
potential tenants, including late fees, parking fees, pet fees, laundry fees,
application fees and other similar items.
Operating
Expenses
Operating
Overall
operating expenses decreased slightly in the quarter ended June 30, 2007
as
compared to the same period of 2006. Property insurance expense saw
the largest increase in costs during the current quarter as compared to the
year
earlier comparative period. As anticipated, increases in premium levels for
property insurance coverage, which was effective on July 1, 2006, continues
to
exceed costs incurred in the comparative period of the prior year, with the
largest increases realized in the Florida and Texas markets. The
Company has renewed its property insurance coverage for the portfolio for
the
upcoming policy period as of May 1, 2007, and was able to achieve modest
cost
reductions in premiums for its property insurance coverage. Decreases
in payroll and related benefits, due to position vacancies at various
properties, and some utilities, including gas, were the main contributors
in
offsetting the increase in insurance premiums. The Seasons of Laurel
property contributes significantly to the Company’s overall utility expense as
the electricity charges at the property are paid by the Company and are not
currently billed directly to tenants for usage of their apartment
unit. The Company is currently undertaking steps necessary to modify
the utility infrastructure to allow for the passing of the individual apartment
unit utility costs directly to its tenants and expects to implement system
changes to allow for direct billing by unit.
Maintenance
Maintenance
expense increased slightly in the three-month period ended June 30, 2007
as
compared to the same period of 2006 and is due mainly to normal operating
fluctuations including normal maintenance activities including cleaning,
interior painting and landscaping. Management continues to employ a
proactive maintenance plan at its multifamily apartment communities within
its
portfolio and considers it an effective program that contributes to preserving,
and in some cases increasing, its occupancy levels.
Real
Estate Taxes
Real
estate taxes decreased for the three-month period ended June 30, 2007 from
the
comparable period of 2006. The decrease is due mainly to an adjustment of
assessments on various properties in the portfolio, including properties
located
in Texas which have seen a reduced real estate tax due to newly enacted tax
legislation creating a new business excise tax designed to offset the property
tax burden in the state of Texas. The savings were partially offset
by the continued escalation of assessed property valuations for other properties
in the Same Property Portfolio. The Company scrutinizes the assessed
values of its properties and avails itself of arbitration or similar forums
made
available by the taxing authority for increases in assessed value that it
considers to be unreasonable. The Company has been successful in achieving
tax
abatements for certain of its properties based on challenges made to the
assessed values. The Company anticipates a continued upward trend in real
estate
tax expense as local and state taxing agencies continue to place significant
reliance on property tax revenue.
General
and Administrative
General
and administrative expenses increased in the three-month period ended June
30,
2007 compared to 2006. The overall increase is due mainly to normal
operating expense fluctuations experienced throughout the properties of the
Same
Property Portfolio including increases in legal fees related to ongoing property
related issues and projects at certain properties in the portfolio as well
as
legal fees related to tenant issues including those related to rent collection
at various properties in the portfolio. Additionally, expenses
related to the updating of computer software increased in the current
three-month period.
Management
Fees
Management
fees of the Same Property Portfolio increased in the three-month period ended
June 30, 2007 compared to the same period of 2006 based on increased levels
of
revenue of the Same Property Portfolio. Property management fees are assessed
on
the revenue stream of the properties managed by an affiliate of the
Company.
Non
Operating Expenses
Depreciation
Depreciation
expense of the Same Property Portfolio increased for the three months ended
June
30, 2007 as compared to the same period of the prior year. The increased
expense
is related to the additions to the basis of fixed assets in the portfolio
driven
by substantial rehabilitation projects ongoing at the Yorktowne, Seasons
of
Laurel and Hannibal Grove properties and to a lesser degree, normal recurring
capital spending activities over the remaining properties in the Same Property
Portfolio.
Interest
Interest
expense for the three months ended June 30, 2007 increased significantly
over
the comparable period of 2006. The increase is attributable to the refinancing
of mortgages on properties at an incrementally higher principal level than
the
related paid-off loan, with the majority of the additional debt obtained
on the
Seasons of Laurel property, which was partially offset by the reduced interest
rate obtained on the new debt and new second mortgage debt on seven other
properties that was not in place in the comparative period of
2006. Additionally, during the three-month period ended June 30,
2007, supplemental debt in the form of two second mortgages were obtained
and
contributed to the increased interest expense.
