e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
000-49986
AMERICA FIRST APARTMENT
INVESTORS, INC.
(Exact name of registrant as
specified in its charter)
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Maryland
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47-0858301
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1004 Farnam Street,
Suite 100
Omaha, Nebraska
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68102
(Zip Code)
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(Address of principal executive
offices)
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(402)
557-6360
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, $.01 par Value
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of the chapter) is not contained herein,
and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-
accelerated filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). YES o NO þ
The aggregate market value of the registrants common stock
held by non-affiliates based on the final sales price of the
shares on the last business day of the registrants most
recently completed second fiscal quarter was $151,934,040.
As of March 5, 2007, there were 11,045,558 outstanding
shares of the registrants common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement pertaining to
its 2007 Annual Shareholders Meeting are incorporated herein by
reference into Part III.
AMERICA
FIRST APARTMENT INVESTORS, INC.
TABLE OF
CONTENTS
Forward-Looking
Statements
This report (including, but not limited to, the information
contained in Managements Discussion and Analysis of
Financial Condition and Results of Operations) contains
forward-looking statements that reflect managements
current beliefs and estimates of future economic circumstances,
industry conditions, the Companys performance and
financial results. All statements, trend analysis and other
information concerning possible or assumed future results of
operations of the Company and the real estate investments it has
made constitute forward-looking statements. Shareholders and
others should understand that these forward-looking statements
are subject to numerous risks and uncertainties, and a number of
factors could affect the future results of the Company and could
cause those results to differ materially from those expressed in
the forward-looking statements contained herein. These factors
include local and national economic conditions, the amount of
new construction, affordability of home ownership, interest
rates on single-family home mortgages and on the Companys
variable-rate borrowings, government regulation, price
inflation, the level of real estate and other taxes imposed on
the properties, labor problems and natural disasters and other
items discussed under Risk Factors in Item 1A
of this report.
ii
AMERICA
FIRST APARTMENT INVESTORS, INC.
America First Apartment Investors, Inc. (the
Company) was formed on March 29, 2002 under the
Maryland General Corporation Law and is taxed as a real estate
investment trust (REIT) for Federal income tax
purposes. The Company is the successor to America First
Apartment Investors, L.P. (the Partnership) which
merged with the Company as of January 1, 2003. As a result
of this merger, the Company assumed the assets, liabilities and
business operations of the Partnership. The Company had no
material assets or operations prior to its merger with the
Partnership. Accordingly, any operations or financial results of
the Company described herein for periods prior to
January 1, 2003 are those of the Partnership.
On June 3, 2004, the Company merged with America First Real
Estate Investment Partners, L.P. (AFREZ). As a
result of the merger, AFREZ was merged with and into the
Company. The Company was the surviving entity and assumed all of
the assets, liabilities and business operations of AFREZ,
including 14 multifamily apartment properties containing
2,783 rental units.
As of December 31, 2006, the Company owned 33 multifamily
apartment properties containing a total of 7,484 rental
units and a 72,007 square foot office/warehouse facility.
The Companys multifamily apartment properties are located
in the states of Arizona, California, Florida, Illinois,
Michigan, Missouri, Nebraska, North Carolina, Ohio,
Oklahoma, South Carolina, Tennessee, and Virginia. On
January 31, 2007, the Company sold Cumberland Trace, a
248 unit property, located in Fayetteville, North Carolina,
for $10.9 million.
Operating
and Investment Strategy
The Companys operating and investment strategy primarily
focuses on multifamily apartment properties as long-term
investments. The Companys operating goal is to generate
increasing amounts of net rental income from these properties
that will allow it to provide shareholders with a secure and
growing dividend and build shareholder value through selective
property acquisitions and dispositions that further increase net
rental income. In order to achieve this goal, management of
these multifamily apartment properties is focused on:
(i) maintaining high physical occupancy and increasing
rental rates through effective leasing, reduced turnover rates
and providing quality maintenance and services to maximize
resident satisfaction; (ii) managing operating expenses and
achieving cost reductions through operating efficiencies and
economies of scale generally inherent in the management of a
portfolio of multiple properties; and (iii) emphasizing
regular programs of repairs, maintenance and property
improvements to enhance the competitive advantage and value of
its properties in their respective market areas.
The Company focuses its acquisition efforts on established
multifamily apartment properties located in markets with
positive growth prospects. In particular, the Company seeks out
properties that it believes have the potential for increased
revenues through more effective management. In connection with
each potential property acquisition, the Company reviews many
factors, including the following: (i) the age and location
of the property; (ii) the construction quality, condition
and design of the property; (iii) the current and projected
cash flow generated by the property and the potential to
increase cash flow through more effective management;
(iv) the potential for capital appreciation of the
property; (v) the potential for rental rate increases;
(vi) the expected required capital expenditures;
(vii) the economic situation in the community in which the
property is located and the potential changes thereto;
(viii) the occupancy and rental rates at competing
properties; and (ix) the potential for liquidity through
financing or refinancing of the property or the ultimate sale of
the property. The Company does not have any limitations on the
percentage of its assets which may be invested in any one
property or on the number of properties that it may own in any
particular geographic market.
The Company may sell real estate assets from time to time and,
in general, it expects to reinvest the net proceeds received
from the sale of properties rather than to distribute the net
sale proceeds as dividends to shareholders. The Company may sell
properties in order to redeploy assets from markets which are
overbuilt or declining economically into markets which provide
better opportunities for growth in rental income and capital
1
appreciation. In addition, the Company may sell a property that
is inconsistent with the Companys strategic plan and
reinvest the net sale proceeds in new properties.
The Company may also invest in other types of real estate assets
including:
(i) Equity investments in other REITs and similar real
estate companies which can include publicly traded common
stocks. The Company may also acquire controlling and
non-controlling interests in other real estate businesses such
as property management companies. The Company may decide to
invest available cash in these types of securities, but must do
so in compliance with REIT tax requirements and in a manner that
will not subject it to registration as an investment company
under the Investment Company Act of 1940. As of
December 31, 2006, the Company had investments of this type
with a fair market value of approximately $3.5 million.
(ii) Agency securities issued or guaranteed as to the
payment of principal or interest by an agency of the
U.S. government or a federally-chartered corporation such
as the Federal National Mortgage Association (FNMA),
Government National Mortgage Association (GNMA) or
the Federal Home Loan Mortgage Corporation (FHLMC)
(agency securities). Agency securities acquired by
the Company are secured by pools of first mortgage loans on
single-family residences. Agency securities held by the Company
bear interest at an adjustable interest rate or at a fixed rate
for an initial period of time (typically one to three years) and
then convert to a one-year adjustable rate for the remaining
loan term. During 2006, the Company sold substantially all of
its investments in agency securities.
(iii) Mezzanine-level financing provided to developers and
operators of residential real estate which can take a variety of
forms including subordinated mortgage loans and preferred equity
investments. These mezzanine level investments will generally be
structured to provide the Company with a minimum return by way
of a fixed base rate of interest or preferred dividend as well
as the opportunity to participate in the excess cash flow and
sales proceeds of the underlying apartment property through the
payment of participating interest and additional dividends. As
of December 31, 2006, the Company did not have any
mezzanine level investments.
By including investments in other real estate companies, agency
securities, and mezzanine-level financing of residential real
estate, the Company has the ability to supplement and stabilize
its cash flow by investing in assets that are less affected by
the variables that affect the cash flow generated by investments
in apartments. In addition, investments in agency securities
allow the Company to quickly invest the proceeds from the sale
of stock or from the sale of any of its real property
investments at potentially higher returns than traditional money
market investments. The overall mix of these various types of
investments will vary from time to time as the Company seeks to
take advantage of opportunities in the real estate industry. In
general, however, it is anticipated that at least 80% of the
Companys assets will be invested in multifamily apartment
properties.
All investments made by the Company must be made in compliance
with applicable requirements for maintaining its status as a
REIT for Federal income tax purposes. As a REIT, the Company is
generally not subject to Federal income taxes on distributed
income. To maintain qualification as a REIT, the Company must
meet a number of organizational and operational requirements,
including a requirement to distribute at least 90% of the
Companys ordinary taxable income to shareholders. It is
the Companys current intention to adhere to these
requirements and maintain its REIT status.
The Company may modify the investment policies from time to time
without the vote of the shareholders.
Financing
Strategies
The Company has the authority to finance the acquisition of
additional real estate assets in a variety of manners, including
raising additional equity capital, reinvestment of cash flows
and or borrowings. If the Company raises additional equity
capital through the issuance of shares of its stock, it may
issue shares of common stock or shares of one or more classes of
preferred stock. Shares of preferred stock, if any, would have
rights and privileges different from common stock, which may
include preferential rights to receive dividends. At this time,
the Board of Directors has not authorized the issuance of any
shares of preferred stock.
2
If the Company decides to sell shares, it may do so in a number
of different manners, including a rights offering directly to
existing shareholders, an underwritten public offering or in a
private placement negotiated with a small number of investors.
The Company may also issue shares to the owners of multifamily
apartment properties that it acquires as full or partial payment
for those properties. In June 2004, the Company filed a
Form S-3
registration statement for $200 million of any combination
of common stock and preferred stock in one or more offerings
which may be sold from time to time in order to raise additional
equity capital in order to support the Companys business
strategy. To date, no securities have been sold under this
registration statement.
In addition to the funds that might be raised through the
issuance of additional equity capital, the Company is also able
to borrow money in a variety of manners in order to acquire
additional real estate assets. Borrowings to acquire additional
multifamily apartment properties is generally in the form of
long-term taxable or tax exempt mortgage loans secured by the
acquired properties. In the third quarter of 2006, the Company
entered into a Master Credit Facility and Reimbursement
Agreement (the Facility) with Wells Fargo Bank, N.A.
and Fannie Mae. The Facility was initially established for
$70.5 million and may be expanded with the consent of the
lenders. The Facility provides the Company the ability to borrow
at either fixed or variable interest rates and also enables the
Company to utilize Fannie Mae credit enhancement on tax exempt
bond financings on its existing portfolio or for future property
acquisitions. The Facility is secured by first mortgages on
Covey at Fox Valley, Cornerstone Apartments, Morganton Place,
Village of Cliffdale, Woodberry Apartments, The Greenhouse,
Arbors of Dublin, and Brentwood Oaks.
The Facility also provides the Company the ability, until
September 28, 2007, to borrow an additional
$21.6 million at a fixed interest rate of 5.68%. On
January 25, 2007, the Company drew down $10.0 million
of the available $21.6 million. These borrowings have a
term of ten years from the date of the transaction.
Borrowings may be made at either fixed or variable interest
rates, but the Company intends to utilize more fixed rate debt
than variable rate debt to finance multifamily apartment
properties. The terms of some mortgage debt requires periodic
payments of principal and interest, while other mortgage
financings require only periodic payments of interest with the
entire principal due at the end of the loan term. Mortgage loans
on our properties will generally be made on a non-recourse
basis, which means that the lenders source of payment in
the event of a default is limited to foreclosure of the
underlying property or properties securing the mortgage loan.
The amount of debt the Company can incur is not limited by its
Charter or otherwise. In general, however, the amount of
borrowing used to finance the overall multifamily apartment
property portfolio is approximately 55% to 70% of the purchase
price of these assets, although higher or lower levels of
borrowings may be used on any single property. In addition, as a
practical matter, the Companys ability to borrow
additional money will be limited if it can not issue additional
capital stock in order to increase equity. As a general matter,
the Company does not intend to use second mortgages on our
properties; however, it is not prohibited from doing so.
Properties financed by tax exempt mortgage debt are subject to
numerous restrictive covenants, including a requirement that a
percentage of the apartment units in each such property be
occupied by residents whose income does not exceed a percentage
of the median income for the area in which the property is
located. These covenants can, and often do, remain in effect
until the bonds mature which may be as long as 30 or
40 years. Because of these restrictions, it is possible
that the rents charged by these properties may be lowered, or
rent increases foregone, in order to attract enough residents
meeting the income requirements. In the event that such
requirements are not met, interest on mortgage debt could become
subject to federal and state income tax, which would result in
either an increase in the interest rate we would have to pay or
an early termination of the loan that would force the Company to
obtain alternative financing. Alternative financing, if
available, would generally be expected to be provided by taxable
borrowings and, therefore, would be at higher interest rates
than the original tax exempt mortgage loan on the property. If
alternative financing is not available, we may be forced to sell
the property or could lose the property in foreclosure.
The Company may also use some of its current cash flow to
partially finance the acquisition of additional multifamily
apartment complexes or other investments, but it does not intend
to use current cash flows as a primary method of financing these
acquisitions and does not intend to reduce dividend levels in
order to finance acquisitions of additional real estate
investments.
3
Internalization
transactions
On December 30, 2005, the Company completed its transition
from being externally advised to being self-advised through the
merger of America First Apartment Advisory Corporation
(AFAAC or Advisor) into the Company. The
aggregate merger consideration of $11.4 million consisting
of $4.0 million in cash, and 525,000 shares of Company
stock, was paid to the Burlington Capital Group, LLC (formerly
America First Companies LLC), the parent of AFAAC
(Burlington). As a result of this transaction, the
Company no longer obtains executive and administrative services
from the Advisor, no longer pays an administrative fee based
upon the Companys asset base, nor is it required to pay
acquisition fees on future asset purchases. In the transaction
the Company assumed the employment agreements of its Chief
Executive Officer, Chief Investment Officer, and Chief Financial
Officer from Burlington.
The internalization process was initiated with the November 2004
acquisition of certain property management assets, rights to use
certain proprietary systems, certain property management
agreements, certain employment agreements and other intangible
assets from America First Properties Management Companies, LLC.
(America First Properties) and its parent,
Burlington. Prior to this transaction, America First Properties
managed each of the multi-family apartment complexes owned by
the Company.
AFREZ
Merger
On May 26, 2004, the shareholders of the Company approved a
merger with AFREZ, pursuant to the Agreement and Plan of Merger
entered into by the Company and AFREZ on November 25, 2003.
The merger became effective on June 3, 2004.
The Company issued shares of its common stock and paid cash to
the holders of the limited partner and general partner interests
in AFREZ upon consummation of the merger. Each Unit representing
an assigned limited partnership interest in AFREZ as of the date
of the merger was converted into the right to receive
0.7910 shares of the common stock of the Company and a cash
payment of $0.39 per Unit. Fractional shares were rounded up or
down to the nearest whole number. A total of
5,376,353 shares of the common stock of the Company were
issued to Unit holders in connection with the merger plus a cash
payment of $2.7 million. The general partners 1%
interest in AFREZ was converted into 54,308 shares of the
common stock of the Company plus a cash payment of approximately
$27,000. The general partner was an affiliate of the Advisor.
Competition
In each city where the Companys properties are located,
the properties compete with a substantial number of other
multifamily properties. Multifamily properties also compete with
single-family housing that is either owned or leased by
potential tenants. To compete effectively, the Company must
offer quality apartments at competitive rental rates. In order
to maintain occupancy rates and attract quality tenants, the
Company may also offer rental concessions, such as free rent to
new tenants for a stated period. The Company also competes by
offering a quality apartment lifestyle, in attractive locations
and providing tenants with amenities such as recreational
facilities, garages and pleasant landscaping.
The Company also competes for opportunities to acquire real
estate investments against numerous other REITs, banks,
insurance companies and pension funds, as well as corporate and
individual owners of real estate. Many of these competitors have
significantly greater financial resources than the Company.
Environmental
Matters
The Company believes that each of its properties is in
compliance, in all material respects, with federal, state and
local regulations regarding hazardous waste and other
environmental matters and is not aware of any environmental
contamination at any of its properties that would require any
material capital expenditure by the Company for the remediation
thereof.
4
Information
Available on Website
The Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and press releases are available free of charge at
www.apro-reit.com as soon as reasonably practical after they are
filed with the Securities and Exchange Commission
(SEC).
The financial condition and results of operations of the Company
and its ability to pay dividends are affected by various
factors, many of which are beyond the Companys control.
These include the following:
The
Company may not be able to successfully implement its business
plan.
There can be no assurance that the Company will be able to
successfully implement its business plan of raising capital and
making additional investments in multifamily apartment
properties, agency securities and other residential real estate
assets. Among other things, it may not be able to locate
additional real estate assets that can be acquired on acceptable
terms, and it may not be able to raise additional equity capital
or obtain additional debt financing on terms that would be
acceptable in order to finance the acquisition of additional
real estate assets. If additional equity capital is raised, but
the Company is not able to invest it in additional apartment
complexes, agency securities or other real estate assets that
generate net income at least equivalent to the levels generated
by its then existing assets, earnings per share could decrease.
In that case, the level of dividends that the Company is able to
pay may be reduced and the market price of the common stock may
decline.
The
Companys financial results are substantially dependent
upon the performance of the multifamily apartment
complexes.
The performance of the multifamily apartment complexes is
affected by a number of factors, some of which are beyond the
Companys control. These include general and local economic
conditions, the relative supply of apartments and other homes in
the market area, interest rates on single family mortgages and
its effect on home buying, the need for and costs of repairs and
maintenance of the properties, government regulations and the
cost of complying with them, property tax rates imposed by local
taxing authorities, utility rates and property insurance rates.
If interest rates on single-family mortgages continue to remain
low, it could further increase home buying and continue to
reduce the number of quality tenants available. In addition, the
financing costs, operating costs and the costs of any necessary
improvements and repairs to the apartment properties may exceed
expectations. As a result, the amount of cash available for
distribution to the shareholders could decrease and the market
price of the Companys common stock could decline.
The
Company is not completely insured against damages to its
properties.
The Company owns several apartment complexes and other
properties that are in areas that are prone to damage from
hurricanes and other major storms, including four apartment
complexes and one commercial property located in Florida. Due to
the significant losses incurred by insurance companies on
policies written on properties in Florida damaged by hurricanes,
property and casualty insurers in Florida have modified their
approach to underwriting policies. As a result, the Company
assumes the risk of first loss on a larger percentage of the
value of its Florida real estate. If any of these properties
were damaged in a hurricane or other major storm, the losses
incurred could be significant. The Companys current
policies carry a 5% deductible on the insurable value of the
properties if damage is caused by such a storm. The current
insurable value of the Florida properties is approximately
$31.3 million. Additionally, the Company does not carry
flood insurance for those properties located outside of
designated flood zones. The Company also does not carry specific
insurance for losses resulting from acts of terrorism and such
losses may be excluded from coverage under its existing
insurance policies.
The
Company is subject to the risk normally associated with debt
financing.
The Companys real estate investments are financed with
mortgage debt and this subjects it to the risk that the cash
flow may not be sufficient to meet required payments of
principal and interest on the debt. In addition, the terms of
some of the mortgage debt does not require that the principal of
the debt be repaid prior to maturity.
5
Therefore, it is likely that the Company will need to refinance
at least a portion of this debt as it matures. There is a risk
that the terms of any such refinancing will not be as favorable
as the existing debt. In addition, the Company may not be able
to refinance the entire amount of the existing debt. This could
happen, for example, if the collateral value of the financed
real estate has declined or if lenders require a lower loan to
value ratio at the time of refinancing. The Companys
obligations to make principal debt service payments, which are
not treated as deductions for federal income tax purposes, does
not relieve it from the obligation of distributing at least 90%
of its REIT taxable income to the shareholders. In addition, the
Companys borrowings will be secured by first mortgages on
the Companys real estate assets. This exposes the Company
to a risk of losing its interests in the assets given as
collateral for secured borrowings if it is unable to make the
required principal and interest payments when due. In addition,
pledged assets may not be available to shareholders in the event
of the liquidation of the Company to the extent that they are
used to satisfy the amounts due to creditors. The ability to pay
dividends to the shareholders is subordinated to the payment of
debt service on the Companys debt and other borrowings.
Real
estate financed with tax-exempt debt is subject to certain
restrictions.
A number of the Companys multifamily apartment complexes
are financed with tax-exempt bond financing. This type of
financing is designed to promote the supply of affordable rental
housing and, accordingly, it subjects the financed property to
certain restrictive covenants, including a requirement that a
percentage of the apartment units in each property be occupied
by residents whose income does not exceed a percentage of the
median income for the area in which the property is located.
Generally, the Companys financing agreements require that
20% of the apartment units be rented to individuals whose income
is less than 80% of the areas median income. It is
possible that such covenants may cause the rents charged by
these properties to be lowered, or rent increases foregone, in
order to attract enough residents meeting the income
requirements. In the event the Company does not comply with
these restrictions, the interest on the bonds could become
subject to federal and state income tax, which would result in
either an increase in the interest rate on the bonds or an early
redemption of these bonds that would force the Company to obtain
alternative financing or sell the property financed by the bond.
Fluctuating
interest rates may affect earnings.
Some of the tax-exempt mortgage debt bears interest at variable
rates. The variable rate mortgage debt is tied to a tax-exempt
index that is reset on a weekly basis. Increases in these
variable interest rates increase the Companys interest
expense.
Likewise, the borrowings under repurchase agreements is similar
to variable rate debt since the effective interest rate on these
repurchase agreements is reset to the current market rates each
time the term of the repurchase agreement is renewed. Repurchase
agreements typically have terms between one and six months. An
increase in market interest rates would cause the interest rates
of the obligations to increase when and if they are renewed upon
maturity. If interest rates increase, the Company will have to
pay more interest on its debt, but would not necessarily be able
to increase rental income from the multifamily apartment
properties. Therefore, an increase in interest rates may reduce
earnings and this may reduce the amount of funds that the
Company has available for distribution to shareholders. This may
also affect the market price of the common stock.
The
use of derivatives to mitigate interest rate risks may not be
effective.
The Companys policies permit it to enter into interest
rate swaps, caps and floors and other derivative transactions to
help mitigate interest rate risks. No hedging strategy, however,
can completely insulate the Company from the interest rate risks
to which it is exposed. Furthermore, certain of the federal
income tax requirements that the Company must satisfy in order
to qualify as a REIT limit its ability to hedge against such
risks.
Multifamily
apartment properties are illiquid and their value may
decrease.
A substantial amount of the Companys assets consist of
investments in multifamily apartment properties. These
investments are relatively illiquid. The ability to sell these
assets, and the price received upon sale are affected by a
number of factors including the number of potential and
interested buyers, the number of competing properties
6
on the market in the area and a number of other market
conditions. As a result, the Company may not be able to recover
its entire investment in an apartment complex upon sale.
There
are risks associated with making mezzanine investments that
differ from those involved with owning multifamily apartment
properties.
In general, mezzanine level financing provided by the Company
will be subordinate to senior lenders on the financed
properties. Accordingly, in the event of a default on
investments of this type, senior lenders will have a first right
to the proceeds from the sale of the property securing their
loan and this may result in the Company receiving less than all
principal and interest it is owed on the mezzanine level
financing. Also, since mezzanine level financings are expected
to participate in the cash flow or sale proceeds from a financed
property, they may carry a base interest rate different than a
non-participating financing. However, there can be no assurance
that an apartment complex financed with such a participating
feature will generate excess cash flow or sale proceeds that
will require any payments over the base return payable on the
mezzanine financing. Accordingly, investments in mezzanine
financings will not necessarily generate any additional earnings
and may result in lower earnings or losses and, as a result, the
amount of cash available for distribution to shareholders and
the market price of the common stock could decline.
Because
of competition, the Company may not be able to acquire
investment assets.
In acquiring investment assets, the Company competes with a
variety of other investors including other REITs and real estate
companies, insurance companies, mutual funds, pension funds,
investment banking firms, banks and other financial
institutions. Many of the entities with which the Company
competes have greater financial and other resources. In
addition, many of the Companys competitors are not subject
to REIT tax compliance and may have greater flexibility to make
certain investments. As a result, the Company may not be able to
acquire apartment complexes, agency securities or other
investment assets or it may have to pay more for these assets
than it otherwise would.
Company
policies may be changed without shareholder
approval.
The Board of Directors establishes all of the Companys
fundamental operating policies; including the investment,
financing and distribution policies, and any revisions to such
policies would require the approval of the Board. Although the
Board of Directors has no current plans to do so, it may amend
or revise these policies at any time without a vote of the
shareholders. Policy changes could adversely affect the
Companys financial condition, results of operations, the
market price of the common stock or the Companys ability
to pay dividends or distributions.
The
Company has not established a minimum dividend payment
level.
The Company intends to pay dividends on its common stock in an
amount equal to at least 90% of its REIT taxable income
(determined with regard to the dividends paid deduction and by
excluding net capital gains) in order to maintain its status as
a REIT for federal income tax purposes. Dividends will be
declared and paid at the discretion of the Board of Directors
and will depend on earnings, financial condition, maintenance of
REIT status and such other factors as the Board of Directors may
deem relevant from time to time. The Company has not established
a minimum dividend payment level and its ability to pay
dividends may be adversely affected for the reasons set forth in
this section.
The
concentration of real estate in a geographical area may make the
Company vulnerable to adverse changes in local economic
conditions.
The Company does not have specific limitations on the total
percentage of real estate investments that may be located in any
one geographical area. Consequently, real estate investments
that it owns may be located in the same or a limited number of
geographical regions. As a result, adverse changes in the
economic conditions of the geographic regions in which the real
estate investments are concentrated may have an adverse effect
on real estate
7
values, rental rates and occupancy rates. Any of these could
reduce the income earned from, or the market value of, these
real estate investments.
Owning
real estate may subject the Company to liability for
environmental contamination.
The owner or operator of real estate may become liable for the
costs of removal or remediation of hazardous substances released
on the Companys property. Various federal, state and local
laws often impose such liability without regard to whether the
owner or operator knew of, or was responsible for, the release
of such hazardous substances. The Company cannot make any
assurances that the multifamily apartment properties in which it
currently owns, or those it may acquire in the future, will not
be contaminated. The costs associated with the remediation of
any such contamination may be significant and may exceed the
value of the property causing the Company to lose its entire
investment. In addition, environmental laws may materially limit
the use of the properties underlying the real estate investments
and future laws, or more stringent interpretations or
enforcement policies of existing environmental requirements, may
increase the Companys exposure to environmental liability.
Compliance
with the requirements of Governmental Laws and Regulations could
be costly.
Many laws and governmental regulations are applicable to our
properties and changes in these laws and regulations, or their
interpretation by agencies and the courts, occur frequently.
Under the Americans with Disabilities Act of 1990 (the
ADA), all places of public accommodation are
required to meet certain federal requirements related to access
and use by disabled persons. These requirements became effective
in 1992. Compliance with the ADA requires removal of structural
barriers to handicapped access in certain public areas where
such removal is readily achievable. The ADA does
not, however, consider residential properties, such as apartment
communities, to be public accommodations or commercial
facilities, except to the extent portions of such facilities,
such as a leasing office, are open to the public. A number of
additional federal, state and local laws exist which also may
require modifications to the properties, or restrict certain
further renovations thereof, with respect to access thereto by
disabled persons. For example, the Fair Housing Amendments Act
of 1988 (the FHAA) requires apartment communities
first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the ADA or the FHAA could result
in the imposition of fines or an award of damages to private
litigants.
The
issuance of additional shares of stock could cause the price of
the Companys stock to decline.
The Company has the authority to issue additional equity. These
may be shares of common stock or shares of one or more classes
of preferred stock. Shares of preferred stock, if any, would
have rights and privileges different from common stock, which
may include preferential rights to receive dividends. The
issuance of additional common stock or other forms of equity
could cause dilution of the existing shares of common stock and
a decrease in the market price of the common stock.
There
are a number of risks associated with being taxed as a
REIT.
The Companys status as a REIT subjects it and its
shareholders to a number of risks, including the following:
|
|
|
|
|
Failure to qualify as a REIT would have adverse tax
consequences.
|
In order to maintain its status as a REIT, the Company must meet
a number of requirements. These requirements are highly
technical and complex and often require an analysis of various
factual matters and circumstances that may not be completely
within the Companys control. Even a technical or
inadvertent mistake could jeopardize the Companys status
as a REIT. Furthermore, Congress and the Internal Revenue
Service (the IRS) might make changes to the tax laws
and regulations, and the courts might issue new rulings, that
make it more difficult or impossible to remain qualified as a
REIT. If the Company fails to qualify as a REIT, it would be
subject to federal income tax at regular corporate rates.
Therefore, it could have less funds available for investments
and for distributions to the shareholders and it would no longer
be required to make any distributions to the shareholders. This
may also have a significant adverse effect on the market value
of the common stock. In general, the Company would not be able
to elect REIT status for four years after a year in which it
loses that status as a result of a failure to comply with one or
more of the applicable requirements.
8
|
|
|
|
|
If the Company fails to qualify as a REIT, the dividends
will not be deductible, and the Companys income will be
subject to taxation.
|
If the Company were to fail to qualify as a REIT in any taxable
year, it would not be allowed a deduction for distributions to
the shareholders in computing taxable income and would be
subject to federal income tax (including any applicable
alternative minimum tax) on taxable income at regular corporate
rates. Unless entitled to relief under certain provisions of the
Code, the Company would also be disqualified from treatment as a
REIT for the four taxable years following the year during which
qualification was lost. As a result, amounts available for
distribution to shareholders would be reduced for each of the
years involved. Although the Company currently intends to
operate in a manner designed to qualify as a REIT, it is
possible that future economic, market, legal, tax or other
considerations could cause it to revoke its election to be taxed
as a REIT.
|
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|
|
Failure to make required distributions would subject the
Company to income taxation.
|
In order to qualify as a REIT, each year the Company must
distribute to shareholders at least 90% of REIT taxable income
(determined without regard to the dividend paid deduction and by
excluding net capital gains). To the extent that the Company
satisfies the distribution requirement, but distributes less
than 100% of taxable income, it will be subject to federal
corporate income tax on the undistributed income. In addition,
the Company will incur a 4% nondeductible excise tax on the
amount, if any, by which the distributions in any year are less
than the sum of:
|
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|
|
|
85% of ordinary income for that year;
|
|
|
|
95% of capital gain net income for that year; and
|
|
|
|
100% of undistributed taxable income from prior years.
|
Differences in timing between the recognition of income and the
related cash receipts or the effect of required debt
amortization payments could require the Company to borrow money
or sell assets to pay out enough of the taxable income to
satisfy the distribution requirement and to avoid corporate
income tax and the 4% nondeductible excise tax in a particular
year.
Loss
of Investment Company Act exemption would adversely affect the
Company.
The Company intends to conduct its business so as not to become
regulated as an investment company under the Investment Company
Act. If it fails to qualify for this exemption, the
Companys ability to use borrowings would be substantially
reduced and it would be unable to conduct its business. The
Investment Company Act exempts entities that are primarily
engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate. Under
the current interpretation of the SEC staff, in order to qualify
for this exemption, the Company must maintain at least 55% of
its assets directly in these qualifying real estate interests.
Mortgage-backed securities that do not represent all the
certificates issued with respect to an underlying pool of
mortgages may be treated as securities separate from the
underlying mortgage loans and, thus, may not qualify for
purposes of the 55% requirement. Therefore, the ownership of
these mortgage-backed securities is limited by the provisions of
the Investment Company Act. In order to insure that the Company
at all times qualifies for the exemption from the Investment
Company Act, it may be precluded from acquiring mortgage-backed
securities whose yield is somewhat higher than the yield on
mortgage-backed securities that could be purchased in a manner
consistent with the exemption. The net effect of these factors
may be to lower net income.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
9
Properties owned by the Company as of December 31, 2006 are
described in the following table:
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Number
|
|
|
Percentage
|
|
|
|
|
|
Number
|
|
|
Square Feet
|
|
|
of Units
|
|
|
of Units
|
|
Property Name
|
|
Location
|
|
of Units
|
|
|
per Unit
|
|
|
Occupied
|
|
|
Occupied
|
|
|
Arbor Hills
|
|
Antioch, TN
|
|
|
548
|
|
|
|
827
|
|
|
|
507
|
|
|
|
93
|
%
|
Arbors of Dublin
|
|
Dublin, OH
|
|
|
288
|
|
|
|
990
|
|
|
|
266
|
|
|
|
92
|
%
|
Bluff Ridge Apartments
|
|
Jacksonville, NC
|
|
|
108
|
|
|
|
873
|
|
|
|
106
|
|
|
|
98
|
%
|
Brentwood Oaks Apartments
|
|
Nashville, TN
|
|
|
262
|
|
|
|
852
|
|
|
|
253
|
|
|
|
97
|
%
|
Coral Point Apartments
|
|
Mesa, AZ
|
|
|
337
|
|
|
|
780
|
|
|
|
315
|
|
|
|
93
|
%
|
Cornerstone Apartments
|
|
Independence, MO
|
|
|
420
|
|
|
|
887
|
|
|
|
371
|
|
|
|
88
|
%
|
Covey at Fox Valley
|
|
Aurora, IL
|
|
|
216
|
|
|
|
948
|
|
|
|
205
|
|
|
|
95
|
%
|
Cumberland Trace(1)
|
|
Fayetteville, NC
|
|
|
248
|
|
|
|
958
|
|
|
|
201
|
|
|
|
81
|
%
|
Elliots Crossing Apartments
|
|
Tempe, AZ
|
|
|
247
|
|
|
|
717
|
|
|
|
230
|
|
|
|
93
|
%
|
Fox Hollow Apartments
|
|
High Point, NC
|
|
|
184
|
|
|
|
877
|
|
|
|
158
|
|
|
|
86
|
%
|
Greenbriar Apartments
|
|
Tulsa, OK
|
|
|
120
|
|
|
|
666
|
|
|
|
113
|
|
|
|
94
|
%
|
Highland Park Apartments
|
|
Columbus, OH
|
|
|
252
|
|
|
|
891
|
|
|
|
234
|
|
|
|
93
|
%
|
Huntsview Apartments
|
|
Greensboro, NC
|
|
|
240
|
|
|
|
875
|
|
|
|
220
|
|
|
|
92
|
%
|
Jackson Park Place Apartments
|
|
Fresno, CA
|
|
|
296
|
|
|
|
822
|
|
|
|
281
|
|
|
|
95
|
%
|
Jackson Park Place
Apartments
Phase II
|
|
Fresno, CA
|
|
|
80
|
|
|
|
1,096
|
|
|
|
73
|
|
|
|
91
|
%
|
Lakes of Northdale Apartments
|
|
Tampa, FL
|
|
|
216
|
|
|
|
873
|
|
|
|
214
|
|
|
|
99
|
%
|
Littlestone of Village Green
|
|
Gallatin, TN
|
|
|
200
|
|
|
|
987
|
|
|
|
194
|
|
|
|
97
|
%
|
Misty Springs Apartments
|
|
Daytona Beach, FL
|
|
|
128
|
|
|
|
786
|
|
|
|
128
|
|
|
|
100
|
%
|
Monticello Apartments
|
|
Southfield, MI
|
|
|
106
|
|
|
|
1,027
|
|
|
|
94
|
|
|
|
89
|
%
|
Morganton Place
|
|
Fayetteville, NC
|
|
|
280
|
|
|
|
962
|
|
|
|
257
|
|
|
|
92
|
%
|
Oakhurst Apartments
|
|
Ocala, FL
|
|
|
214
|
|
|
|
790
|
|
|
|
211
|
|
|
|
99
|
%
|
Oakwell Farms Apartments
|
|
Nashville, TN
|
|
|
414
|
|
|
|
800
|
|
|
|
398
|
|
|
|
96
|
%
|
Shelby Heights
|
|
Bristol, TN
|
|
|
100
|
|
|
|
980
|
|
|
|
99
|
|
|
|
99
|
%
|
The Greenhouse
|
|
Omaha, NE
|
|
|
126
|
|
|
|
881
|
|
|
|
124
|
|
|
|
98
|
%
|
The Hunt Apartments
|
|
Oklahoma City, OK
|
|
|
216
|
|
|
|
693
|
|
|
|
210
|
|
|
|
97
|
%
|
The Park at Countryside
|
|
Port Orange, FL
|
|
|
120
|
|
|
|
720
|
|
|
|
118
|
|
|
|
98
|
%
|
The Ponds at Georgetown
|
|
Ann Arbor, MI
|
|
|
134
|
|
|
|
1,002
|
|
|
|
124
|
|
|
|
93
|
%
|
The Reserve at Wescott Plantation
|
|
Summerville, SC
|
|
|
192
|
|
|
|
1,083
|
|
|
|
180
|
|
|
|
94
|
%
|
Tregaron Oaks Apartments
|
|
Bellevue, NE
|
|
|
300
|
|
|
|
875
|
|
|
|
289
|
|
|
|
96
|
%
|
Village at Cliffdale
|
|
Fayetteville, NC
|
|
|
356
|
|
|
|
798
|
|
|
|
321
|
|
|
|
90
|
%
|
Watermans Crossing
|
|
Newport News, VA
|
|
|
260
|
|
|
|
944
|
|
|
|
254
|
|
|
|
98
|
%
|
Waters Edge Apartments(1)
|
|
Lake Villa, IL
|
|
|
108
|
|
|
|
814
|
|
|
|
101
|
|
|
|
94
|
%
|
Woodberry Apartments
|
|
Asheville, NC
|
|
|
168
|
|
|
|
837
|
|
|
|
163
|
|
|
|
97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,484
|
|
|
|
876
|
|
|
|
7,012
|
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Exchange at Palm Bay
|
|
Palm Bay, FL
|
|
|
72,007
|
(2)
|
|
|
n/a
|
|
|
|
69,193
|
|
|
|
96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Property is held for sale as of December 31, 2006. |
|
(2) |
|
This is an office/warehouse facility. The figure represents
square feet available for lease to tenants and percentage of
square feet occupied. |
10
In the opinion of the Companys management, each of the
properties is adequately covered by insurance. For additional
information concerning the properties, see Note 7 to the
Companys consolidated financial statements. A discussion
of general competitive conditions to which these properties are
subject is included in Item 1 of this report.
|
|
Item 3.
|
Legal
Proceedings.
|
There are no material pending legal proceedings to which the
Company is a party or to which any of its properties is subject.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
No matter was submitted during the fourth quarter of the fiscal
year ended December 31, 2006 to a vote of the
Companys security holders.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities.
|
(a) Market Information. Shares of the Company trade on the
NASDAQ Global Market under the trading symbol APRO.