Amortization
of acquired in-place leases and tenant relationships
Amortization
of acquired in-place-leases and tenant relationships decreased significantly
in
the three months ended June 30, 2007 as compared to the same three-month
period
of 2006. The decrease is related mainly to the completion of
amortization of the acquired-in-place lease intangible assets booked at
acquisition and amortized over a 12 month period which did not extend into
the
three month period ended June 30, 2007.
Comparison
of the six months ended June 30, 2007 to the six months ended June 30,
2006.
|
|
Same
Property Portfolio
|
|
|
|
Six
months ended June 30,
|
|
|
|
|
|
|
|
|
|
Increase
/
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
34,315,889
|
|
|
$ |
32,195,868
|
|
|
$ |
2,120,021
|
|
|
|
6.58 |
% |
Interest,
utility reimbursement and other
|
|
|
1,907,781
|
|
|
|
1,837,695
|
|
|
|
70,086
|
|
|
|
3.81 |
% |
Total
revenue
|
|
|
36,223,670
|
|
|
|
34,033,563
|
|
|
|
2,190,107
|
|
|
|
6.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
9,150,834
|
|
|
|
8,917,103
|
|
|
|
233,731
|
|
|
|
2.62 |
% |
Maintenance
|
|
|
2,401,694
|
|
|
|
2,380,348
|
|
|
|
21,346
|
|
|
|
0.90 |
% |
Real
estate taxes
|
|
|
3,646,309
|
|
|
|
3,858,044
|
|
|
|
(211,735 |
) |
|
|
(5.49 |
)% |
General
and administrative
|
|
|
686,059
|
|
|
|
570,793
|
|
|
|
115,266
|
|
|
|
20.19 |
% |
Management
fees
|
|
|
1,420,547
|
|
|
|
1,325,209
|
|
|
|
95,338
|
|
|
|
7.19 |
% |
Total
operating expenses
|
|
|
17,305,443
|
|
|
|
17,051,497
|
|
|
|
253,946
|
|
|
|
1.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Income
|
|
|
18,918,227
|
|
|
|
16,982,066
|
|
|
|
1,936,161
|
|
|
|
11.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
13,181,689
|
|
|
|
12,354,619
|
|
|
|
827,070
|
|
|
|
6.69 |
% |
Interest
|
|
|
10,915,391
|
|
|
|
9,318,257
|
|
|
|
1,597,134
|
|
|
|
17.14 |
% |
Amortization
of acquired in-place leases and tenant relationships
|
|
|
78,834
|
|
|
|
541,585
|
|
|
|
(462,751 |
) |
|
|
(85.44 |
)% |
Total
non-operating expenses
|
|
|
24,175,914
|
|
|
|
22,214,461
|
|
|
|
1,961,453
|
|
|
|
8.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest in properties, equity in income (loss)
of
Multifamily Venture and Limited Partnership venture, minority common
interest in Operating Partnership and income (loss) from discontinued
operations
|
|
|
(5,257,687 |
) |
|
|
(5,232,395 |
) |
|
|
(25,292 |
) |
|
|
(0.48 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Multifamily Venture and
Limited
Partnership Venture
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,257,687 |
) |
|
$ |
(5,232,395 |
) |
|
$ |
(25,292 |
) |
|
|
(0.48 |
)% |
|
|
Total
Property Portfolio
|
|
|
|
Six
months ended June 30,
|
|
|
|
|
|
|
|
|
|
Increase
/
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
38,659,900
|
|
|
$ |
32,412,356
|
|
|
$ |
6,247,544
|
|
|
|
19.28 |
% |
Interest,
utility reimbursement and other
|
|
|
2,565,214
|
|
|
|
2,225,455
|
|
|
|
339,759
|
|
|
|
15.27 |
% |
Total
revenue
|
|
|
41,225,114
|
|
|
|
34,637,811
|
|
|
|
6,587,303
|
|
|
|
19.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
10,889,118
|
|
|
|
9,203,888
|
|
|
|
1,685,230
|
|
|
|
18.31 |
% |
Maintenance
|
|
|
2,710,639
|
|
|
|
2,382,197
|
|
|
|
328,442
|
|
|
|
13.79 |
% |
Real
estate taxes
|
|
|
4,260,444
|
|
|
|
3,858,961
|
|
|
|
401,483
|
|
|
|
10.40 |
% |
General
and administrative
|
|
|
1,540,887
|
|
|
|
1,186,721
|
|
|
|
354,166
|
|
|
|
29.84 |
% |
Management
fees
|
|
|
2,433,005
|
|
|
|
2,176,548
|
|
|
|
256,457
|
|
|
|
11.78 |
% |
Total
operating expenses
|
|
|
21,834,093
|
|
|
|
18,808,315
|
|
|
|
3,025,778
|
|
|
|
16.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Income
|
|
|
19,391,021
|
|
|
|
15,829,496
|
|
|
|
3,561,525
|
|
|
|
22.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
15,549,897
|
|
|
|
12,653,566
|
|
|
|
2,896,331
|
|
|
|
22.89 |
% |
Interest
|
|
|
13,259,150
|
|
|
|
9,322,290
|
|
|
|
3,936,860
|
|
|
|
42.23 |
% |
Amortization
of acquired in-place leases and tenant relationships
|
|
|
751,811
|
|
|
|
541,585
|
|
|
|
210,226
|
|
|
|
38.82 |
% |
Total
non-operating expenses
|
|
|
29,560,858
|
|
|
|
22,517,441
|
|
|
|
7,043,417
|
|
|
|
31.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest in properties, equity in income (loss)
of
Multifamily Venture and Limited Partnership venture, minority common
interest in Operating Partnership and income (loss) from discontinued
operations
|
|
|
(10,169,837 |
) |
|
|
(6,687,945 |
) |
|
|
(3,481,892 |
) |
|
|
52.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
(1,695,195 |
) |
|
|
(1,213,378 |
) |
|
|
(481,817 |
) |
|
|
39.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Multifamily Venture and
Limited
Partnership Venture
|
|
|
(1,297,766 |
) |
|
|
9,484,345
|
|
|
|
(10,782,111 |
) |
|
|
(113.68 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
(1,952,200 |
) |
|
|
(976,100 |
) |
|
|
(976,100 |
) |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
31,326,632
|
|
|
|
(140,989 |
) |
|
|
31,467,621
|
|
|
|
(22319.20 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
16,211,634
|
|
|
$ |
465,933
|
|
|
$ |
15,745,701
|
|
|
|
3379.39 |
% |
Comparison
of the six months ended June 30, 2007 to the six months ended June 30,
2006.
(Same
Property Portfolio)
Revenue
Rental
Revenue
Rental
revenue of the Same Property Portfolio increased for the six-month period
ended
June 30, 2007 in comparison to the similar period of 2006. The majority of
the
increase is attributable mainly to properties that have completed major
renovations in late 2006 and early 2007and are leasing the newly renovated
units
at premium rent levels and are raising the occupancy levels at the properties
following the completion of the rehabilitation projects. Properties
experiencing increased post rehabilitation rent levels include the Seasons
property in Maryland and the Berkshires on Brompton property in
Texas. Market conditions remain favorable in the majority of the
sub-markets in which the Company operates. The Company continues to
benefit from ongoing property rehabilitation projects at various properties
in
the Same Property Portfolio where successful results benefit the Company
by
yielding enhanced rental revenues as rehabilitated units are placed back
into
service with incrementally higher rental rates than pre-rehabilitation
levels.
Interest,
utility reimbursement and other revenue
Same
Property Portfolio interest, utility reimbursement and other revenues increased
for the six-month period ended June 30, 2007 as compared to the six-month
period
ended June 30, 2006. Utility reimbursements increased, mainly due to
increased usage of bill back programs to tenants, period over period and
were
partially offset by decreases in interest and other miscellaneous revenues.