The following table sets forth the high and low sale prices for
the shares for each quarterly period in 2006 and 2005.
|
|
|
|
|
|
|
|
|
2006
|
|
High
|
|
|
Low
|
|
|
1st Quarter
|
|
$
|
15.01
|
|
|
$
|
13.65
|
|
2nd Quarter
|
|
$
|
16.01
|
|
|
$
|
12.58
|
|
3rd Quarter
|
|
$
|
17.08
|
|
|
$
|
14.50
|
|
4th Quarter
|
|
$
|
20.70
|
|
|
$
|
15.92
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
High
|
|
|
Low
|
|
|
1st Quarter
|
|
$
|
12.76
|
|
|
$
|
11.30
|
|
2nd Quarter
|
|
$
|
12.13
|
|
|
$
|
11.25
|
|
3rd Quarter
|
|
$
|
13.14
|
|
|
$
|
11.56
|
|
4th Quarter
|
|
$
|
14.67
|
|
|
$
|
12.16
|
|
(b) Shareholders. As of December 31, 2006 there were
approximately 1,130 shareholders of record, and
approximately 8,300 street-name beneficial holders
whose shares are held in names other than their own.
(c) Dividends. Dividends to shareholders were made on a
quarterly basis during 2006 and 2005. Total dividends declared
to shareholders during the fiscal years ended December 31,
2006 and 2005 amounted to $11.3 million and
$10.6 million, respectively.
See Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations, for
information regarding the sources of funds that will be used for
cash dividends and for a discussion of factors which may affect
the Companys ability to pay cash dividends at the same
levels in 2007 and thereafter.
11
(d) Equity Compensation Plan Information
The following equity compensation plan information summarizes
plans and securities approved by, and not approved by, security
holders as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available
|
|
|
|
to be Issued
|
|
|
Weighted-Average
|
|
|
for Future Issuance
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Under Equity Compensation
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Plans (Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
Equity compensation plans approved
by security holders
|
|
|
152,467
|
(1)
|
|
$
|
14.88
|
|
|
|
582,533
|
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
152,467
|
|
|
$
|
14.88
|
|
|
|
582,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Weighted-average term to expiration
for these options is 9.1 years.
|
(E) Stock Performance Graph
The following stock performance graph and table provide a
comparison over the five-year period ending December 31,
2006 of the cumulative total return from a $100 investment in
the limited partner units of America First Apartment Investors,
L.P. (the predecessor to the Company) on December 31, 2001
with the stocks listed on the S&P 500 and the Equity REIT
Total Return index prepared by the National Association of Real
Estate Investment Trusts (NAREIT). The Company had
no operations of its own, and its shares did not trade in any
public market, prior to its merger with America First Apartment
Investors, L.P. on January 1, 2003. As a result of that
merger, the Company issued one share for each outstanding
limited partnership unit of America First Apartment Investors,
L.P. The following assumes that the base share price for our
common stock and each index is $100 and that all dividends are
reinvested. The performance graph is not necessarily indicative
of the Companys future investment performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Analysis
|
|
|
12/31/2001
|
|
|
|
12/31/2002
|
|
|
|
12/31/2003
|
|
|
|
12/31/2004
|
|
|
|
12/31/2005
|
|
|
|
12/31/2006
|
|
America First Apartment Investors,
Inc.
|
|
|
$
|
100/00
|
|
|
|
$
|
80.04
|
|
|
|
$
|
114.43
|
|
|
|
$
|
132.89
|
|
|
|
$
|
168.43
|
|
|
|
$
|
233.58
|
|
NAREIT Equity Index
|
|
|
$
|
100.00
|
|
|
|
$
|
103.82
|
|
|
|
$
|
142.37
|
|
|
|
$
|
187.33
|
|
|
|
$
|
210.11
|
|
|
|
$
|
283.77
|
|
S&P 500 Index
|
|
|
$
|
100.00
|
|
|
|
$
|
77.95
|
|
|
|
$
|
100.27
|
|
|
|
$
|
111.15
|
|
|
|
$
|
116.60
|
|
|
|
$
|
134.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source: CTA
Integrated Communications www.ctaintegrated.com (303) 665-4200.
Data from ReutersBridge Data Networks & National Association
of Real Estate Investments Trusts.
(F) Sales of Unregistered Securities, None
(G) Repurchase of Securities, None
12
|
|
Item 6.
|
Selected
Financial Data.
|
Set forth below is selected financial data for the Company for
the five years ended December 31, 2006. Information for
periods prior to January 1, 2003 represents the financial
data of America First Apartment Investors, L.P. (the
Partnership), which merged with the Company as of
January 1, 2003. As a result of this merger, the Company
assumed the assets, liabilities, and business operations of the
Partnership. Information for the periods beginning June 3,
2004 includes the financial information of AFREZ which merged
with the Company as of that date. The information should be read
in conjunction with the Companys consolidated financial
statements and Notes thereto filed in response to Item 8 of
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
Dec. 31, 2006
|
|
|
Dec. 31, 2005
|
|
|
Dec. 31, 2004
|
|
|
Dec. 31, 2003
|
|
|
Dec. 31, 2002
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Rental revenues
|
|
$
|
49,134
|
|
|
$
|
39,207
|
|
|
$
|
26,320
|
|
|
$
|
16,423
|
|
|
$
|
16,752
|
|
Other revenues
|
|
|
223
|
|
|
|
382
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
Real estate operating expenses
|
|
|
(21,208
|
)
|
|
|
(18,808
|
)
|
|
|
(14,488
|
)
|
|
|
(7,998
|
)
|
|
|
(8,400
|
)
|
Property management expenses(1)
|
|
|
(1,039
|
)
|
|
|
(799
|
)
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(5,335
|
)
|
|
|
(5,656
|
)
|
|
|
(3,865
|
)
|
|
|
(1,910
|
)
|
|
|
(1,773
|
)
|
Depreciation expense
|
|
|
(10,436
|
)
|
|
|
(7,748
|
)
|
|
|
(4,951
|
)
|
|
|
(3,287
|
)
|
|
|
(3,344
|
)
|
In-place lease amortization
|
|
|
(1,728
|
)
|
|
|
(2,674
|
)
|
|
|
(2,130
|
)
|
|
|
|
|
|
|
|
|
Intangible asset impairment
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract termination costs(2)
|
|
|
|
|
|
|
(11,619
|
)
|
|
|
(5,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
9,412
|
|
|
|
(7,715
|
)
|
|
|
(5,118
|
)
|
|
|
3,228
|
|
|
|
3,235
|
|
Interest and dividend income
|
|
|
1,995
|
|
|
|
1,725
|
|
|
|
1,252
|
|
|
|
328
|
|
|
|
306
|
|
Other non-operating gains
(losses)(3)
|
|
|
(522
|
)
|
|
|
|
|
|
|
212
|
|
|
|
4,444
|
|
|
|
|
|
Interest expense
|
|
|
(11,231
|
)
|
|
|
(8,771
|
)
|
|
|
(5,140
|
)
|
|
|
(3,351
|
)
|
|
|
(3,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(346
|
)
|
|
|
(14,761
|
)
|
|
|
(8,794
|
)
|
|
|
4,649
|
|
|
|
249
|
|
Income (loss) from discontinued
operations
|
|
|
706
|
|
|
|
1,107
|
|
|
|
56
|
|
|
|
(288
|
)
|
|
|
741
|
|
Gain on sales of discontinued
operations
|
|
|
19,197
|
|
|
|
24,606
|
|
|
|
5,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,557
|
|
|
$
|
10,952
|
|
|
$
|
(2,765
|
)
|
|
$
|
4,361
|
|
|
$
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations per share or BUC (beneficial unit certificate), basic
and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(1.40
|
)
|
|
$
|
(1.07
|
)
|
|
$
|
0.92
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), basic and
diluted, per share or BUC
|
|
$
|
1.77
|
|
|
$
|
1.04
|
|
|
$
|
(0.34
|
)
|
|
$
|
0.86
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends (distributions) declared
per share or BUC
|
|
$
|
1.02
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in real estate, net of
accumulated depreciation(4)
|
|
$
|
357,272
|
|
|
$
|
239,733
|
|
|
$
|
240,501
|
|
|
$
|
114,898
|
|
|
$
|
119,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
385,764
|
|
|
$
|
333,959
|
|
|
$
|
297,397
|
|
|
$
|
166,892
|
|
|
$
|
136,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and mortgage notes payable
|
|
$
|
249,651
|
|
|
$
|
185,764
|
|
|
$
|
167,150
|
|
|
$
|
82,215
|
|
|
$
|
82,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under repurchase
agreements
|
|
$
|
12,825
|
|
|
$
|
36,202
|
|
|
$
|
27,875
|
|
|
$
|
33,012
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations(5)
|
|
$
|
13,143
|
|
|
$
|
(1,422
|
)
|
|
$
|
970
|
|
|
$
|
9,362
|
|
|
$
|
5,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
or BUCs outstanding basic
|
|
|
11,037
|
|
|
|
10,513
|
|
|
|
8,243
|
|
|
|
5,074
|
|
|
|
5,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
(1) |
|
Property management expenses consist of salaries and benefits of
the Companys regional property managers, training
personnel, national maintenance directors and senior
vice-president of operations, their respective travel costs and
other costs directly attributable to these personnel. Such
amounts were not incurred until November 2004 when the Company
internalized the property management function. Prior to that
time, the Company paid property management fees to America First
PM Group, Inc., a property management company that was an
affiliate of the Advisor, and such fees were included in real
estate operating expenses. |
|
(2) |
|
Contract termination charges result from the allocation of a
portion of the consideration paid by the Company for the Advisor
and America First PM Group, Inc, in 2005 and 2004, respectively
to the termination of the pre-existing contractual relationships. |
|
(3) |
|
Other non-operating gains (losses) in 2006 include a $64,000
loss on redemption of securities, a $367,000 impairment of
securities, and a $91,000 loss on redemption of debt. In 2004,
other non-operating gains include a gain recognized upon the
redemption of a corporate equity security. The 2003 amount
represents a gain on a previously written off subordinated note
that was realized from the sale of Jefferson Place Apartments. |
|
(4) |
|
In 2006, the Company sold Park at 58th, the Belvedere Apartments
and Delta Crossing. Additionally, the Company has designated
Cumberland Trace and Waters Edge as held for sale. These assets
of $15,540 and $20,570 at December 31, 2006 and 2005
respectively are included in assets of discontinued operations
in the consolidated balance sheets included within item 8,
Financial Statements and Supplementary Data. |
|
(5) |
|
The Company generally calculates FFO in accordance with the
definition of FFO that is recommended by the National
Association of Real Estate Investment Trusts
(NAREIT). To calculate FFO under the NAREIT
definition, depreciation and amortization expenses related to
the Companys real estate, gains or losses realized from
the disposition of depreciable real estate assets, and certain
extraordinary items are added back or deducted from the
Companys net income (loss). In the 2006 computation, the
Company has added back the impairment loss recognized on the
Companys agency securities and preferred stock and
believes that this treatment is appropriate since NAREIT allows
for the exclusion of gains and losses recognized in connection
with the sale of a security in the determination of FFO. NAREIT
does not specifically discuss how an impairment of a security
should be handled. FFO in 2005 and 2004 was negatively affected
by $11.6 million and $5.9 million of costs associated
with the conversion of the Company to a self-advised and
self-managed REIT. Although these costs are required to be
included within FFO, these types of expenses will not likely
re-occur. For other items impacting comparability of FFO refer
to the FFO discussion in Item 7, Management Discussion and
Analysis of Financial Condition and Results of Operations. |
The Companys FFO may not be comparable to other REITs or
real estate companies with similar assets. This is due in part
to the differences in capitalization policies used by different
companies and the significant effect these capitalization
policies have on FFO. Real estate costs incurred in connection
with real estate operations which are accounted for as capital
improvements are added to the carrying value of the property and
depreciated over time whereas real estate costs that are
expensed are accounted for as a current period expense. This
affects FFO because costs that are accounted for as expenses
reduce FFO. Conversely, real estate costs associated with assets
that are capitalized and then subsequently depreciated are added
back to net income to calculate FFO.
The Company believes FFO is an important non-GAAP measure, as
FFO excludes the depreciation expense on real estate assets that
generally appreciate over time or maintains residual value to a
much greater extent than other depreciable assets such as
machinery or equipment. Additionally, other real estate
companies, analysts and investors utilize FFO in analyzing the
results of real estate companies. FFO should not be considered
as an alternative to net income which is calculated in
accordance with Accounting Principals Generally Accepted in the
United States of America (GAAP).
See the Funds from Operations caption included within
item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, for a
reconciliation of FFO to net income, which is calculated in
accordance with GAAP.
14
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
General
The Companys primary business is the operation of
multifamily apartment properties as long-term investments.
Accordingly, the Companys operating results will depend
primarily on the net operating income generated by its
multifamily apartment properties. This, in turn, will depend on
the rental and occupancy rates of the properties and on the
level of operating expenses. Occupancy rates and rents are
directly affected by the supply of, and demand for, apartments
in the market areas in which a property is located. Several
factors influence this, including local and national economic
conditions, the amount of new apartment construction, interest
rates on single-family mortgage loans and the cost of home
ownership. In addition, factors such as government regulation
(such as zoning laws), inflation, real estate and other taxes,
labor problems and natural disasters can affect the economic
operations of a property.
The following table sets forth certain information regarding the
Companys real estate properties as of December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Number
|
|
|
Percentage
|
|
|
|
|
|
Number
|
|
|
Square Feet
|
|
|
of Units
|
|
|
of Units
|
|
Property Name
|
|
Location
|
|
of Units
|
|
|
per Unit
|
|
|
Occupied
|
|
|
Occupied
|
|
|
Arbor Hills
|
|
Antioch, TN
|
|
|
548
|
|
|
|
827
|
|
|
|
507
|
|
|
|
93
|
%
|
Arbors of Dublin
|
|
Dublin, OH
|
|
|
288
|
|
|
|
990
|
|
|
|
266
|
|
|
|
92
|
%
|
Bluff Ridge Apartments
|
|
Jacksonville, NC
|
|
|
108
|
|
|
|
873
|
|
|
|
106
|
|
|
|
98
|
%
|
Brentwood Oaks Apartments
|
|
Nashville, TN
|
|
|
262
|
|
|
|
852
|
|
|
|
253
|
|
|
|
97
|
%
|
Coral Point Apartments
|
|
Mesa, AZ
|
|
|
337
|
|
|
|
780
|
|
|
|
315
|
|
|
|
93
|
%
|
Cornerstone Apartments
|
|
Independence, MO
|
|
|
420
|
|
|
|
887
|
|
|
|
371
|
|
|
|
88
|
%
|
Covey at Fox Valley
|
|
Aurora, IL
|
|
|
216
|
|
|
|
948
|
|
|
|
205
|
|
|
|
95
|
%
|
Cumberland Trace(1)
|
|
Fayetteville, NC
|
|
|
248
|
|
|
|
958
|
|
|
|
201
|
|
|
|
81
|
%
|
Elliots Crossing Apartments
|
|
Tempe, AZ
|
|
|
247
|
|
|
|
717
|
|
|
|
230
|
|
|
|
93
|
%
|
Fox Hollow Apartments
|
|
High Point, NC
|
|
|
184
|
|
|
|
877
|
|
|
|
158
|
|
|
|
86
|
%
|
Greenbriar Apartments
|
|
Tulsa, OK
|
|
|
120
|
|
|
|
666
|
|
|
|
113
|
|
|
|
94
|
%
|
Highland Park Apartments
|
|
Columbus, OH
|
|
|
252
|
|
|
|
891
|
|
|
|
234
|
|
|
|
93
|
%
|
Huntsview Apartments
|
|
Greensboro, NC
|
|
|
240
|
|
|
|
875
|
|
|
|
220
|
|
|
|
92
|
%
|
Jackson Park Place Apartments
|
|
Fresno, CA
|
|
|
296
|
|
|
|
822
|
|
|
|
281
|
|
|
|
95
|
%
|
Jackson Park Place
Apartments Phase II
|
|
Fresno, CA
|
|
|
80
|
|
|
|
1,096
|
|
|
|
73
|
|
|
|
91
|
%
|
Lakes of Northdale Apartments
|
|
Tampa, FL
|
|
|
216
|
|
|
|
873
|
|
|
|
214
|
|
|
|
99
|
%
|
Littlestone of Village Green
|
|
Gallatin, TN
|
|
|
200
|
|
|
|
987
|
|
|
|
194
|
|
|
|
97
|
%
|
Misty Springs Apartments
|
|
Daytona Beach, FL
|
|
|
128
|
|
|
|
786
|
|
|
|
128
|
|
|
|
100
|
%
|
Monticello Apartments
|
|
Southfield, MI
|
|
|
106
|
|
|
|
1,027
|
|
|
|
94
|
|
|
|
89
|
%
|
Morganton Place
|
|
Fayetteville, NC
|
|
|
280
|
|
|
|
962
|
|
|
|
257
|
|
|
|
92
|
%
|
Oakhurst Apartments
|
|
Ocala, FL
|
|
|
214
|
|
|
|
790
|
|
|
|
211
|
|
|
|
99
|
%
|
Oakwell Farms Apartments
|
|
Nashville, TN
|
|
|
414
|
|
|
|
800
|
|
|
|
398
|
|
|
|
96
|
%
|
Shelby Heights
|
|
Bristol, TN
|
|
|
100
|
|
|
|
980
|
|
|
|
99
|
|
|
|
99
|
%
|
The Greenhouse
|
|
Omaha, NE
|
|
|
126
|
|
|
|
881
|
|
|
|
124
|
|
|
|
98
|
%
|
The Hunt Apartments
|
|
Oklahoma City, OK
|
|
|
216
|
|
|
|
693
|
|
|
|
210
|
|
|
|
97
|
%
|
The Park at Countryside
|
|
Port Orange, FL
|
|
|
120
|
|
|
|
720
|
|
|
|
118
|
|
|
|
98
|
%
|
The Ponds at Georgetown
|
|
Ann Arbor, MI
|
|
|
134
|
|
|
|
1,002
|
|
|
|
124
|
|
|
|
93
|
%
|
The Reserve at Wescott Plantation
|
|
Summerville, SC
|
|
|
192
|
|
|
|
1,083
|
|
|
|
180
|
|
|
|
94
|
%
|
Tregaron Oaks Apartments
|
|
Bellevue, NE
|
|
|
300
|
|
|
|
875
|
|
|
|
289
|
|
|
|
96
|
%
|
Village at Cliffdale
|
|
Fayetteville, NC
|
|
|
356
|
|
|
|
798
|
|
|
|
321
|
|
|
|
90
|
%
|
Watermans Crossing
|
|
Newport News, VA
|
|
|
260
|
|
|
|
944
|
|
|
|
254
|
|
|
|
98
|
%
|
Waters Edge Apartments(1)
|
|
Lake Villa, IL
|
|
|
108
|
|
|
|
814
|
|
|
|
101
|
|
|
|
94
|
%
|
Woodberry Apartments
|
|
Asheville, NC
|
|
|
168
|
|
|
|
837
|
|
|
|
163
|
|
|
|
97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,484
|
|
|
|
876
|
|
|
|
7,012
|
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Exchange at Palm Bay
|
|
Palm Bay, FL
|
|
|
72,007(2
|
)
|
|
|
n/a
|
|
|
|
69,193
|
|
|
|
96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
(1) |
|
Property is held for sale as of December 31, 2006. |
|
(2) |
|
This is an office/warehouse facility. The figure represents
square feet available for lease to tenants and percentage of
square feet occupied. |
Executive
Summary
Fiscal 2006 was the Companys first full year of operation
as a self-advised and self-managed REIT. It also represented the
completion of the first year of the Companys four year
strategic plan. The primary components of the plan include the
divestiture of older, underperforming properties in markets with
limited prospects for growth; the acquisition of newer and
better located properties; increased Funds from Operations per
share; and increased dividends.