Miscellaneous revenues consist primarily of the fees charged to tenants and
potential tenants, including late fees, parking fees, pet fees, laundry fees,
application fees and other similar items.
Operating
Expenses
Operating
Overall
operating expenses decreased slightly in the quarter ended June 30, 2007
as
compared to the same period of 2006. Property insurance expense saw
the largest increase in costs during the current quarter as compared to the
year
earlier comparative period. As anticipated, increases in premium levels for
property insurance coverage, which was effective on July 1, 2006, continues
to
exceed costs incurred in the comparative period of the prior year, with the
largest increases realized in the Florida and Texas markets. The
Company has renewed its property insurance coverage for the portfolio for
the
upcoming policy period as of May 1, 2007, and was able to achieve modest
cost
reductions in premiums for its property insurance coverage. Decreases
in payroll and related benefits, due to position vacancies at various
properties, and some utilities, including gas, were the main contributors
in
offsetting the increase in insurance premiums. The Seasons of Laurel
property contributes significantly to the Company’s overall utility expense as
the electricity charges at the property are paid by the Company and are not
currently billed directly to tenants for usage of their apartment
unit. The Company is currently undertaking steps necessary to modify
the utility infrastructure to allow for the passing of the individual apartment
unit utility costs directly to its tenants and expects to implement system
changes to allow for direct billing by unit.
Maintenance
Maintenance
expense increased slightly in the six-month period ended June 30, 2007 as
compared to the same period of 2006 and is due mainly to normal operating
fluctuations including normal maintenance activities including cleaning,
interior painting and landscaping. Management continues to employ a
proactive maintenance plan at its multifamily apartment communities within
its
portfolio and considers it an effective program that contributes to preserving,
and in some cases increasing, its occupancy levels.
Real
Estate Taxes
Real
estate taxes decreased for the six-month period ended June 30, 2007 from
the
comparable period of 2006. The decrease is due mainly to an adjustment of
prior
year taxes assessed on two properties and recognized in the current
period. The savings were partially offset by the continued
escalation of assessed property valuations for other properties in the Same
Property Portfolio. The Company scrutinizes the assessed values of
its properties and avails itself of arbitration or similar forums made available
by the taxing authority for increases in assessed value that it considers
to be
unreasonable. The Company has been successful in achieving tax abatements
for
certain of its properties based on challenges made to the assessed values.
The
Company anticipates a continued upward trend in real estate tax expense as
local
and state taxing agencies continue to place significant reliance on property
tax
revenue. Additionally, during the six months ended June 30, 2007, the
Company received a refund of approximately $88,500 of real estate taxes paid
in
a prior period on the Country Place I and II properties related to an exemption
initiated by the tax authority.
General
and Administrative
General
and administrative expenses increased in the six-month period ended June
30,
2007 compared to 2006. The overall increase is due mainly to normal
operating expense fluctuations experienced throughout the properties of the
Same
Property Portfolio including increases in legal fees related to ongoing property
related issues and projects at certain properties in the portfolio as well
as
legal fees related to tenant issues including those related to rent collection
at various properties in the portfolio. Additionally, expenses
related to the updating of computer software increased in the current six-month
period.
Management
Fees
Management
fees of the Same Property Portfolio increased in the six-month period ended
June
30, 2007 compared to the same period of 2006 based on increased levels of
revenue of the Same Property Portfolio. Property management fees are assessed
on
the revenue stream of the properties managed by an affiliate of the
Company.
Non
Operating Expenses
Depreciation
Depreciation
expense of the Same Property Portfolio increased for the six months ended
June
30, 2007 as compared to the same period of the prior year. The increased
expense
is related to the additions to the basis of fixed assets in the portfolio
driven
by substantial rehabilitation projects ongoing at the Yorktowne, Seasons
of
Laurel and Hannibal Grove properties and to a lesser degree, normal recurring
capital spending activities over the remaining properties in the Same Property
Portfolio.
Interest
Interest
expense for the six months ended June 30, 2007 increased significantly over
the
comparable period of 2006. The increase is attributable to the refinancing
of
mortgages on properties at an incrementally higher principal level than the
related paid-off loan, with the majority of the additional debt obtained
on the
Seasons of Laurel property, which was partially offset by the reduced interest
rate obtained on the new debt and new second mortgage debt on seven other
properties that was not in place in the comparative period of
2006. Additionally, during the six-month period ended June 30, 2007,
supplemental debt in the form of two second mortgages were obtained and
contributed to the increased interest expense.
Amortization
of acquired in-place leases and tenant relationships
Amortization
of acquired in-place-leases and tenant relationships decreased significantly
in
the six months ended June 30, 2007 as compared to the same six-month period
of
2006. The decrease is related mainly to the completion of
amortization of the acquired-in-place lease intangible assets booked at
acquisition and amortized over a 12 month period which did not extend into
the
six-month period ended June 30, 2007.
Comparison
of the three months ended March 31, 2007 to the three months ended March
31,
2006. (Total
Property Portfolio).
In
general, increases in revenues, operating expenses, non-operating expenses
and
the related losses of the Total Property Portfolio for the six months ended
June
30, 2007 as compared to the six months ended June 30, 2007 are due mainly
to the
increase in the number of properties owned by the Company in the comparative
periods presented and to the increase in the level of mortgage and revolving
credit debt outstanding during the comparative periods.
Debt
to Fair Value of Real Estate Assets
The
Company’s total debt summary and debt maturity schedule, as of June 30, 2007, is
as follows:
Debt
Summary
|
|
|
|
|
Weighted
|
|
|
Balance
|
|
Average
Rate
|
|
|
|
|
|
|
|
|
|
Total
- Collateralized - Fixed Rate Debt
|
|
|
$ |
477,585,100
|
|
|
|
5.48 |
% |
Debt
Maturity Summary
|
|
|
|
|
|
|
|
|
Year
|
|
Balance
|
|
|
%
of Total
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
1,620,084
|
|
|
|
0.34 |
% |
2008
|
|
|
13,027,490
|
|
|
|
2.73 |
% |
2009
|
|
|
20,319,044
|
|
|
|
4.25 |
% |
2010
|
|
|
4,844,279
|
|
|
|
1.01 |
% |
2011
|
|
|
5,156,323
|
|
|
|
1.08 |
% |
Thereafter
|
|
|
432,617,880
|
|
|
|
90.59 |
% |
Total
|
|
$ |
477,585,100
|
|
|
|
100.00 |
% |
The
Company’s “Debt-to-Fair Value of Real Estate Assets” as of June 30, 2007 is
presented in the following table. Fair value of real estate assets is based
on
management’s best estimate of fair value for properties purchased in prior years
or purchase price for properties acquired within the current year. As with
any
estimate, management’s estimate of the fair value of properties purchased in
prior years represents only its good faith opinion as to that value, and
there
can be no assurance that the actual value that might, in fact, be realized
for
any such property would approximate that fair value. The following
information is presented in lieu of information regarding the Company’s
“Debt-to-Total Market Capitalization Ratio”, which is a commonly used measure in
our industry, because the Company’s market capitalization is not readily
determinable since there was no public market for its common equity during
the
periods presented in this report.
The
Board
has established investment guidelines under which management may not incur
indebtedness such that at the time we incur the indebtedness our ratio of
debt
to total assets exceeds 75%. This measure is calculated based on the
fair value of the assets determined by management as described
above.
The
information regarding “Debt-to-Fair Value of Real Estate Assets” is presented to
allow investors to calculate our loan-to-value ratios in a manner consistent
with those used by management and others in our industry, including those
used
by our current and potential lenders. Management uses this information when
making decisions about financing or refinancing properties. Management also
uses
fair value information when making decisions about selling assets as well
as
evaluating acquisition opportunities within markets where we have
assets.
Fair
Value of Real Estate Assets is not a GAAP financial measure and should not
be
considered as an alternative to net book value of real estate assets, the
most
directly comparable financial measure calculated and presented in accordance
with GAAP. The net book value of our real estate assets was
$469,738,370 at June 30, 2007 and is presented on the balance sheet as
multifamily apartment communities, net of accumulated depreciation. The
following table reconciles the fair value of our real estate assets to the
net
book value of real estate assets as of June 30, 2007.