To meet the provisions of the strategic plan, the Company
accomplished the following during 2006:
|
|
|
|
|
Eight properties were acquired, consisting of 1,966 units,
for aggregate consideration of $145.7 million. The
acquisitions were financed with approximately $72.1 million
in cash, borrowings of an additional $72.0 million and the
assumption of $1.6 million of liabilities. The cash for
these transactions was primarily generated from the 2005 sale of
St. Andrews at Westwood, the second quarter 2006 sale of the
Belvedere Apartments and the release of cash collateralizing the
bonds payable at Coral Point and Covey at Fox Valley.
|
|
|
|
Two underperforming properties, Park at
58th and
Delta Crossing, were sold. In January 2007, a third
underperforming property, Cumberland Trace, was sold for
$10.9 million, with no gain or loss recognized on the sale.
Cumberland Trace, acquired in September 2006, did not meet the
Companys acquisition criteria if bought on a stand alone
basis, but was required to be purchased as it, Morganton Place,
Village at Cliffdale and Woodberry Apartments were being sold
only as a single portfolio.
|
|
|
|
Reduced general and administrative expenses through benefits
realized from the internalization of management. The elimination
of administrative fees previously paid to our former external
advisor reduced general and administrative expenses by
approximately $1.6 million from the prior year. These
savings are partially offset by approximately $600,000 of
incremental costs. Such costs primarily relate to incremental
salary costs to replace services formerly provided by the
external advisor and incremental rental expenses for office
space for those employees providing such services. Additionally
the absence of property acquisition fees on the current year
acquisitions created cash savings of $1.8 million. For the
year, the Company estimates that it has saved approximately
$2.8 million in cash and increased Funds from Operations by
$0.10 per share by completing the management
internalization.
|
|
|
|
Dividends were increased by 4% to a dividend rate of
$0.26 per share per quarter.
|
Critical
Accounting Policies
The preparation of financial statements in accordance with
accounting principals generally accepted in the United States of
America (GAAP) requires management of the Company to
make a number of judgments, assumptions and estimates. The
application of these judgments, assumptions and estimates can
affect the amounts of assets, liabilities, revenues and expenses
reported by the Company. All of the Companys significant
accounting policies are described in Note 2 to the
Companys consolidated financial statements filed in
response to Item 8 of this report. The Company considers
the following to be its critical accounting policies as they
involve judgments, assumptions and estimates that significantly
affect the preparation of its consolidated financial statements.
Establishment of depreciation policy The
Companys real estate assets are carried on the balance
sheet at cost less accumulated depreciation. Depreciation of
real estate is based on the estimated useful life of the related
asset, generally
271/2 years
on multifamily residential apartment buildings,
311/2 years
on commercial buildings and five to fifteen years on capital
improvements, and is calculated using the straight-line method.
Depreciation of capital improvements on the Companys
commercial property is based on the term of the related tenant
lease using the straight-line method. Shorter or longer
depreciable lives and method of depreciation directly impact
depreciation expense recorded in earnings.
16
Establishment of capitalization policy
Expenditures for purchases of a new asset with a useful life in
excess of one year and for replacements and repairs that
substantially extend the useful life, or improve the quality, of
an asset are capitalized and depreciated over their useful
lives. Recurring capital expenditures are typically incurred
every year during the life of an apartment community and include
such expenditures as carpet, vinyl flooring and appliances.
Non-recurring capital expenditures are costs that are generally
incurred in connection with a major project such as a roof
replacement, parking lot resurfacing, siding replacement and
exterior painting. Maintenance and repairs, such as landscaping
maintenance, interior painting, and make ready costs are charged
to expense as incurred. The determination of what constitutes an
expenditure that substantially extends the life, or improves the
quality of an asset, requires judgment and is not necessarily
consistent with companies of similar type as there is diversity
in such accounting policies adopted by the real estate industry.
Review of real estate assets for impairment
Management reviews each property for impairment whenever events
or changes in circumstances indicate that the carrying value of
a property may not be recoverable. The review of recoverability
is based upon comparing the net book value of each real estate
property to the sum of its estimated undiscounted future cash
flows. If impairment exists due to the inability to recover the
carrying value of a property, an impairment loss is recorded to
the extent that the carrying value of the property exceeds its
estimated fair value. The recognition of an impaired property
and the potential impairment calculation are subject to a
considerable degree of judgment, the results of which when
applied under different conditions or assumptions could have a
material impact on the financial statements. The estimated
future cash flow of each property is subject to a significant
amount of uncertainty in the estimation of future rental
receipts, future rental expenses, and future capital
expenditures. Such estimates are affected by economic factors
such as the rental markets and labor markets in which the
properties operate the current market values for properties in
the rental markets, and tax and insurance expenses. Different
conditions or different assumptions applied to the calculation
may result in different results.
Results
of Operations
In accordance with Statement of Financial Accounting Standards
No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets, the Company has classified the results of
operations of the properties sold during 2006, 2005 and 2004,
and those held for sale at December 31, 2006, as
discontinued operations for all periods presented. Accordingly,
the rental revenue, real estate operating expense, depreciation
expense and interest expense on debt collateralized by these
properties and any other property specific components of net
income are not reflected in our results of continuing operations
in any periods presented.
Year
Ended December 31, 2006 Compared to the Year Ended
December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
Change
|
|
|
Change
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
49,134
|
|
|
$
|
39,207
|
|
|
$
|
9,927
|
|
|
|
25
|
%
|
Other
|
|
|
223
|
|
|
|
382
|
|
|
|
(159
|
)
|
|
|
(42
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
49,357
|
|
|
|
39,589
|
|
|
|
9,768
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operating
|
|
|
21,208
|
|
|
|
18,808
|
|
|
|
2,400
|
|
|
|
13
|
%
|
Property management
|
|
|
1,039
|
|
|
|
799
|
|
|
|
240
|
|
|
|
30
|
%
|
General and administrative
|
|
|
5,335
|
|
|
|
5,656
|
|
|
|
(321
|
)
|
|
|
(6
|
)%
|
Depreciation
|
|
|
10,436
|
|
|
|
7,748
|
|
|
|
2,688
|
|
|
|
35
|
%
|
In-place lease amortization
|
|
|
1,728
|
|
|
|
2,674
|
|
|
|
(946
|
)
|
|
|
(35
|
)%
|
Intangible asset impairment
|
|
|
199
|
|
|
|
|
|
|
|
199
|
|
|
|
|
|
Contract termination costs
|
|
|
|
|
|
|
11,619
|
|
|
|
(11,619
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
39,945
|
|
|
|
47,304
|
|
|
|
(7,359
|
)
|
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
9,412
|
|
|
$
|
(7,715
|
)
|
|
$
|
17,127
|
|
|
|
222
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Rental revenues. Rental revenues increased by
$9.9 million, or 25% from the year ended December 31,
2005. Same store (properties owned for the entirety of both
periods presented) revenues increased 5% or $1.9 million
from the prior year. The increased same store revenues are a
result of improved market conditions primarily being driven by
increased demand. Demand for apartments has increased due to
continued job growth, reduced affordability of home ownership
and modest supply of new apartments due to higher land and
construction costs. Additionally, the supply of rental
apartments, in certain of the Companys markets has
decreased due to the conversion of multifamily apartment
properties to condominiums. Full year ownership of Tregaron Oaks
and Reserve at Wescott, both acquired in the third quarter of
2005, increased revenues by $2.7 million. The 2006
acquisitions of The Greenhouse, Arbors of Dublin, Jackson Park
Place-Phase II, Morganton Place, Village at Cliffdale, the
Woodberry Apartments and the Cornerstone Apartments
(collectively, the 2006 Acquisitions) increased
revenues by $5.3 million.
Other revenues. Other revenues consist
primarily of fees earned from the management of properties owned
by unrelated third parties. These revenues decreased during 2006
as the Company is managing fewer properties in 2006 than in
2005. As of December 31, 2006, the Company only provides
third party management services at two properties. As of
December 31, 2005, the Company was providing such services
at five properties.
Real estate operating expenses. Real estate
operating expenses are comprised principally of real estate
taxes, property insurance, utilities, repairs and maintenance,
and salaries and related employee expenses of
on-site
employees. The 2006 Acquisitions increased operating expenses by
$2.3 million. Incremental operating expenses incurred as a
result of a full year of ownership of Tregaron Oaks and Reserve
at Wescott Plantation are mostly offset by reduced operating
costs at the Companys same store properties. These costs
decreased due to reduced market ready costs, reduced utility
expenses as a result of the Company passing on more utility
costs to tenants, and a successful tax appeal at one of the
Companys properties which reduced 2006 property taxes by
approximately $100,000.
Property management expenses. Property
management expenses consist of salaries and benefits of the
Companys regional property managers, national maintenance
director and senior vice-president of operations, their
respective travel costs and other costs directly attributable to
these personnel. The majority of the increase is a result of the
creation of a national training program, and the costs of
development. The remaining increase is due to the addition of a
regional manager for the Florida properties and increased travel
by all regional directors.
General and administrative expenses. General
and administrative expenses decreased by $321,000 from the prior
year. The elimination of administrative fees paid to the former
external advisor reduced general and administrative expenses by
$1.6 million. Salary costs increased by approximately
$470,000 from the prior year. This increase is primarily a
result of hiring additional personnel to replace the services
formerly provided by the Advisor, and increased compensation
provided to certain executives based upon the current year
results. The Company has also incurred approximately $145,000 of
other general and administrative costs as a result of separating
from the Advisor. These costs primarily resulted from increased
rent expense for office space for individuals hired to replace
the services formerly provided by the Advisor. Fees paid to our
Board of Directors increased by approximately $250,000. This
increase resulted primarily from a stock option grant made to
the entire Board in August and a bonus payment made to the
Companys Chairman in December. The remaining increase is
primarily attributable to increased professional fees of
$390,000 associated with hiring professional service firms to
serve as financial advisors and to assist in the evaluation of
the Companys compensation programs.
Depreciation expense. The 2006 Acquisitions
and full year ownership of Tregaron and Reserve at Wescott
increased depreciation expense by $2.3 million. Same store
deprecation expense increased by approximately $300,000. This
increase is primarily due to the impact of capital expenditures.
In-place lease amortization. In-place lease
intangibles arise as a result of the allocation of a portion of
the total acquisition cost of an acquired property to leases in
existence as of the date of acquisition. The estimated valuation
of in-place leases is calculated by applying a risk-adjusted
discount rate to the projected cash flow realized at each
property during the estimated
lease-up
period it would take to lease these properties. This allocated
cost is amortized over the average remaining term of the leases.
Amortization expense from in-place lease intangibles decreased
in 2006, as the in-place leases obtained in the 2004 merger with
AFREZ became fully amortized in May of 2005. The decrease
resulting from the complete amortization of the AFREZ leases
more than offset the additional amortization expense from
in-place leases acquired in the 2006 Acquisitions.
18
Intangible asset impairment. In connection
with the November 2004 acquisition of certain property
management assets from America First Properties Management
Companies, LLC, the Company assumed property management
agreements for five apartment complexes owned by unrelated third
parties. These contracts were recorded as an intangible asset in
accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. During the
first quarter of 2006, the Company purchased The Greenhouse,
which was one of the properties for which it previously provided
management services. Additionally, the Company became aware that
several of the other properties for which it provided third
party management services were expected to be sold during 2006.
As a result, the Company determined that a portion of the
intangible asset was impaired and recorded a charge of $199,000.
Contract termination costs. On
December 30, 2005, the Company acquired the Companys
external advisor through a merger. Prior to the merger, the
advisor provided management and advisory services to the
Company. As a result of the Companys pre-existing
relationship with the advisor, $11.6 million of the
$11.8 million total merger consideration was required to be
allocated to the termination of the pre-existing contractual
relationship and was expensed in 2005.
Other
income and expenses
The following table sets forth the components of other income
and expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
Change
|
|
|
Change
|
|
|
Interest and dividend income
|
|
$
|
1,995
|
|
|
$
|
1,725
|
|
|
$
|
270
|
|
|
|
16
|
%
|
Loss on redemption of securities
|
|
|
(64
|
)
|
|
|
|
|
|
|
(64
|
)
|
|
|
|
|
Impairment of securities
|
|
|
(367
|
)
|
|
|
|
|
|
|
(367
|
)
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
(91
|
)
|
|
|
|
|
|
|
(91
|
)
|
|
|
|
|
Interest expense
|
|
|
(11,231
|
)
|
|
|
(8,771
|
)
|
|
|
(2,460
|
)
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
$
|
(9,758
|
)
|
|
$
|
(7,046
|
)
|
|
$
|
(2,712
|
)
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income increased from 2005 due to the
interest income earned on $29.3 million of the cash
proceeds from the November 16, 2005 sale of St. Andrews
which was not fully reinvested in real estate assets until
March 22, 2006, as well as the $17.6 million of
proceeds from the June 1, 2006 sale of the Belvedere
Apartments, which was not reinvested until September 28,
2006. Additionally, until September 28, 2006, the Company
had approximately $16.9 million of cash invested in
interest bearing accounts, which served as additional collateral
for tax-exempt bonds issued to finance Coral Point Apartments
and the Covey at Fox Valley. This income was partially offset by
the impairment and subsequent loss upon sale of the agency
securities. In March 2006, the Company determined that it no
longer intended to hold the agency securities for a period of
time that would be sufficient to allow it to recover the
unrealized losses which were recorded as a component of other
comprehensive income, and on April 24, 2006, the portfolio
of agency securities was sold.
Interest expense represents interest paid and other expenses
associated with the taxable and tax-exempt mortgage debt
incurred to finance the Companys investments in
multifamily apartment properties. The acquisitions of Tregaron
Oaks and The Reserve at Wescott Plantation increased interest
expense by approximately $870,000 compared to the year ended
December 31, 2005. The 2006 Acquisitions increased interest
expense by $595,000. The adjustment of the Companys
interest rate swaps to current market value accounted for
$264,000 of the increase in interest expense. During 2005, the
market value of its interest rate swaps increased, which in turn
reduced interest expense by $85,000, whereas in the current
year, the market valued decreased, which increased interest
expense by $179,000. Increased interest rates on the
Companys repurchase agreement borrowings and subordinated
notes increased interest expense by $340,000. The remaining
increase is due to the Companys 2005 allocation of
interest expense to St. Andrews, Park Trace, and The Retreat, in
accordance with Emerging Issue Task Force Issue No.
87-24,
Allocation of Interest to Discontinued Operations. Under
the terms of this consensus, the Company was required to
allocate interest expense to discontinued operations for the
three properties which collateralized debt issued by other of
the Companys properties. These properties were sold in the
second half of 2005. Since the Company utilized the proceeds
from the sales to purchase additional multifamily properties,
rather
19
than repay a portion of the collateralized debt, interest
expense associated with continuing operations increased. The
loss on extinguishment of debt occurred as a result of the
Companys refunding of the Covey at Fox Valley bonds. The
loss consists of unamortized deferred financing costs and legal
fees associated with the transaction.
Discontinued operations. During 2006, the
Company sold the Belvedere Apartments, the Park at
58th Apartments,
and Delta Crossing. The results of operations and the gain on
the sale of these properties are classified as discontinued
operations in the Consolidated Statements of Operations and
Comprehensive Income (Loss). The sales of these three properties
resulted in a gain of $19.2 million. Additionally, the
Company has designated Cumberland Trace and Waters Edge as held
for sale pursuant to SFAS No. 144. The divestiture of
Cumberland Trace was completed on January 31, 2007 for
$10.9 million. Waters Edge is not currently under contract,
but the Company is currently marketing the property to
prospective buyers and it expects the property will be divested
within the next 12 months. During 2005, the Company sold
the Park Trace Apartments, The Retreat Apartments and the St.
Andrews at Westwood Apartments for a gain of $24.6 million.
Revenues, operating expenses, and other expenses, all decreased
from 2005 to 2006 due to the number of properties which
comprised discontinued operations for each period. During 2006
five properties were included within discontinued operations; in
2005 there were eight properties.
Year
Ended December 31, 2005 Compared to the Year Ended
December 31, 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
Change
|
|
|
Change
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
39,207
|
|
|
$
|
26,320
|
|
|
$
|
12,887
|
|
|
|
49
|
%
|
Other
|
|
|
382
|
|
|
|
39
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
39,589
|
|
|
|
26,359
|
|
|
|
13,230
|
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operating
|
|
|
18,808
|
|
|
|
14,488
|
|
|
|
4,320
|
|
|
|
30
|
%
|
Property management
|
|
|
799
|
|
|
|
132
|
|
|
|
667
|
|
|
|
|
|
General and administrative
|
|
|
5,656
|
|
|
|
3,865
|
|
|
|
1,791
|
|
|
|
46
|
%
|
Depreciation
|
|
|
7,748
|
|
|
|
4,951
|
|
|
|
2,797
|
|
|
|
56
|
%
|
In-place lease amortization
|
|
|
2,674
|
|
|
|
2,130
|
|
|
|
544
|
|
|
|
26
|
%
|
Contract termination costs
|
|
|
11,619
|
|
|
|
5,911
|
|
|
|
5,708
|
|
|
|
97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
47,304
|
|
|
|
31,477
|
|
|
|
15,827
|
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(7,715
|
)
|
|
$
|
(5,118
|
)
|
|
$
|
(2,597
|
)
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues. The June 2004 merger with
AFREZ increased rental revenues by $7.3 million, due to
twelve months of ownership in 2005 as compared to seven months
of ownership in 2004. The acquisitions of Arbor Hills in
December 2004, Tregaron Oaks in August 2005, and The Reserve at
Wescott Plantation in September 2005 (collectively the
2005 Acquisitions), increased rental revenues by
$5.2 million. The remaining revenue growth is attributable
to increased occupancy and reduced concessions at those
properties owned for the two years ended December 31, 2005.
Other revenues. Other revenues include fees
earned from the management of properties owned by unrelated
third parties. Prior to the November 2004 acquisition of
property management agreements from America First Properties
Management Companies, LLC, (America First
Properties) the Company did not provide any such services.
Real estate operating expenses. Real estate
operating expenses are comprised principally of real estate
taxes, property insurance, utilities, repairs and maintenance,
and salaries and related employee expenses of
on-site
employees. The AFREZ merger increased operating expenses by
$3.3 million over 2004 levels as the properties acquired in
the merger were owned for a full year in 2005 compared to seven
months of 2004. The 2005 Acquisitions increased operating
expense by $2.7 million. These increases were partially
offset by the elimination
20
of the property management fees, which were $1.3 million in
2004. These fees were eliminated due to the internalization of
property management functions in November 2004. Fiscal 2004
results were also negatively impacted by hurricane related
expenses of $257,000 at several of the Companys properties.
Property management expenses. Property
management expenses consist of salaries and benefits of the
Companys regional property managers, national maintenance
director and senior vice-president of operations, their
respective travel costs and other costs directly attributable to
these personnel. Such costs were not incurred until November
2004, when the Company acquired assets from America First
Properties and began providing their own property management
services.
General and administrative expenses. General
and administrative expenses increased by $1.8 million from
the prior year. Salaries and benefits increased by approximately
$830,000 primarily due to severance payments made to the former
Chief Investment Officer and the incremental costs incurred as a
result of hiring additional personnel necessary to replace the
support services of Companys former management company.
Administrative fees paid to the Companys former advisor
increased by approximately $420,000 due to the 2005 Acquisitions
and the AFREZ merger. The Company also incurred approximately
$200,000 of professional fees as it utilized the services of an
executive recruiter to hire selected management personnel. The
remainder of the increase is primarily attributable to increased
legal and accounting fees and directors and officers insurance
costs.
Depreciation expense. The increase in
depreciation expense of $2.8 million is attributable to the
acquisition of properties in the merger with AFREZ and the
purchase of the 2005 Acquisitions. Depreciation expense incurred
by the properties held by the Company prior to the merger with
AFREZ was consistent with the depreciation expense incurred in
2004.
In-place lease amortization. In-place lease
intangibles arise as a result of the allocation of a portion of
the total acquisition cost of an acquired property to leases in
existence as of the date of acquisition. The estimated valuation
of in-place leases is calculated by applying a risk-adjusted
discount rate to the projected cash flow realized at each
property during the estimated
lease-up
period it would take to lease these properties. This allocated
cost is amortized over the average remaining term of the leases.
The 2005 Acquisitions increased such expenses by $343,000. The
remaining increase is due to increased amortization expense from
the AFREZ merger.
Contract termination costs. On
December 30, 2005, the Company acquired the Advisor through
a merger. Prior to the merger, the Advisor provided management
and advisory services to the Company. As a result of the
Companys pre-existing relationship with the Advisor,
$11.6 million of the $11.8 million total merger
consideration was required to be allocated to the termination of
the pre-existing contractual relationship and was expensed in
the current year.
In November 2004, the Company acquired certain property
management assets, rights to use certain proprietary systems,
certain property management agreements, certain employment
agreements and other intangible assets from America First
Properties Management Companies, LLC. Of the $6.8 million
acquisition price, $5.9 million was expensed as an
allocation of the acquisition price to the termination of the
existing property management relationship on the Companys
properties. The Company estimates that the property management
acquisition resulted in incremental earnings of approximately
$800,000 in 2005.
Other
income and expenses
The following table sets forth the components of other income
and expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
Change
|
|
|
Change
|
|
|
Interest and dividend income
|
|
$
|
1,725
|
|
|
$
|
1,252
|
|
|
$
|
473
|
|
|
|
38
|
%
|
Gain on redemption of securities
|
|
|
|
|
|
|
212
|
|
|
|
(212
|
)
|
|
|
|
|
Interest expense
|
|
|
(8,771
|
)
|
|
|
(5,140
|
)
|
|
|
(3,631
|
)
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
$
|
(7,046
|
)
|
|
$
|
(3,676
|
)
|
|
$
|
(3,370
|
)
|
|
|
92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income. The increased
interest and dividend income is primarily due to
$7.4 million loan made to America First Communities Offutt
Developers, LLC (the Developer), in September 2005.
These
21
funds were used by the Developer to partially finance the
military housing privatization project at Offutt Air Force Base
in Bellevue, Nebraska. Interest is paid at a variable rate based
upon the 30 day LIBOR rate plus 9%. During 2005, the
Company recognized $286,000 of interest income from this loan.
Also increasing interest income is the interest earned on
restricted cash. At December 31, 2005, the Company had
$53.3 million of restricted cash. Approximately
$29.4 million of the restricted cash resulted from a
portion of the proceeds from the sale of St. Andrews at Westwood
being placed in a segregated account for purposes of acquiring
additional properties in transactions that qualify for the
deferral of gain recognition under Section 1031 of the
Internal Revenue Code. Additionally, as a result of the
divestitures of The Retreat and Park Trace, the Company had to
utilize $16.9 million of cash to serve as replacement
collateral for mortgage notes which were previously
collateralized by these properties. In aggregate, these
restricted funds generated $275,000 of interest income.
Offsetting these increases was reduced interest income on
unrestricted cash and cash equivalents, due to reduced levels of
unrestricted cash during 2005.
Interest expense. Interest expense increased
by $3.6 million from 2004 to 2005. Approximately
$2.8 million of the increase is due to the debt assumed in
the AFREZ merger and to finance the acquisitions of the 2005
Acquisitions. Interest expense also increased by $300,000 due to
increased repurchase agreement borrowings and higher interest
rates on such borrowings. Also contributing to increased
interest expense was the valuation of the Companys
interest rate swaps. In 2004, these swaps reduced interest
expense by $273,000. In 2005, the swaps decreased interest
expense by $85,000, a change of $188,000. The remaining increase
is due to higher interest rates on the Companys variable
rate mortgage notes and bonds.
Discontinued operations. During 2005, the
Company divested the Park Trace Apartments, The Retreat
Apartments, and St. Andrews at Westwood. In connection with
these sales, the Company received cash proceeds of
$54.4 million, net of closing costs of $1.1 million.
These proceeds were partially utilized by the Company to finance
the acquisitions of Tregaron Oaks, the Reserve at Wescott
Plantation, and the January 2006 acquisition of The Greenhouse.
In aggregate, the Company recognized a gain on the sale of these
properties of $24.6 million.
In December 2004, the Company sold The Glades Apartments. The
Glades Apartments was sold for a total sales price of
$20.0 million which consisted of cash and debt assumed by
the buyer. The net cash proceeds to the Company were
approximately $11.1 million, net of closing costs of
approximately $149,000. A gain on the sale of this property was
realized in the amount of $6.0 million.
Revenues, operating expenses, and other expenses, all decreased
from 2004 to 2005 due to the number of properties which
comprised discontinued operations for each period. During 2005
eight properties were included within discontinued operations;
in 2004 there were nine properties.
Funds
from Operations (FFO)
The following sets forth a reconciliation of the Companys
net income (loss) as determined in accordance with GAAP and its
FFO for the periods set forth (in thousands except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss)
|
|
$
|
19,557
|
|
|
$
|
10,952
|
|
|
$
|
(2,765
|
)
|
Depreciation expense
|
|
|
10,248
|
|
|
|
7,748
|
|
|
|
4,951
|
|
In-place lease amortization
|
|
|
1,728
|
|
|
|
2,674
|
|
|
|
2,130
|
|
Depreciation and amortization of
discontinued operations
|
|
|
376
|
|
|
|
1,810
|
|
|
|
2,839
|
|
(Gain) loss on redemption of
securities
|
|
|
64
|
|
|
|
|
|
|
|
(212
|
)
|
Impairment of securities
|
|
|
367
|
|
|
|
|
|
|
|
|
|
Less: Gain on sales of
discontinued operations
|
|
|
(19,197
|
)
|
|
|
(24,606
|
)
|
|
|
(5,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations
|
|
$
|
13,143
|
|
|
$
|
(1,422
|
)
|
|
$
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
outstanding
|
|
|
11,037
|
|
|
|
10,513
|
|
|
|
8,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations per share
|
|
$
|
1.19
|
|
|
$
|
(0.14
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
The Companys FFO increased by $14.6 million for the
year ended December 31, 2006 compared to the prior year.
FFO during 2005 was negatively affected by a contract
termination charge of $11.6 million described below. No
such charge was recorded in 2006 and this accounted for the
majority of the increase in 2006 FFO over 2005 FFO.
Approximately $1.0 million of the remaining
$3.0 million increase is attributable to the benefit the
Company experienced from the internalization of the Advisor. The
remaining increase is largely attributable to improved same
store operations. While the current year acquisitions, net of
divestitures generated positive FFO, these gains were offset by
increased interest expense and increases in certain general and
administrative expenses.
The Companys FFO decreased $2.4 million for the year
ended 2005 compared to the prior year. The reduction in 2005 is
a result of the contract termination charge of
$11.6 million recognized in connection with the merger of
the Advisor. During 2004, the Company recognized a contract
termination charge of $5.9 million related to the
acquisition of certain assets from America First Properties
Management Company. The additional contract termination charge
incurred in 2005 was partially offset by additional FFO
generated from holding the former AFREZ properties for a full
year in 2005; the benefit of the 2005 Acquisitions; same store
revenue growth of approximately $900,000; and approximately
$800,000 in savings generated from the property management asset
acquisition. FFO, prior to considering the contract termination
charges was $10.2 million, or $0.97 per share, and
$6.9 million, or $0.84 per share, in 2005 and 2004
respectively.
The Company generally calculates FFO in accordance with the
definition of FFO that is recommended by the National
Association of Real Estate Investment Trusts
(NAREIT). To calculate FFO under the NAREIT
definition, depreciation and amortization expenses related to
the Companys real estate, gains or losses realized from
the disposition of depreciable real estate assets, and certain
extraordinary items are added back or deducted from the
Companys net income (loss). The Company has added back the
impairment loss recognized on the Companys agency
securities and preferred stock and believes that this treatment
is appropriate since NAREIT allows for the exclusion of gains
and losses recognized in connection with the sale of a security
in the determination of FFO. NAREIT does not specifically
discuss how an impairment of a security should be handled.
The Company believes that FFO is an important non-GAAP
measurement because FFO excludes the depreciation expense on
real estate assets and real estate generally appreciates over
time or maintains residual value to a much greater extent than
other depreciable assets such as machinery or equipment.
Additionally, other real estate companies, analysts and
investors utilize FFO in analyzing the results of real estate
companies. The Companys FFO may not be comparable to other
REITs or real estate companies with similar assets. This is due
in part to the differences in capitalization policies used by
different companies and the significant effect these
capitalization policies have on FFO. Real estate costs incurred
in connection with real estate operations which are accounted
for as capital improvements are added to the carrying value of
the property and depreciated over time whereas real estate costs
that are expensed are accounted for as a current period expense.
This affects FFO because costs that are accounted for as
expenses reduce FFO. Conversely, real estate costs associated
with assets that are capitalized and then subsequently
depreciated are added back to net income to calculate FFO.
Although the Company considers FFO to be a useful measure of its
operating performance, FFO should not be considered as an
alternative to net income which is calculated in accordance with
GAAP.
Supplemental
Operating Performance Statistics
As property performance drives the overall financial results for
the Company, it is important to examine a few key property
performance measures. The following are high level performance
measures management uses to gauge the overall performance of our
property portfolio.
Physical occupancy and average annual same store rent per unit
are performance measures that provide management an indication
as to the quality of rental revenues. Physical occupancy is
calculated simply as the percentage of units occupied out of the
total units owned. Average annual same store rent per unit is
calculated as the same store rental revenue divided by the
number of units at same store properties without adjustment for
changes in occupancy levels.
23
Net operating income margin is calculated as the excess of
rental revenues over real estate operating expenses as a
percentage of rental revenues, and provides management an
indication as to the ability of the properties to manage
expenses in the current occupancy environment.
In previous filings, the Company indicated that economic
occupancy was also a high level measure used to gauge the
performance of the portfolio. In the third quarter of 2006, the
Company instituted a change in pricing methodology which will
eliminate the majority of the monthly-recurring concessions
granted to tenants. The change in methodology is in anticipation
of the potential future implementation of a rent optimization
software program. The elimination of the majority of recurring
concessions will not impact net rental revenues, but will
significantly reduce the spread between the economic and
physical occupancy percentages. At most properties, economic
occupancy will be within one or two percentage points of the
physical occupancy. Accordingly, the economic occupancy metric
will no longer provide valuable insight into the Companys
performance.
The following table presents these measures as for the years
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Physical Occupancy
|
|
|
94
|
%
|
|
|
93
|
%
|
|
|
92
|
%
|
Average annual same store rent per
unit(1)
|
|
$
|
8,038
|
|
|
$
|
7,643
|
|
|
|
n/a
|
|
Net operating income margin(2)
|
|
|
57
|
%
|
|
|
52
|
%
|
|
|
45
|
%
|
|
|
|
(1) |
|
Fiscal 2004 average same store rent per unit is not disclosed,
as the same store information for the period from
January 1, 2004 through December 31, 2006 is not as
relevant due to the significant impact that the AFREZ merger had
on the Company. |
|
(2) |
|
Net operating income margin has increased largely due to the
elimination of property management fees in November 2004 as a
result of the acquisition of certain assets from America First
Property Management Companies, LLC, the acquisition of
properties which allow the Company to realize improved margins,
and strong same store revenue growth. |
24
The following tables are presented to provide additional
information regarding property performance
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
Physical Occupancy
|
|
December 31,
|
|
|
December 31,
|
|
Property Name
|
|
2006
|
|
|
2005
|
|
|
Same store properties
|
|
|
|
|
|
|
|
|
Arbor Hills
|
|
|
93
|
%
|
|
|
90
|
%
|
Bluff Ridge Apartments
|
|
|
98
|
%
|
|
|
98
|
%
|
Brentwood Oaks Apartments
|
|
|
97
|
%
|
|
|
98
|
%
|
Coral Point Apartments
|
|
|
93
|
%
|
|
|
94
|
%
|
Covey at Fox Valley
|
|
|
95
|
%
|
|
|
89
|
%
|
Elliots Crossing Apartments
|
|
|
93
|
%
|
|
|
95
|
%
|
Fox Hollow Apartments
|
|
|
86
|
%
|
|
|
84
|
%
|
Greenbriar Apartments
|
|
|
94
|
%
|
|
|
94
|
%
|
Highland Park Apartments
|
|
|
93
|
%
|
|
|
95
|
%
|
Huntsview Apartments
|
|
|
92
|
%
|
|
|
90
|
%
|
Jackson Park Place Apartments
|
|
|
95
|
%
|
|
|
94
|
%
|
Lakes of Northdale Apartments
|
|
|
99
|
%
|
|
|
96
|
%
|
Littlestone of Village Green
|
|
|
97
|
%
|
|
|
95
|
%
|
Misty Springs Apartments
|
|
|
100
|
%
|
|
|
100
|
%
|
Monticello Apartments
|
|
|
89
|
%
|
|
|
93
|
%
|
Oakhurst Apartments
|
|
|
99
|
%
|
|
|
98
|
%
|
Oakwell Farms Apartments
|
|
|
96
|
%
|
|
|
95
|
%
|
Shelby Heights
|
|
|
99
|
%
|
|
|
96
|
%
|
The Hunt Apartments
|
|
|
97
|
%
|
|
|
93
|
%
|
The Park at Countryside
|
|
|
98
|
%
|
|
|
98
|
%
|
The Ponds at Georgetown
|
|
|
93
|
%
|
|
|
88
|
%
|
The Reserve at Wescott Plantation
|
|
|
94
|
%
|
|
|
94
|
%
|
Tregaron Oaks Apartments
|
|
|
96
|
%
|
|
|
96
|
%
|
Watermans Crossing
|
|
|
98
|
%
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
95
|
%
|
|
|
94
|
%
|
Fiscal 2006
acquisitions
|
|
|
|
|
|
|
|
|
Arbors of Dublin
|
|
|
92
|
%
|
|
|
|
|
Cornerstone Apartments
|
|
|
88
|
%
|
|
|
|
|
Jackson Park Place
Apartments Phase II
|
|
|
91
|
%
|
|
|
|
|
Morganton Place
|
|
|
92
|
%
|
|
|
|
|
The Greenhouse
|
|
|
98
|
%
|
|
|
|
|
Village at Cliffdale
|
|
|
90
|
%
|
|
|
|
|
Woodberry Apartments
|
|
|
97
|
%
|
|
|
|
|
Properties held for sale or
sold in 2006
|
|
|
|
|
|
|
|
|
Belvedere Apartments
|
|
|
|
|
|
|
99
|
%
|
Cumberland Trace
|
|
|
81
|
%
|
|
|
|
|
Delta Crossing
|
|
|
|
|
|
|
96
|
%
|
Park at 58th
|
|
|
|
|
|
|
76
|
%
|
Waters Edge Apartments
|
|
|
94
|
%
|
|
|
88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
%
|
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
25
Annual
Rental Revenue per unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
Property Name
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
% Change
|
|
|
Same store properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arbor Hills
|
|
$
|
6,836
|
|
|
$
|
6,750
|
|
|
$
|
86
|
|
|
|
1
|
%
|
Bluff Ridge Apartments
|
|
|
8,217
|
|
|
|
7,842
|
|
|
|
375
|
|
|
|
5
|
%
|
Brentwood Oaks Apartments
|
|
|
8,454
|
|
|
|
8,133
|
|
|
|
321
|
|
|
|
4
|
%
|
Coral Point Apartments
|
|
|
7,143
|
|
|
|
6,537
|
|
|
|
606
|
|
|
|
9
|
%
|
Covey at Fox Valley
|
|
|
10,158
|
|
|
|
9,391
|
|
|
|
767
|
|
|
|
8
|
%
|
Elliots Crossing Apartments
|
|
|
7,673
|
|
|
|
6,816
|
|
|
|
857
|
|
|
|
13
|
%
|
Fox Hollow Apartments
|
|
|
6,255
|
|
|
|
5,996
|
|
|
|
259
|
|
|
|
4
|
%
|
Greenbriar Apartments
|
|
|
6,019
|
|
|
|
5,859
|
|
|
|
160
|
|
|
|
3
|
%
|
Highland Park Apartments
|
|
|
6,406
|
|
|
|
6,436
|
|
|
|
(30
|
)
|
|
|
0
|
%
|
Huntsview Apartments
|
|
|
6,748
|
|
|
|
6,513
|
|
|
|
235
|
|
|
|
4
|
%
|
Jackson Park Place Apartments
|
|
|
8,897
|
|
|
|
8,329
|
|
|
|
568
|
|
|
|
7
|
%
|
Lakes of Northdale Apartments
|
|
|
9,397
|
|
|
|
8,563
|
|
|
|
834
|
|
|
|
10
|
%
|
Littlestone of Village Green
|
|
|
7,426
|
|
|
|
7,163
|
|
|
|
263
|
|
|
|
4
|
%
|
Misty Springs Apartments
|
|
|
8,504
|
|
|
|
8,005
|
|
|
|
499
|
|
|
|
6
|
%
|
Monticello Apartments
|
|
|
9,760
|
|
|
|
10,110
|
|
|
|
(350
|
)
|
|
|
(3
|
)%
|
Oakhurst Apartments
|
|
|
8,249
|
|
|
|
7,991
|
|
|
|
258
|
|
|
|
3
|
%
|
Oakwell Farms Apartments
|
|
|
7,094
|
|
|
|
6,736
|
|
|
|
358
|
|
|
|
5
|
%
|
Shelby Heights
|
|
|
7,289
|
|
|
|
6,692
|
|
|
|
597
|
|
|
|
9
|
%
|
The Hunt Apartments
|
|
|
6,182
|
|
|
|
5,810
|
|
|
|
372
|
|
|
|
6
|
%
|
The Park at Countryside
|
|
|
8,549
|
|
|
|
8,050
|
|
|
|
499
|
|
|
|
6
|
%
|
The Ponds at Georgetown
|
|
|
11,090
|
|
|
|
10,640
|
|
|
|
450
|
|
|
|
4
|
%
|
Watermans Crossing
|
|
|
10,491
|
|
|
|
9,789
|
|
|
|
702
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
$
|
8,038
|
|
|
$
|
7,643
|
|
|
$
|
395
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
acquisitions(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arbors of Dublin
|
|
$
|
5,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cornerstone Apartments
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jackson Park Place
Apartments Phase II
|
|
|
4,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morganton Place
|
|
|
2,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Greenhouse
|
|
|
12,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Village at Cliffdale
|
|
|
1,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Woodberry Apartments
|
|
|
2,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
$
|
4,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties held for sale or
sold in 2006(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Belvedere Apartments
|
|
$
|
4,128
|
|
|
$
|
9,770
|
|
|
|
|
|
|
|
|
|
Cumberland Trace
|
|
|
1,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delta Crossing
|
|
|
5,959
|
|
|
|
6,817
|
|
|
|
|
|
|
|
|
|
Park at 58th
|
|
|
1,665
|
|
|
|
4,994
|
|
|
|
|
|
|
|
|
|
Waters Edge Apartments
|
|
|
9,807
|
|
|
|
9,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
$
|
4,643
|
|
|
$
|
7,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
Property Name
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
% Change
|
|
|
Fiscal 2005 acquisitions and
divestitures(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Reserve at Wescott Plantation
|
|
$
|
9,487
|
|
|
$
|
3,298
|
|
|
|
|
|
|
|
|
|
Tregaron Oaks Apartments
|
|
|
8,457
|
|
|
|
3,273
|
|
|
|
|
|
|
|
|
|
Park Trace Apartments
|
|
|
|
|
|
|
4,297
|
|
|
|
|
|
|
|
|
|
St. Andrews Apartments
|
|
|
|
|
|
|
7,536
|
|
|
|
|
|
|
|
|
|
The Retreat Apartments
|
|
|
|
|
|
|
5,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
$
|
8,972
|
|
|
$
|
4,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rent per unit represents revenue earned by the Company during
the period of ownership. Such amounts are not indicative of the
full year revenues per unit. |
Liquidity
and Capital Resources
The Companys primary source of cash is net rental revenues
generated by its real estate investments. Net rental revenues
from a multifamily apartment property depend on the rental and
occupancy rates of the property. Occupancy rates and rents are
directly affected by the supply of, and demand for, apartments
in the market areas in which a property is located. This, in
turn, is affected by several factors, such as local or national
economic conditions, the amount of new apartment construction
and the affordability of home ownership. In addition, factors
such as government regulation (such as zoning laws), inflation,
real estate and other taxes, labor problems and natural
disasters can affect the economic operations of a property.