Debt-to-Fair
Value of Real Estate Assets as of
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Net
book value of multifamily apartment
communities
|
|
$ |
469,746,523
|
|
|
$ |
445,597,599
|
|
Accumulated
depreciation
|
|
|
154,430,286
|
|
|
|
148,670,523
|
|
Historical
cost
|
|
|
624,176,809
|
|
|
|
594,268,122
|
|
Increase
in fair value over historical cost
|
|
|
158,365,066
|
|
|
|
180,440,878
|
|
Fair
Value – estimated
|
|
$ |
782,541,875
|
|
|
$ |
774,709,000
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Debt
|
|
$ |
477,585,100
|
|
|
$ |
469,378,510
|
|
Revolving
Credit Agreement
|
|
|
17,500,000
|
|
|
|
-
|
|
Total
Debt Outstanding
|
|
$ |
495,085,100
|
|
|
$ |
469,378,510
|
|
|
|
|
|
|
|
|
|
|
Debt-to-Fair
Value
|
|
|
63.27 |
% |
|
|
60.59 |
% |
The
debt-to-fair value of real estate assets includes the outstanding borrowings
under the revolving credit facility, which were $17,500,000 and $0 at June
30,
2007 and December 31, 2006, respectively. The revolving credit facility contains
covenants that require the Company to maintain certain financial ratios,
including an indebtedness to value ratio not to exceed 75%. If the
Company was to be in violation of this covenant, we would be unable to draw
advances from our line, which could have a material impact on our ability
to
meet our short-term liquidity requirements. Further, if we were
unable to draw on the line, we may have to slow or temporarily stop our
rehabilitation projects, which could have a negative impact on our results
of
operations and cash flows. As of June 30, 2007 and December 31, 2006,
the Company was in compliance with the covenants of the revolving credit
facility. Fair value of the real estate assets is based on the
management most current valuation of properties, which was made for all
properties owned at December 31, 2006, and acquisition cost of properties
acquired subsequent to December 31, 2006.
Funds
From Operations
The
Company has adopted the revised definition of Funds from Operations (“FFO”)
adopted by the Board of Governors of the National Association of Real Estate
Investment Trusts (“NAREIT”). Management considers FFO to be an appropriate
measure of performance of an equity REIT. We calculate FFO by adjusting net
income (loss) (computed in accordance with GAAP, including non-recurring
items),
for gains (or losses) from sales of properties, real estate related depreciation
and amortization, and adjustment for unconsolidated partnerships and ventures.
Management believes that in order to facilitate a clear understanding of
the
historical operating results of the Company, FFO should be considered in
conjunction with net income as presented in the consolidated financial
statements included elsewhere herein. Management considers FFO to be a useful
measure for reviewing the comparative operating and financial performance
of the
Company because, by excluding gains and losses related to sales of previously
depreciated operating real estate assets and excluding real estate asset
depreciation and amortization (which can vary among owners of identical assets
in similar condition based on historical cost accounting and useful life
estimates), FFO can help one compare the operating performance of a company’s
real estate between periods or as compared to different companies.
The
Company’s calculation of FFO may not be directly comparable to FFO reported by
other REITs or similar real estate companies that have not adopted the term
in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently. FFO is not a GAAP financial measure and should
not be considered as an alternative to net income (loss), the most directly
comparable financial measure of our performance calculated and presented
in
accordance with GAAP, as an indication of our performance. FFO does
not represent cash generated from operating activities determined in accordance
with GAAP and is not a measure of liquidity or an indicator of our ability
to
make cash distributions. We believe that to further understand our performance,
FFO should be compared with our reported net income and considered in addition
to cash flows in accordance with GAAP, as presented in our consolidated
financial statements.