The Company uses cash primarily to (i) pay the operating
expenses of its multifamily apartment properties, including the
cost of capital improvements; (ii) pay the operating
expenses of the Companys administration; (iii) pay
debt service on its bonds and mortgages payable;
(iv) acquire additional multifamily apartments and other
investments and (v) pay dividends. The Company expects to
be able to fund dividends from cash generated from operating
activities.
The Companys principal business strategy is to acquire and
operate multifamily apartment properties as long-term
investments. In order to achieve its acquisition strategy, the
Company has the authority to finance the acquisition of
additional real estate in a variety of manners, including
raising additional equity capital. In June 2004, the Company
filed a registration statement for $200 million of capital
stock which may be sold from time to time in order to raise
additional equity capital in order to support the Companys
business strategy. To date, no securities have been sold under
this registration statement.
In addition to the funds that the Company may raise through the
issuance of additional equity capital, it may also be able to
borrow money to finance the acquisition of additional real
estate assets. Borrowing to acquire additional multifamily
apartment properties is in the form of long-term taxable or tax
exempt mortgage loans secured by the acquired properties. In the
third quarter of 2006, the Company entered into a Master Credit
Facility and Reimbursement Agreement (the Facility)
with Wells Fargo Bank, N.A. and Fannie Mae. The Facility was
initially established for $70.5 million and may be expanded
with the consent of the lenders. The Facility provides the
Company the ability to borrow at either fixed or variable
interest rates and also enables the Company to utilize Fannie
Mae credit enhancement on tax exempt bond financings on its
existing portfolio or for future property acquisitions. Upon
closing of the Facility, the Company borrowed $37.6 million
to finance the acquisition of Morganton Place, Village of
Cliffdale, and Woodberry. In addition to these three properties,
the Facility is also secured by first mortgages on The
Greenhouse, Arbors of Dublin, Brentwood Oaks, Covey at Fox
Valley, and Cornerstone.
As of December 31, 2006, the Company had $63.1 million
and $23.1 million in fixed and variable rate borrowings,
respectively, under the Facility. The Facility also provides the
Company the ability, until September 28, 2007, to borrow an
additional $21.6 million at a fixed interest rate of 5.68%.
On January 25, 2007, the Company
27
drew down $10.0 million of the available
$21.6 million. These borrowings have a term of ten years
from the date of the transaction.
The Facility contains representations, warranties, terms and
conditions customary for transactions of this type with Fannie
Mae. These include covenants limiting the Companys
subsidiary borrowers ability to (1) transfer
ownership interests in the subsidiary borrowers or in the real
estate mortgaged as collateral for the Facility, (2) enter
into certain transactions with affiliates, (3) make
distributions to the Company during the continuation of a
Potential Event of Default or an Event of Default (as those
terms are defined in the Facility), and (4) initiate any
public process or make public application to convert any of the
mortgaged properties to a condominium or cooperative.
The Facility also contains financial covenants that require the
Company to maintain at all times (a) a Net Worth (defined
as total stockholders equity plus accumulated
depreciation) of not less than $100 million, (b) cash
and cash equivalents (as defined in the Facility) of not less
than $3 million, and (c) a total balance of cash, cash
equivalents and investments in publicly-traded common or
preferred stock of not less than $4 million. The Company is
in compliance with such covenants.
The Facility contains certain events of default, including
(1) failure to pay principal, interest or any other amount
owing on any other obligation under the Facility when due,
(2) material incorrectness of representations and
warranties when made, (3) breach of covenants,
(4) failure to comply with requirements of any Governmental
Authority (as defined in the Facility) beyond specified cure
periods, (5) bankruptcy and insolvency and (6) entry
by a court of one or more judgments against the borrowers or the
Company in the aggregate amount in excess of $250,000 that
remain unbonded, undischarged or unstayed for a certain number
of days after the entry thereof. If any event of default occurs
and is not cured within applicable grace periods set forth in
the Facility or waived, all loans and other obligations could
become due and immediately payable and the Facility could be
terminated.
The multifamily apartment properties which the Company currently
owns are financed under 22 financings, with an aggregate
principal balance of $249.7 million as of December 31,
2006. These financings consist of twelve tax-exempt bonds with
an aggregate principal balance outstanding of approximately
$111.8 million and nine taxable mortgage notes payable with
a combined principal balance of approximately
$129.0 million (including the companys obligations
under the Facility). Approximately 78% of these obligations bear
interest at a fixed rate with a weighted average interest rate
of 5.12% per annum for the year ended December 31,
2006. The remaining 22% of these obligations bear interest at
variable rates that had a weighted average interest rate of
3.87% per annum, including the effect of interest rate
swaps, for the year ended December 31, 2006. Maturity dates
on these obligations range from December 2007 to November 2044.
The final financing relates to an $8.9 million short-term
loan undertaken to finance the acquisition of Cumberland Trace.
This short-term loan was repaid on January 31, 2007, in
connection with the sale of this property.
In addition, the Company has borrowings in the form of Notes
payable of $2.4 million at December 31, 2006. The
Notes payable, which were assumed as part of the merger with
AFREZ, bear interest at a variable rate with a weighted average
interest rate of 5.84% for the year ended December 31,
2006. On January 15, 2007, the Company redeemed the notes
for a price equal to 100% of the outstanding principal balance
of the notes together with accrued interest to the date fixed
for redemption. The Company was required to redeem the notes, as
under the terms of the indenture, 80% of the net proceeds from
sale of Delta Crossing were required to be utilized to prepay
the notes.
The Company also has short term borrowings under repurchase
agreements of $12.8 million at December 31, 2006 that
bear interest at fixed rates with a weighted average interest
rate of 5.33% for the year ended December 31, 2006 and
mature within one year. Repurchase agreements are utilized by
the Company to meet short term working capital needs, to finance
certain investments, such as agency securities or
mezzanine-level financings and, in 2005, to finance a portion of
the cash consideration paid in the acquisition of the Advisor.
Repurchase agreements take the form of a sale of a security to a
counterparty at an agreed upon price in return for the
counterpartys simultaneous agreement to resell the same
securities back to the owner at a future date at a higher price.
Although structured as a sale and repurchase obligation, a
repurchase agreement operates as a borrowing under which the
Company pledges agency securities that it already owns as
collateral to secure a short-term loan with a counterparty. The
borrowings are then used to acquire agency securities, which
themselves may be used as collateral for additional borrowings
under repurchase agreements. The difference between the sale
and
28
repurchase price is the cost, or interest expense, of borrowing
under the repurchase agreements. The repurchase agreements may
require the Company to pledge additional assets to the lender in
the event the market value of existing pledged collateral
declines below a specified percentage. The pledged collateral
may fluctuate in value due to, among other things, principal
repayments, market changes in interest rates and credit quality.
The Company retains beneficial ownership of the pledged
collateral, including the right to distributions, while the
counterparty maintains custody of the collateral securities. At
the maturity of a repurchase agreement, the Company is required
to repay the loan and concurrently receive back its pledged
collateral from the lender or, may renew the repurchase
agreement at the then prevailing financing rate.
To finance the 2005 loan made to the Developer which partially
financed the military housing privatization project at Offutt
Air Force Base and the Advisor acquisition, the Company utilized
repurchase agreements collateralized by GNMA securities of
certain 100% owned properties. Other than the collateral, the
terms of these repurchase agreements are similar to those
described above.
The January 25, 2007 borrowing under the Facility was
utilized by the Company to repay $7.9 million of the
$12.8 million outstanding repurchase agreements. This
transaction allows the Company to fix the interest rates on
formerly revolving borrowings at a rate which is comparable to
the current variable rates being paid on this debt. The
remaining proceeds were utilized to repay the $2.4 million
of Notes payable outstanding.
The Company may use derivatives and other hedging strategies to
help mitigate interest rate risks on the long-term borrowings
used to finance its properties and the prepayment and interest
rate risks on its agency securities. The Company may use
interest rate caps, interest rate swaps or other derivative
instruments to achieve these goals, but the timing and amount of
hedging transactions, if any, will depend on numerous market
conditions, including, but not limited to, the interest rate
environment, managements assessment of the future changes
in interest rates and the market availability and cost of
entering into such hedge transactions. In addition,
managements ability to employ hedging strategies may be
restricted by requirements for maintaining REIT status. It is
against Management policy to enter into derivatives for
speculative or trading purposes.
Cash provided by operating activities for the year ended
December 31, 2006 increased by $4.7 million compared
to the same period a year earlier due to increased operating
income generated by the 2006 acquisitions and the same store
properties and the absence of contract termination charges.
In 2006, $43.0 million of cash was used for investing
activities. The Company utilized approximately
$144.1 million to acquire the Greenhouse, Arbors of Dublin,
Jackson Park Place- Phase II, Cumberland Trace, Morganton
Place, Woodberry Apartments, Village at Cliffdale and the
Cornerstone Apartments. These acquisitions were partially
financed with $34.9 million in proceeds from the sale of
Park at 58th, Belvedere Apartments, and Delta Crossing, and the
release of restricted cash. The restricted cash was generated in
2005 through the placement of $29.3 million of the proceeds
from the sale of St. Andrews in a Section 1031 exchange
account. The use of this account allows the Company, upon
meeting certain conditions, to defer the majority of the taxable
gain from the sale. Restricted cash was also generated in 2005
as result of the sale of Park Trace and The Retreat. Prior to
their sales, these properties collateralized bonds payable. When
Park Trace and The Retreat were sold, the Company utilized
$16.6 million of cash from the sales as replacement
collateral for those bonds. The Company was able to access all
but $1.8 million of the cash collateral in 2006 through the
placement of Covey at Fox Valley into the credit facility and
substitution of Jackson Park Place-Phase II as collateral for
the Coral Point debt.
The Company also generated $18.0 million of cash through
the principal repayment and sale of its agency security
portfolio and $7.1 million from the prepayment of the
mezzanine loan made by the Company to the developer of a
military housing project at Offutt AFB.
Financing activities provided $27.9 million of cash in
2006. The Company issued $72.0 million of mortgage notes to
finance approximately 50% of the cost of the 2006 acquisitions.
Cash from financing activities was utilized to pay
$11.2 million in dividends and dividend equivalents and to
repay $23.4 million of borrowings under repurchase
agreements. An additional $8.1 million of cash was utilized
to make principal payments on bonds and mortgage notes. Lastly,
approximately $1.5 million of cash was utilized to pay
up-front costs incurred in connection with mortgages issued
during 2006. These costs will be amortized over the respective
life of the mortgages.
29
Off
Balance Sheet Arrangements
As of December 31, 2006 and 2005, the Company did not have
any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
In addition, the Company does not engage in trading activities
involving non-exchange traded contracts. As such, the Company is
not materially exposed to any financing, liquidity, market, or
credit risk that could arise if it had engaged in such
relationships. The Company does not have any relationships or
transactions with persons or entities that derive benefits from
their non-independent relationships with the Company or its
related parties other than what is disclosed in Note 14 to
the Companys consolidated financial statements.
Contractual
Obligations
The Company had the following contractual obligations as of
December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
2-3
|
|
|
4-5
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Notes payable
|
|
$
|
2,413
|
|
|
$
|
|
|
|
$
|
2,413
|
|
|
$
|
|
|
|
$
|
|
|
Bonds and mortgage notes payable
|
|
|
249,651
|
|
|
|
15,354
|
|
|
|
13,611
|
|
|
|
11,998
|
|
|
|
208,688
|
|
Borrowings under repurchase
agreements
|
|
|
12,825
|
|
|
|
12,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
264,889
|
|
|
$
|
28,179
|
|
|
$
|
16,024
|
|
|
$
|
11,998
|
|
|
$
|
208,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is also contractually obligated to pay interest on
its long-term debt obligations; this interest is not included in
the table above. The weighted average interest rate of the
long-term debt obligations outstanding as of December 31,
2006 was approximately 5.12% for fixed-rate debt and 3.87% for
variable-rate debt.
In January 2007, the Company repaid $7.9 million of the
repurchase agreements as they came due. The remaining
$4.9 million will either be paid down or renewed with
repurchase agreements having similar terms, although interest
rates may continue to increase. Additionally, the Company
redeemed the $2.4 million of Notes payable. These
transactions were funded through $10.0 million of
additional borrowings under the Facility. These borrowings
require monthly payments of interest for the next five years,
and payments of principal and interest in years six through ten.
Inflation
Substantially all of the resident leases at the Companys
multifamily apartment properties allow, at the time of renewal,
for adjustments in the rent payable, and thus may enable the
Company to seek rent increases. The short-term nature of these
leases, substantially all of which have terms of one year or
less, serves to reduce the risk to the Company of the adverse
effects of inflation; however, market conditions may prevent the
Company from increasing rental rates in amounts sufficient to
offset higher operating expenses.
Recent
Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48),
which clarifies the accounting for uncertainty in tax positions.
This Interpretation requires that the Company recognize in its
financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of
FIN 48 are effective as of the beginning of fiscal 2007.
The Company does not anticipate the adoption of this standard
will have a material impact on the consolidated financial
statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 is
30
effective in fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact that the
adoption of this statement will have on the consolidated
financial statements.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,
(SAB 108) to address diversity in practice
in quantifying financial statement misstatements and the
potential under current practice for the build up of improper
amounts on the balance sheet. SAB 108, effective for the
Companys fiscal year ended December 31, 2006,
provides guidance on the consideration of the effects of prior
year misstatements in quantifying current year misstatements for
the purpose of a materiality assessment. The adoption of
SAB 108 did not have an impact on the Companys
consolidated financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standard No. 159 (SFAS 159),
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115. SFAS 159 permits entities to choose, at
specified election dates, to measure many financial instruments
and certain other items at fair value that are not currently
measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected would be reported
in earnings at each subsequent reporting date. The statement
also establishes presentation and disclosure requirements in
order to facilitate comparisons between entities choosing
different measurement attributes for similar types of assets and
liabilities. SFAS 159 does not affect existing accounting
requirements for certain assets and liabilities to be carried at
fair value. SFAS 159 is effective as of the beginning of a
reporting entitys first fiscal year that begins after
November 15, 2007. The Company is currently evaluating the
requirements of SFAS 159, and has not yet determined the
impact on its consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
The Companys primary market risk exposure is interest rate
risk on its borrowings, credit risks of cash concentrations and
credit risks on its interest rate swap and cap agreements. Each
of their risks is discussed below.
Interest
Rate Risk on Bonds and Mortgage Notes Payable
The Companys exposure to market risk for changes in
interest rates relates primarily to its variable rate long-term
borrowings and its repurchase agreements. Interest rate risk is
highly sensitive to many factors, including governmental,
monetary and tax policies, domestic and international economic
and political considerations and other factors that are beyond
the Companys control.
The Companys interest rate risk management objective is to
limit the impact of interest rate changes on earnings and cash
flows and to lower its overall borrowing costs. To achieve its
objectives, the Company borrows primarily at fixed rates and
also enters into derivative financial instruments, such as
interest rate swaps and caps, in order to manage its variable
interest rate risk. The Company has not entered into derivative
instrument transactions for speculative purposes.
At December 31, 2006, the Company had approximately
$12.8 million in repurchase agreement borrowings, with a
weighted average interest rate of 5.33%. Variation in interest
rates affect the Companys cost of borrowings on these
agreements. Had average interest rates on the Companys
repurchase agreement borrowings increased or decreased by
100 basis points during the year ended December 31,
2006, interest expense on the repurchase agreements would have
increased or decreased by approximately $128,000.
As of December 31, 2006, approximately 78% of the
Companys long-term borrowings consisted of fixed-rate
financing. The remaining 22% consisted of variable-rate
financing. Variations in interest rates affect the
Companys cost of borrowing on its variable-rate financing.
The interest rates payable by the Company on these obligations
increase or decrease with certain index interest rates. If the
Companys borrowing costs increase, the amount of cash
available for distribution to shareholders will decrease. Had
the average index rates increased or decreased by 100 basis
points during the year ended December 31, 2006, interest
expense on the Companys variable-rate debt financing would
have increased or decreased by approximately $460,000.
31
The following table presents information about the
Companys financial instruments that are sensitive to
changes in interest rates, including principal amounts and
weighted average interest rates by year of maturity for the
Companys bonds and mortgage payable (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Rate Borrowings
|
|
|
Variable-Rate Borrowings
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Principal
|
|
|
Average
|
|
|
|
|
|
Principal
|
|
|
Average
|
|
Maturity
|
|
Amount
|
|
|
Interest Rate
|
|
|
Maturity
|
|
|
Amount
|
|
|
Interest Rate(1)
|
|
|
2007
|
|
$
|
1,085
|
|
|
|
6.01
|
%
|
|
|
2007
|
|
|
$
|
14,269
|
|
|
|
4.09
|
%
|
2008
|
|
|
1,151
|
|
|
|
6.01
|
%
|
|
|
2008
|
|
|
|
129
|
|
|
|
4.09
|
%
|
2009
|
|
|
12,192
|
|
|
|
6.84
|
%
|
|
|
2009
|
|
|
|
139
|
|
|
|
4.09
|
%
|
2010
|
|
|
1,014
|
|
|
|
5.77
|
%
|
|
|
2010
|
|
|
|
4,564
|
|
|
|
4.09
|
%
|
2011
|
|
|
6,420
|
|
|
|
6.72
|
%
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
172,929
|
|
|
|
4.93
|
%
|
|
|
Thereafter
|
|
|
|
35,759
|
|
|
|
3.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
194,791
|
|
|
|
|
|
|
|
|
|
|
$
|
54,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Weighted average rate for the year ended December 31, 2006. |
The following interest rate swap and cap contracts owned by the
Company do not qualify for hedge accounting and thus are
accounted for as free standing financial instruments which are
marked to market each period through the statement of operations
as a component of interest expense. As of December 31,
2006, notional amounts and terms are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps and Caps
|
|
|
|
|
|
Counterparty
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Receive/
|
|
|
Notional
|
|
|
Pay
|
|
|
|
Maturity
|
|
Amount
|
|
|
Cap Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Fixed to Variable
|
|
September 20, 2007
|
|
$
|
5,300
|
(4)
|
|
|
7.13
|
%
|
|
$
|
5,300
|
(4)
|
|
|
4.09
|
%(3)
|
Fixed to Variable
|
|
December 6, 2007
|
|
$
|
4,950
|
(1)(4)
|
|
|
7.75
|
%
|
|
$
|
4,950
|
(1)(4)
|
|
|
4.09
|
%(3)
|
Fixed to Variable
|
|
January 22, 2009
|
|
$
|
8,300
|
(4)
|
|
|
5.38
|
%
|
|
$
|
8,300
|
(4)
|
|
|
4.09
|
%(3)
|
Fixed to Variable
|
|
July 13, 2009
|
|
$
|
6,930
|
(4)
|
|
|
7.25
|
%
|
|
$
|
6,930
|
(4)
|
|
|
4.09
|
%(3)
|
Fixed to Variable
|
|
July 13, 2009
|
|
$
|
3,980
|
(4)
|
|
|
7.50
|
%
|
|
$
|
3,980
|
(4)
|
|
|
4.09
|
%(3)
|
Variable to Fixed
|
|
February 3, 2009
|
|
$
|
8,100
|
|
|
|
3.44
|
%(2)
|
|
$
|
8,100
|
|
|
|
2.82
|
%
|
Variable to Fixed
|
|
June 25, 2009
|
|
$
|
10,910
|
|
|
|
3.44
|
%(2)
|
|
$
|
10,910
|
|
|
|
3.30
|
%
|
Interest Rate Cap
|
|
December 22, 2009
|
|
$
|
13,400
|
|
|
|
4.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Interest Rate Cap
|
|
December 22, 2009
|
|
$
|
12,750
|
|
|
|
4.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Interest Rate Cap
|
|
September 15, 2011
|
|
$
|
11,320
|
|
|
|
6.22
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
Notional amount is tied to the Exchange at Palm Bay bond payable
and adjusts downward as principal payments are made on the bond
payable. |
|
(2) |
|
Weighted average Bond Market Association rate for the year ended
December 31, 2006. |
|
(3) |
|
Weighted average Bond Market Association rate for the year ended
December 31, 2006 plus 0.65%. |
|
(4) |
|
These are total return swaps. |
The $10.9 million variable to fixed rate swap was entered
into on top of and to mitigate the variable rate risk of those
fixed to variable rate swap maturing July 13, 2009. It
effectively fixes the interest rate on $10.9 million of
bonds payable at 3.30%, plus the 0.65% variable rate spread,
through June 25, 2009.
The $8.1 million variable to fixed rate swap was entered
into on top of and to mitigate the variable rate risk of the
fixed to variable rate swap maturing January 22, 2009. It
effectively fixes the interest rate on $8.1 million of
bonds payable at 2.82%, plus the 0.65% variable rate spread,
through February 3, 2009.
32
As of December 31, 2006, the Company had two interest rate
swaps which qualified, and have been designated as cash flow
hedges of changes in variable interest rates. The notional
amounts and terms are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Receive
|
|
|
Notional
|
|
|
Pay
|
|
|
|
Maturity
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Variable to Fixed
|
|
January 15, 2012
|
|
$
|
11,320
|
|
|
|
3.44
|
%(1)
|
|
$
|
11,320
|
|
|
|
3.44
|
%
|
Variable to Fixed
|
|
December 15, 2016
|
|
$
|
12,410
|
|
|
|
3.80
|
%(2)
|
|
$
|
12,410
|
|
|
|
3.69
|
%
|
|
|
|
(1) |
|
Weighted average Bond Market Association rate for the year ended
December 31, 2006. |
|
(2) |
|
Swap was entered into on December 15, 2006. Amount is the
average Bond Market rate for the last two weeks of 2006. |
As the above tables incorporate only those exposures or
positions that existed as of December 31, 2006, they do not
consider those exposures or positions that could arise after
that date. The Companys ultimate economic impact with
respect to interest rate fluctuations will depend on the
exposures that arise during the period, the Companys risk
mitigating strategies at that time and interest rates.
Credit
Risk of Cash Concentrations
The Companys cash and cash equivalents are deposited
primarily in a trust account at a single financial institution
and are not covered by the Federal Deposit Insurance Corporation.
Credit
Risk of Interest Rate Swap and Cap Agreements
The Companys interest rate swap and cap agreements create
credit risk. Credit risk arises from the potential failure of
counterparties to perform in accordance with the terms of their
contracts. The Companys risk management policies define
parameters of acceptable market risk and limit exposure to
credit risk. Credit exposure resulting from derivative financial
instruments is represented by their fair value amounts,
increased by an estimate of potential adverse position exposure
arising from changes over time in interest rates, maturities and
other relevant factors.
33
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of America First
Apartment Investors, Inc.
We have audited the accompanying consolidated balance sheets of
America First Apartment Investors, Inc. and subsidiaries (the
Company) as of December 31, 2006 and 2005, and
the related consolidated statements of operations and
comprehensive income (loss), shareholders equity, and cash
flows for each of the three years in the period ended
December 31, 2006. Our audits also included the financial
statement schedule listed in the Index at Item 15. These
financial statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
America First Apartment Investors, Inc. and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 7, 2007 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
Omaha, Nebraska
March 7, 2007
34
AMERICA
FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
5,724
|
|
|
$
|
4,743
|
|
Restricted cash
|
|
|
9,391
|
|
|
|
53,279
|
|
Real estate assets:
|
|
|
|
|
|
|
|
|
Land
|
|
|
42,953
|
|
|
|
32,549
|
|
Building and improvements
|
|
|
345,296
|
|
|
|
222,814
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
388,249
|
|
|
|
255,363
|
|
Less: accumulated depreciation
|
|
|
(46,517
|
)
|
|
|
(36,200
|
)
|
|
|
|
|
|
|
|
|
|
Real estate assets, net
|
|
|
341,732
|
|
|
|
219,163
|
|
Assets of discontinued operations
|
|
|
15,540
|
|
|
|
20,570
|
|
Investments in agency securities,
at fair value
|
|
|
|
|
|
|
18,189
|
|
Investments in corporate equity
securities, at fair value
|
|
|
3,526
|
|
|
|
4,073
|
|
Investment in mezzanine loan
|
|
|
|
|
|
|
7,173
|
|
In-place lease intangibles, net of
accumulated amortization of $7,105 and $5,377, respectively
|
|
|
1,931
|
|
|
|
550
|
|
Other assets
|
|
|
7,920
|
|
|
|
6,219
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
385,764
|
|
|
$
|
333,959
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Accounts payable and accrued
expenses
|
|
$
|
11,332
|
|
|
$
|
8,996
|
|
Dividends payable
|
|
|
2,872
|
|
|
|
2,759
|
|
Notes payable
|
|
|
2,413
|
|
|
|
2,413
|
|
Bonds and mortgage notes payable
|
|
|
249,651
|
|
|
|
185,764
|
|
Borrowings under repurchase
agreements
|
|
|
12,825
|
|
|
|
36,202
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
279,093
|
|
|
|
236,134
|
|
|
|
|
|
|
|
|
|
|
Contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock, $0.01 per share
par value; 500,000,000 shares authorized, 11,045,558 and
11,035,558 issued and outstanding
|
|
|
110
|
|
|
|
110
|
|
Additional paid-in capital
|
|
|
110,421
|
|
|
|
110,157
|
|
Accumulated deficit
|
|
|
(4,084
|
)
|
|
|
(12,318
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
224
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
106,671
|
|
|
|
97,825
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
385,764
|
|
|
$
|
333,959
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
35
AMERICA
FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
49,134
|
|
|
$
|
39,207
|
|
|
$
|
26,320
|
|
Other revenues
|
|
|
223
|
|
|
|
382
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
49,357
|
|
|
|
39,589
|
|
|
|
26,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operating
|
|
|
21,208
|
|
|
|
18,808
|
|
|
|
14,488
|
|
Property management
|
|
|
1,039
|
|
|
|
799
|
|
|
|
132
|
|
General and administrative
|
|
|
5,335
|
|
|
|
5,656
|
|
|
|
3,865
|
|
Depreciation
|
|
|
10,436
|
|
|
|
7,748
|
|
|
|
4,951
|
|
In-place lease amortization
|
|
|
1,728
|
|
|
|
2,674
|
|
|
|
2,130
|
|
Intangible asset impairment
|
|
|
199
|
|
|
|
|
|
|
|
|
|
Contract termination costs
|
|
|
|
|
|
|
11,619
|
|
|
|
5,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
39,945
|
|
|
|
47,304
|
|
|
|
31,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
9,412
|
|
|
|
(7,715
|
)
|
|
|
(5,118
|
)
|
Interest and dividend income
|
|
|
1,995
|
|
|
|
1,725
|
|
|
|
1,252
|
|
(Loss) gain on redemption of
securities
|
|
|
(64
|
)
|
|
|
|
|
|
|
212
|
|
Impairment of securities
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(11,231
|
)
|
|
|
(8,771
|
)
|
|
|
(5,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(346
|
)
|
|
|
(14,761
|
)
|
|
|
(8,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
706
|
|
|
|
1,107
|
|
|
|
56
|
|
Gain on sales of discontinued
operations
|
|
|
19,197
|
|
|
|
24,606
|
|
|
|
5,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
19,557
|
|
|
|
10,952
|
|
|
|
(2,765
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on
securities arising during the period
|
|
|
(13
|
)
|
|
|
(282
|
)
|
|
|
(344
|
)
|
Reclassification adjustments for
losses (gains) realized in net income
|
|
|
378
|
|
|
|
|
|
|
|
(212
|
)
|
Unrealized gains (losses) on
derivatives
|
|
|
(17
|
)
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
|
|
(173
|
)
|
|
|
(556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
19,905
|
|
|
$
|
10,779
|
|
|
$
|
(3,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.03
|
)
|
|
$
|
(1.40
|
)
|
|
$
|
(1.07
|
)
|
Income from discontinued operations
|
|
|
1.80
|
|
|
|
2.44
|
|
|
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.77
|
|
|
$
|
1.04
|
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
1.02
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares outstanding basic and diluted
|
|
|
11,037
|
|
|
|
10,513
|
|
|
|
8,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
36
AMERICA
FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
For the
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Stock
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance, January 1, 2004
|
|
|
5,075
|
|
|
$
|
51
|
|
|
$
|
47,418
|
|
|
$
|
(714
|
)
|
|
$
|
605
|
|
|
$
|
47,360
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,765
|
)
|
|
|
|
|
|
|
(2,765
|
)
|
Issuance of common stock
|
|
|
5,436
|
|
|
|
54
|
|
|
|
55,327
|
|
|
|
|
|
|
|
|
|
|
|
55,381
|
|
Stock option compensation
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Unrealized holding losses on
securities arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(556
|
)
|
|
|
(556
|
)
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,149
|
)
|
|
|
|
|
|
|
(9,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
10,511
|
|
|
|
105
|
|
|
|
102,766
|
|
|
|
(12,628
|
)
|
|
|
49
|
|
|
|
90,292
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,952
|
|
|
|
|
|
|
|
10,952
|
|
Issuance of common stock
|
|
|
525
|
|
|
|
5
|
|
|
|
7,329
|
|
|
|
|
|
|
|
|
|
|
|
7,334
|
|
Stock option compensation
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
Unrealized holding losses on
securities arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(282
|
)
|
|
|
(282
|
)
|
Unrealized gains (losses) on
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
109
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,642
|
)
|
|
|
|
|
|
|
(10,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
11,036
|
|
|
|
110
|
|
|
|
110,157
|
|
|
|
(12,318
|
)
|
|
|
(124
|
)
|
|
|
97,825
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,557
|
|
|
|
|
|
|
|
19,557
|
|
Issuance of common stock
|
|
|
10
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
Stock option compensation
|
|
|
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
178
|
|
Reclassification adjustment for
losses recognized in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
378
|
|
|
|
378
|
|
Unrealized holding losses on
securities arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Unrealized gains (losses) on
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
(17
|
)
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,323
|
)
|
|
|
|
|
|
|
(11,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
11,046
|
|
|
$
|
110
|
|
|
$
|
110,421
|
|
|
$
|
(4,084
|
)
|
|
$
|
224
|
|
|
$
|
106,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
37
AMERICA
FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,557
|
|
|
$
|
10,952
|
|
|
$
|
(2,765
|
)
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
10,812
|
|
|
|
9,317
|
|
|
|
7,122
|
|
Gain on sales of discontinued
operations
|
|
|
(19,197
|
)
|
|
|
(24,606
|
)
|
|
|
(5,973
|
)
|
Impairment of securities
|
|
|
367
|
|
|
|
|
|
|
|
|
|
Loss (gain) on redemption of
securities
|
|
|
64
|
|
|
|
|
|
|
|
(212
|
)
|
Loss on extinguishment of debt
|
|
|
91
|
|
|
|
|
|
|
|
|
|
Intangible asset impairment
|
|
|
199
|
|
|
|
|
|
|
|
|
|
Contract termination costs
|
|
|
|
|
|
|
11,619
|
|
|
|
5,911
|
|
Change in fair value on interest
rate swap agreements
|
|
|
179
|
|
|
|
(85
|
)
|
|
|
(273
|
)
|
Amortization
|
|
|
1,919
|
|
|
|
3,269
|
|
|
|
3,321
|
|
Non-cash stock option compensation
|
|
|
178
|
|
|
|
62
|
|
|
|
21
|
|
Change in other assets
|
|
|
560
|
|
|
|
(272
|
)
|
|
|
385
|
|
Change in accounts payable and
accrued expenses
|
|
|
1,351
|
|
|
|
1,104
|
|
|
|
704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
16,080
|
|
|
|
11,360
|
|
|
|
8,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital improvements and real
estate acquisitions
|
|
|
(147,444
|
)
|
|
|
(27,067
|
)
|
|
|
(5,398
|
)
|
Proceeds from sales of discontinued
operations
|
|
|
34,873
|
|
|
|
54,352
|
|
|
|
11,076
|
|
Principal and sales proceeds
received on agency securities
|
|
|
18,036
|
|
|
|
7,667
|
|
|
|
11,004
|
|
Change in restricted cash
|
|
|
43,888
|
|
|
|
(45,240
|
)
|
|
|
263
|
|
Proceeds from redemption of
corporate equity securities
|
|
|
583
|
|
|
|
125
|
|
|
|
3,876
|
|
Investment in mezzanine loan
|
|
|
|
|
|
|
(7,444
|
)
|
|
|
|
|
Proceeds from principal repayment
of mezzanine loan
|
|
|
7,094
|
|
|
|
350
|
|
|
|
|
|
Acquisition of America First
Advisory Corporation
|
|
|
|
|
|
|
(4,065
|
)
|
|
|
|
|
Acquisition of America First Real
Estate Investment Partners, LP
|
|
|
|
|
|
|
|
|
|
|
(3,963
|
)
|
Purchase of property management
assets
|
|
|
|
|
|
|
|
|
|
|
(6,898
|
)
|
Cash received in acquisition of
America First Real Estate Investment Partners, LP
|
|
|
|
|
|
|
|
|
|
|
8,400
|
|
Acquisition of agency securities
|
|
|
|
|
|
|
|
|
|
|
(1,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by
investing activities
|
|
|
(42,970
|
)
|
|
|
(21,322
|
)
|
|
|
16,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from mortgage notes payable
|
|
|
71,988
|
|
|
|
12,370
|
|
|
|
|
|
Borrowings under repurchase
agreements
|
|
|
|
|
|
|
11,300
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
86
|
|
|
|
|
|
|
|
44
|
|
Debt financing costs paid
|
|
|
(1,534
|
)
|
|
|
(140
|
)
|
|
|
(419
|
)
|
Dividends and dividend equivalents
paid
|
|
|
(11,191
|
)
|
|
|
(10,511
|
)
|
|
|
(7,790
|
)
|
Repayments of borrowings under
repurchase agreements
|
|
|
(23,377
|
)
|
|
|
(2,973
|
)
|
|
|
(12,111
|
)
|
Principal payments on bonds and
mortgage notes payable
|
|
|
(8,101
|
)
|
|
|
(5,975
|
)
|
|
|
(1,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
financing activities
|
|
|
27,871
|
|
|
|
4,071
|
|
|
|
(21,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
|
|
981
|
|
|
|
(5,891
|
)
|
|
|
3,716
|
|
Cash and cash equivalents at
beginning of year
|
|
|
4,743
|
|
|
|
10,634
|
|
|
|
6,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at year
end
|
|
$
|
5,724
|
|
|
$
|
4,743
|
|
|
$
|
10,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
11,467
|
|
|
$
|
8,500
|
|
|
$
|
5,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared but not paid
|
|
$
|
2,872
|
|
|
$
|
2,759
|
|
|
$
|
2,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares for America
First Advisory Corporation acquisition
|
|
$
|
|
|
|
$
|
7,334
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumption of debt in connection
with property acquisition
|
|
$
|
|
|
|
$
|
12,218
|
|
|
$
|
26,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares for America
First Real Estate Investment Partners, L.P. merger
|
|
$
|
|
|
|
$
|
|
|
|
$
|
55,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relinquishment of debt in
connection with property disposition
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
38
America First Apartment Investors, Inc. (the
Company) is a Maryland corporation which, as of
December 31, 2006, owned and operated 33 multifamily
apartment projects and an office warehouse facility. The Company
is also authorized to invest in mortgage-backed securities and
other real estate assets.
The Company is treated as a Real Estate Investment Trust
(REIT) for Federal income tax purposes. As a REIT,
the Company is generally not subject to Federal income taxes on
distributed income. To maintain qualification as a REIT, the
Company must meet a number of organizational and operational
requirements, including a requirement to distribute at least 90%
of the Companys ordinary taxable income to shareholders.
The Company is the successor in interest to America First
Apartment Investors, L.P. (the Partnership) which
merged with and into the Company as of January 1, 2003.
Prior to that time the Company had no material assets or
business operations. As a result of this merger, the Company
assumed the assets, liabilities and business operations of the
Partnership. In addition, on June 3, 2004, America First
Real Estate Investment Partners, L.P. (AFREZ) merged
with and into the Company as more fully described in
Note 6. As a result of this merger, the Company acquired
the assets, assumed the liabilities and business operations of
AFREZ.
|
|
2.
|
Summary
of Significant Accounting Policies
|
A) Financial
Statement Presentation
The consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
B) Cash
and Cash Equivalents
Cash and cash equivalents include highly liquid investments with
maturities of three months or less when purchased.