The
following table presents a reconciliation of net gain (loss) to FFO for the
three and six months ended June 30, 2007 and 2006:
|
|
Three months
ended
Six months ended
June 30,
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
23,119,830
|
|
|
$ |
5,867,098
|
|
|
$ |
16,211,635
|
|
|
$ |
465,933
|
|
Add
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
of real property
|
|
|
6,611,275
|
|
|
|
5,184,836
|
|
|
|
12,630,905
|
|
|
|
10,323,094
|
|
Depreciation
of real property included in
results
of discontinued operations
|
|
|
171,147
|
|
|
|
-
|
|
|
|
371,043
|
|
|
|
-
|
|
Minority
common interest in Operating
Partnership
|
|
|
976,100
|
|
|
|
-
|
|
|
|
1,952,200
|
|
|
|
976,100
|
|
Minority
interest in properties
|
|
|
1,471,581
|
|
|
|
175,824
|
|
|
|
1,695,195
|
|
|
|
1,215,341
|
|
Amortization
of acquired in-place leases
and
tenant relationships
|
|
|
380,573
|
|
|
|
220,708
|
|
|
|
751,811
|
|
|
|
556,942
|
|
Equity
in loss of Multifamily Venture and
Limited
Partnership Venture
|
|
|
689,536
|
|
|
|
292,273
|
|
|
|
1,297,766
|
|
|
|
437,502
|
|
Funds
from operations of Multifamily
Venture
|
|
|
-
|
|
|
|
226,449
|
|
|
|
-
|
|
|
|
260,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from operations of Multifamily
Venture
and Limited Partnership Venture
|
|
|
(320,989 |
) |
|
|
-
|
|
|
|
(338,208 |
) |
|
|
-
|
|
Minority
interest in properties share of
funds
from operations
|
|
|
(185,405 |
) |
|
|
(258,811 |
) |
|
|
(376,774 |
) |
|
|
(474,888 |
) |
Equity
in income of Multifamily Venture
|
|
|
-
|
|
|
|
(9,910,154 |
) |
|
|
-
|
|
|
|
(9,921,847 |
) |
Gain on disposition of real estate assets
|
|
|
(32,122,606 |
) |
|
|
-
|
|
|
|
(32,122,606 |
) |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from Operations
|
|
$ |
791,042
|
|
|
$ |
1,798,223
|
|
|
$ |
2,072,967
|
|
|
$ |
3,839,076
|
|
FFO
for
the three and six months ended June 30, 2007 decreased significantly as compared
to FFO for the three and six month periods ended June 30, 2006. The
decrease is due mainly to increases in interest expense related to increased
debt balances in the comparative six-month periods ended June 30, 2007 and
2006,
specifically at the Seasons of Laurel property.
Environmental
Issues
There
are
no recorded amounts resulting from environmental liabilities because there
are
no known contingencies with respect to environmental liabilities. The Company
obtains environmental audits through various sources, including lender
evaluations and acquisition due diligence, for each of its properties at
various
intervals throughout a property’s useful life. The Company has not been advised
by any third party as to the existence of, nor has it identified on its own,
any
material liability for site restoration or other costs that may be incurred
with
respect to any of its properties.
Inflation
and Economic Conditions
Substantially
all of the leases at the Company’s properties are for a term of one year or
less, which enables the Company to seek increased rents for new leases or
upon
renewal of existing leases. These short-term leases minimize the potential
adverse effect of inflation on rental income, although residents may leave
without penalty at the end of their lease terms and may do so if rents are
increased significantly. Certain properties are subject to regulations that
require lease periods of two years, which management deems as having minimal
effect on the overall inflation risk to the Company.
The
Company believes the multifamily sector will benefit from the ongoing economic
recovery and favorable current demographic trends. While the apartment sector
has experienced slower growth over the past four years due to rising
unemployment and a significant renter migration to single family homes, a
reversal of both trends is now expected to spur an apartment recovery. The
economic recovery is generating increased job growth, which typically translates
into household formation and rising apartment occupancy. The Company feels,
for
single family homebuyers over the next several years, increasing housing
costs
and potentially higher interest rates may make purchases increasingly expensive
and out of reach. In addition, we believe the projected demographic trends
strongly favor the multifamily sector, driven primarily by the initial wave
of
echo boomers (age 28 to 29), the fastest growing segment of the population,
and
an increasing number of immigrants who are typically renters by
necessity.
Item
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
Company’s mortgage notes are fixed rate instruments; therefore, the Company’s
outstanding mortgage debt is not sensitive to changes in the capital market
except upon maturity. The Company’s revolving credit facility is a
variable rate arrangement tied to LIBOR and is therefore sensitive to changes
in
the capital market. The table below provides information about the
Company’s financial instruments, specifically debt obligations.
The
table
presents principal cash flows and related weighted average interest rates
by
expected maturity dates for the mortgage notes payable as of June 30,
2007. In addition to the outstanding mortgage debt, there was a
balance of $17,500,000 outstanding on the revolving credit facility as of
June
30, 2007 at a rate of 10.32%
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate Debt
|
|
$ |
1,620,084
|
|
|
$ |
13,027,490
|
|
|
$ |
20,319,044
|
|
|
$ |
4,844,279
|
|
|
$ |
5,156,323
|
|
|
$ |
432,617,880
|
|
|
$ |
477,585,100
|
|
Average
Interest Rate
|
|
|
4.83 |
% |
|
|
6.35 |
% |
|
|
5.19 |
% |
|
|
5.14 |
% |
|
|
5.15 |
% |
|
|
5.42 |
% |
|
|
5.48 |
% |
Variable
Rate Debt
|
|
$ |
17,500,000
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
17,500,000
|
|
Average
Interest Rate
|
|
|
10.32 |
% |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10.32 |
% |
The
level
of market interest rate risk remained relatively consistent from December
31,
2006 to June 30, 2007.
As
of
June 30, 2007, $17,500,000 of the Company’s outstanding debt is outstanding
subject to variable interest rates. The Company estimates that the effect
of a
1% increase or decrease in interest rates would not have a material impact
on
interest expense.
Item
4. CONTROLS
AND PROCEDURES
Based
on
its evaluation, required by the Exchange Act Rules 13a-15(e) and 15d-15(e),
the
Company’s management, including its principal executive officer and principal
financial officer, concluded that the Company’s disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were
effective as of June 30, 2007 to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and forms and were
effective as of June 30, 2007 to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Company’s management,
including its principal executive officer and principal financial officer,
or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
No
changes in our internal control over financial reporting (as defined in Rules
13a-15(d) and 15d-15(d) under the Exchange Act) occurred during the fiscal
quarter ended June 30, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER
INFORMATION
Item
1.
|
|
LEGAL
PROCEEDINGS
|
|
|
The
Company and our properties are not subject to any other material
pending
legal proceedings and we are not aware of any such proceedings
contemplated by governmental authorities.
|
|
|
|
Item
1A.
|
|
RISK
FACTORS
|
|
|
-
Please read the risk factors disclosed in our Annual Report on
Form 10K
for the fiscal year ended December 31, 2006 as filed with the Securities
and Exchange Commission on March 28, 2007. As of June 30, 2007
there have been no material changes to the risk factors as presented
therein. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially
adversely affect out financial condition and/or operating
results.
|
|
|
|
Item
2.
|
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
|
-
None
|
|
|
|
Item
3.
|
|
DEFAULTS
UPON SENIOR SECURITIES
|
|
|
-
None
|
|
|
|
Item
4.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
|
|
-
None
|
|
|
|
Item
5.
|
|
OTHER
INFORMATION
|
|
|
-
None
|
|
|
|
Item
6.
|
|
EXHIBITS
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant of 18 U.S.C. Section 1350,
as
Adopted Pursuant to
|
|
|
Section
302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to
|
|
|
Section
302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer Pursuant of 18 U.S.C. Section 1350,
as
Adopted Pursuant to
|
|
|
Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer Pursuant of 18 U.S.C. Section 1350,
as
Adopted Pursuant to
|
|
|
Section
906 of the Sarbanes-Oxley Act of
2002.
|
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.
|
|
|
|
BERKSHIRE
INCOME REALTY, INC.
|
|
August
14, 2007
|
|
|
/s/ David
C. Quade
|
|
|
|
|
David
C. Quade
President,
Chief Financial Officer and
Principal
Executive Officer
|
|
August
14, 2007
|
|
|
/s/ Christopher
M. Nichols
|
|
|
|
|
Christopher
M. Nichols
Vice
President and Principal Accounting
Officer
|