C) Restricted
Cash
At December 31, 2006, restricted cash, which is legally
restricted to its use, consisted primarily of resident security
deposits, required maintenance reserves, escrowed funds and
collateral for various interest rate swap agreements. At
December 31, 2005, restricted cash also included
$29.5 million of funds held in a tax-deferred
Section 1031 exchange account and $16.7 million of
cash providing additional collateral on the tax-exempt-mortgage
bonds issued to finance Coral Point Apartments and Covey at Fox
Valley. During fiscal 2006, these restrictions were met, and the
Company primarily used the funds to partially finance
acquisitions of additional real estate assets.
D) Real
Estate Assets
The Companys real estate assets are carried at cost less
accumulated depreciation. Depreciation of real estate is based
on the estimated useful life of the related asset, generally
271/2 years
on multifamily residential apartment buildings,
311/2 years
on commercial buildings and five to fifteen years on capital
improvements and is calculated using the straight-line method.
Depreciation of improvements on the Companys commercial
property is based on the term of the related tenant lease using
the straight-line method. Maintenance and repairs are charged to
expense as incurred, while significant improvements, renovations
and replacements are capitalized.
Management reviews each property for impairment whenever events
or changes in circumstances indicate that the carrying value of
a property may not be recoverable. The review of recoverability
is based upon comparing the carrying value of each real estate
property to the sum of its estimated undiscounted future cash
flows. If impairment
39
exists due to the inability to recover the carrying value of a
property, an impairment loss is recorded to the extent that the
carrying value of the property exceeds its estimated fair value.
There were no real estate impairment losses incurred
and/or
recorded during the three years in the period ended
December 31, 2006.
The Company allocates the purchase price of property
acquisitions to the acquired tangible assets, including land,
buildings and identifiable intangible assets based on the fair
value of those assets and liabilities. Identifiable intangible
assets include the value of in-place leases.
The fair value of the tangible assets is determined based on the
assumption that the building is vacant. In-place lease
intangibles arise as a result of the allocation of a portion of
the total acquisition costs of a property to leases in existence
as of the date of acquisition. The estimated valuation of
in-place leases is calculated by applying a risk-adjusted
discount rate to the projected cash flow realized at each
property during the estimated
lease-up
period it would take to lease these properties. This allocated
cost is amortized over the average remaining term of the leases.
E) Investment
in Agency Securities and Corporate Equity
Securities
Agency securities consist of mortgage-backed securities issued
or guaranteed as to payment of principal or interest by an
agency of the United States government or a federally-chartered
corporation such as the Federal National Mortgage Association,
Government National Mortgage Association, or the Federal Home
Loan Mortgage Corporation. Corporate equity securities consist
of shares of other REITs and similar real estate companies.
The Company accounts for its investments in securities in
accordance with Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and has classified its investments in
securities as
available-for-sale.
Securities are carried at fair market value, with unrealized
gains and losses reported in shareholders equity as a
component of other comprehensive income. Fair value is
determined by reference to broker quotes.
Premiums paid to acquire mortgage-backed securities are
amortized using the effective yield method over the life of the
related mortgage pool.
Security transactions are recorded on the trade date and
realized gains or losses on security sales are based upon the
specific identification method.
Interest income is recorded as earned and dividend income is
recorded on the ex-dividend date.
F) Debt
Financing Costs
Debt financing costs are capitalized and amortized on a
straight-line basis over the stated life of the term of the
related debt which approximates the effective yield method. Debt
financing costs of approximately $2.0 million and $730,000
are included in other assets on the Companys Consolidated
Balance Sheets as of December 31, 2006 and 2005,
respectively. These costs are net of accumulated amortization of
$1.1 million and $1.7 million as of December 31,
2006 and 2005, respectively.
G) Borrowings
under Repurchase Agreements
With a repurchase agreement, the Company sells a security to a
lender and agrees to repurchase the same or similar securities
in the future for a price that is higher than the original sales
price. The difference between the sales price that the Company
receives and the repurchase price that the Company pays
represents interest paid to the lender. Although structured as a
sale and repurchase obligation, a repurchase agreement operates
as a financing under which the Company pledges its securities as
collateral to secure a loan which is equal in value to a
specified percentage of the estimated fair value of the pledged
collateral. The Company retains beneficial ownership of the
pledged collateral. At the maturity of the repurchase agreement,
the Company is required to repay the loan and concurrently
receives back its pledged collateral from the lender or, with
the consent of the lender, the Company may renew such agreement
at the then prevailing financing rate. These repurchase
agreements may require the Company to pledge additional assets
to the lender in the event the estimated fair value of the
existing pledged collateral declines.
40
H) Revenue
Recognition
The Company leases multifamily rental units under operating
leases with terms of one year or less. Rental revenue is
recognized, net of rental concessions, on a straight-line method
over the related lease term. Rental income on commercial
property is recognized on a straight-line basis over the term of
each operating lease.
I) Income
Taxes
The Company operates as, and has elected to be taxed as, a REIT
under the Internal Revenue Code. To qualify as a REIT, the
Company must meet a number of organizational and operational
requirements, including a requirement to distribute at least 90%
of adjusted taxable income to common shareholders. The Company
intends to adhere to these requirements and maintain the REIT
status. As a REIT, the Company is generally not subject to
corporate level federal or state income tax on taxable income
distributed currently to shareholders. If the Company fails to
qualify as a REIT in any taxable year, it will be subject to
federal and state income taxes at regular corporate rates
(including any applicable alternative minimum tax) and may not
be able to qualify as a REIT for four subsequent taxable years.
Even though the Company qualifies for taxation as a REIT, it may
be subject to certain state and local taxes on income and
property, and to federal income and excise taxes on
undistributed taxable income.
Taxable income differs from income for financial statement
purposes, primarily due to differences for tax purposes in the
estimated useful lives and methods used to compute depreciation
and the carrying value (basis) of the investment in real
properties. The following table reconciles net income (loss) as
reflected in the Companys financial statements to REIT
taxable income for 2006 (estimated), 2005, and 2004 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss) per financial
statements
|
|
$
|
19,557
|
|
|
$
|
10,952
|
|
|
$
|
(2,765
|
)
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Add differences in deductions for
depreciation and amortization
|
|
|
402
|
|
|
|
2,277
|
|
|
|
2,848
|
|
Add (less) basis difference for
assets acquired or disposed
|
|
|
(16,857
|
)
|
|
|
(6,567
|
)
|
|
|
5,399
|
|
Other book/tax differences (net)
|
|
|
13
|
|
|
|
15
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income subject to the
dividend requirement
|
|
$
|
3,115
|
|
|
$
|
6,677
|
|
|
$
|
5,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum dividend required (90% of
taxable income)
|
|
$
|
2,804
|
|
|
$
|
6,009
|
|
|
$
|
5,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The actual tax deduction for dividends taken, and the taxability
of dividends to shareholders, is based on a measurement of
earnings and profits as defined by the Internal
Revenue Code. Although similar to taxable income, as defined by
the Internal Revenue code, earnings and profits differ from
regular taxable income, primarily due to further differences in
the estimated useful lives of assets and methods used to compute
depreciation. The following table reconciles the dividends paid
deduction taken by the Company (the portion of dividends paid
that are taxable as ordinary income to shareholders) on its tax
returns to cash dividends paid (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Common dividends paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary dividends
|
|
$
|
5,358
|
|
|
$
|
4,310
|
|
|
$
|
7,246
|
|
Long-term capital gain
|
|
|
2,333
|
|
|
|
6,201
|
|
|
|
|
|
Return of capital
|
|
|
3,455
|
|
|
|
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends paid
|
|
$
|
11,146
|
|
|
$
|
10,511
|
|
|
$
|
7,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J) Discontinued
Operations
Statement of Financial Accounting Standards No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), requires that the
results of operations for properties sold during the period or
classified as
41
held for sale at the end of the current period be classified as
discontinued operations for all periods presented. The
property-specific components of net earnings that are classified
as discontinued operations include rental revenue, real estate
operating expenses, depreciation expense and interest expense on
debt collateralized by the property. The net gain or loss on the
eventual disposal of the held for sale properties is also
required to be classified as discontinued operations. During
2006, the Company sold the Belvedere Apartments, the Park at
58th Apartments, and Delta Crossing. Additionally, the
Company has designated Cumberland Trace and Waters Edge as held
for sale pursuant to SFAS No. 144. The divestiture of
Cumberland Trace was completed on January 31, 2007 for
proceeds of $10.9 million. Waters Edge is not currently
under contract, but the Company is currently marketing the
property to prospective buyers and it expects the property will
be divested within the next six months. During 2005, the
Company sold the Park Trace Apartments, The Retreat Apartments
and the St. Andrews at Westwood Apartments. During 2004, The
Glades was divested.
K) Net
Income (Loss) per share
Net income (loss) per share is based on the weighted average
number of shares outstanding during each year presented. Diluted
net income (loss) per share includes shares issuable upon
exercise of outstanding stock options where the conversion of
such instruments would be dilutive.
L) Derivative
Instruments and Hedging Activities
The Company accounts for its derivative and hedging activities
in accordance with Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended and interpreted. This
statement requires the recognition of all derivative instruments
as assets or liabilities in the Companys Consolidated
Balance Sheets and measurement of these instruments at fair
value. The accounting treatment is dependent upon whether or not
a derivative instrument is designated as a hedge and, if so, the
type of hedge. The fair value of the interest rate swap and cap
agreements are determined based upon current fair values as
quoted by recognized dealers.
M) Reclassifications
The Company has revised its Consolidated Statements of
Operations and Comprehensive Income (Loss) to separately present
costs associated with property management operations. Such
costs, which were previously included in general and
administrative expenses, consist of salaries and benefits of the
Companys regional property managers, training personnel,
national maintenance directors and senior vice-president of
operations, their respective travel costs and other costs
directly attributable to these personnel.
N) Recently
Issued Accounting Pronouncements
On January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123R), utilizing the
modified prospective method of adoption. Prior to
January 1, 2006, the Company accounted for its stock
options using the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation. Under this method, the Company recorded
compensation expense based upon the estimated fair value of its
granted options, over the expected vesting period. Accordingly,
the adoption of SFAS No. 123R did not materially
impact the Companys consolidated financial statements.
In June 2005, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error
Corrections (SFAS 154), which changes the
requirements for the accounting for and reporting of a change in
accounting principle. Previously, most voluntary changes in
accounting principles required recognition via a cumulative
effect adjustment within net income of the period of the change.
SFAS 154 requires retrospective application to prior
periods financial statements, unless it is impracticable
to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 was effective for
accounting changes made in fiscal years beginning after
December 15, 2005; however, SFAS 154 does not change
the transition provisions of any existing accounting
pronouncements. The adoption of SFAS 154 did not have an
impact on the Companys consolidated financial statements.
42
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48),
which clarifies the accounting for uncertainty in tax positions.
This Interpretation requires that the Company recognize in its
financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of
FIN 48 are effective as of the beginning of fiscal 2007.
The Company does not anticipate the adoption of this standard
will have a material impact on the consolidated financial
statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 is effective in fiscal
years beginning after November 15, 2007. The Company is
currently evaluating the impact that the adoption of this
statement will have on the consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,
(SAB 108) to address diversity in practice
in quantifying financial statement misstatements and the
potential under current practice for the build up of improper
amounts on the balance sheet. SAB 108, effective for the
Companys fiscal year ended December 31, 2006,
provides guidance on the consideration of the effects of prior
year misstatements in quantifying current year misstatements for
the purpose of a materiality assessment. The adoption of
SAB 108 did not have an impact on the Companys
consolidated financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159 (SFAS 159),
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115. SFAS 159 permits entities to choose, at
specified election dates, to measure many financial instruments
and certain other items at fair value that are not currently
measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected would be reported
in earnings at each subsequent reporting date. The statement
also establishes presentation and disclosure requirements in
order to facilitate comparisons between entities choosing
different measurement attributes for similar types of assets and
liabilities. SFAS 159 does not affect existing accounting
requirements for certain assets and liabilities to be carried at
fair value. SFAS 159 is effective as of the beginning of a
reporting entitys first fiscal year that begins after
November 15, 2007. The Company is currently evaluating the
requirements of SFAS 159, and has not yet determined the
impact on its consolidated financial statements.
|
|
3.
|
Acquisition
of Real Estate Assets
|
In the first quarter of 2006, the Company completed the
acquisition of two properties, The Greenhouse, a
126-unit
complex located in Omaha, Nebraska, and the Arbors of Dublin, a
288-unit
complex located in a suburb of Columbus, Ohio. The aggregate
purchase price for these properties was $33.2 million.
These purchases were primarily funded from the release of funds
from the 1031 exchange account which was established with the
proceeds received from the fourth quarter 2005 divestiture of
St. Andrews of Westwood.
On July 27, 2006, the Company acquired the second phase of
Jackson Park Place Apartments, an
80-unit
complex located adjacent to the Companys existing property
in Fresno, California for $10.5 million. This acquisition
was funded through the release of funds from the 1031 exchange
account which was established with the proceeds from the sale of
the Belvedere Apartments in June 2006.
On September 28, 2006, the Company acquired a four property
portfolio comprised of 1,052 units for an aggregate
purchase price of $64.3 million. The properties include
Morganton Place, Cumberland Trace, and Village of Cliffdale,
each located in Fayetteville, North Carolina and Woodberry
Apartments in Asheville, North Carolina. The Company intends to
sell Cumberland Trace as it did not meet the acquisition
criteria of the Companys strategic plan if bought on a
stand alone basis, but was required to be purchased as the
properties were being sold as a single portfolio.
The purchase price of the four properties was funded with
approximately $17.1 million of cash, $37.6 million in
the form of a mortgage loan drawn upon a new $70.5 million
credit facility, a short term loan of $8.9 million, and the
assumption of approximately $720,000 of liabilities, primarily
related to accrued income taxes and tenant
43
security deposits. See Note 9 for a description of the new
credit facility and related borrowings. The short-term loan that
was undertaken to finance the acquisition of Cumberland Trace
bears interest at a variable rate and matures on March 28,
2007. The cash portion was primarily funded by the remaining
proceeds from the sale of the Belvedere Apartments and the
release of $8.8 million of cash, which provided additional
collateral on the bonds payable at Coral Point. The Company was
able to utilize the $8.8 million by substituting the recent
acquisition of the second phase of Jackson Park Place for the
cash collateralizing the bonds payable at Coral Point. The
former owner of the four property portfolio has placed $600,000
of the purchase price in an escrow account. These funds will be
distributed to the Company if the three Fayetteville properties
do not meet specific monthly revenue targets during the twelve
month period ending September 30, 2007. The revenue escrow
is included as a component of other assets in the Companys
consolidated balance sheet and has been included as a component
of the purchase price allocation.
On December 21, 2006, the Company completed the acquisition
of the Cornerstone Apartments, a
420-unit
complex located in Independence, Missouri for
$37.7 million. The purchase was partially funded through
the release of funds from the 1031 exchange account which was
established with the proceeds from the sale of Delta Crossing,
cash on hand, and $25.5 million in the form of a mortgage
loan drawn upon the Companys credit facility.
In 2005, the Company completed the acquisition of two
properties, The Reserve at Wescott Plantation, a
192-unit
complex located in Summerville, South Carolina, and Tregaron
Oaks, a
300-unit
complex located in Bellevue, Nebraska. The purchase of the
Reserve at Wescott included 9.2 acres of adjacent land that
is currently being prepared for development. The aggregate
purchase price for these properties was $37.9 million. The
Tregaron Oaks purchase was partially funded through a
10-year,
$12.4 million mortgage note that bears interest at 5.1%.
The remaining purchase price was funded with cash on hand. In
connection with the acquisition of The Reserve at Wescott
Plantation, the Company assumed the existing first mortgage loan
of $12.2 million.
The following purchase price allocations are substantially
complete, but may change as the Company receives final
appraisals and the escrow period for the three Fayetteville
properties expires. (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
11,580
|
|
|
$
|
3,415
|
|
Buildings
|
|
|
128,187
|
|
|
|
33,000
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
|
139,767
|
|
|
|
36,415
|
|
Other assets
|
|
|
5,951
|
|
|
|
1,489
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
145,718
|
|
|
|
37,904
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable
|
|
|
71,988
|
|
|
|
12,218
|
|
Other liabilities
|
|
|
1,621
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
73,609
|
|
|
|
12,795
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
72,109
|
|
|
$
|
25,109
|
|
|
|
|
|
|
|
|
|
|
Included in other assets in 2006 and 2005 is $3.5 million
and $890,000, respectively, of in-place lease intangible assets
which will be amortized over the weighted average lives of the
respective leases.
|
|
4.
|
Discontinued
Operations
|
During 2006, the Company sold three properties, the Belvedere
Apartments, the Park at
58th Apartments,
and Delta Crossing, for cash proceeds of $34.9 million, net
of $1.0 million of transaction costs. During 2005, the
Company divested of three properties, the Park Trace Apartments,
The Retreat Apartments, and St. Andrews at Westwood, for cash
proceeds of $54.4 million, net of closing costs of
approximately $1.1 million. In 2004, The Glades Apartments
were sold for a total sales price of $20.0 million,
consisting of cash proceeds of $11.1 million, net of
approximately $150,000 of closing costs, and the assumption of
$8.8 million of debt.
In connection with these transactions, the Company has
recognized gains of $19.2 million, $24.6 million and
$6.0 million in 2006, 2005 and 2004, respectively.
44
Summary results of operations for the aforementioned properties,
as well as Waters Edge and Cumberland Trace, which are held for
sale, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
3,526
|
|
|
$
|
9,113
|
|
|
$
|
10,863
|
|
Operating expenses
|
|
|
(2,427
|
)
|
|
|
(7,001
|
)
|
|
|
(9,410
|
)
|
Other expenses, net
|
|
|
(393
|
)
|
|
|
(1,005
|
)
|
|
|
(1,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
706
|
|
|
$
|
1,107
|
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has allocated interest to the divested properties in
accordance with Emerging Issue Task Force (EITF)
Issue
No. 87-24,
Allocation of Interest to Discontinued Operations.
Interest expense of $402,000, $1.0 million, and
$1.4 million was allocated in the years ended
December 31, 2006, 2005 and 2004, respectively.
|
|
5.
|
Internalization
Transactions
|
On December 30, 2005, the Company completed its transition
to a self-advised and self-managed REIT through the merger with
America First Advisory Corporation (the Advisor).
Prior to the merger, the Advisor provided management and
advisory services to the Company. The purchase price was
approximately $11.8 million, including $400,000 of
transaction costs. Approximately $4.0 million of the merger
consideration was paid in cash and the remainder was paid by the
issuance of 525,000 shares of common stock. As a result of
this transaction, the Company no longer pays fees or expense
reimbursements to the Advisor. During 2005, the Company paid
$4.2 million in fees and reimbursable expenses to the
Advisor.
On November 8, 2004, America First PM Group, Inc.,
(PM Group) a wholly-owned subsidiary of the Company,
acquired certain property management assets, rights to use
certain proprietary systems, certain property management
agreements, certain employment agreements and other intangible
assets from America First Properties Management Companies, LLC
(America First Properties) and its parent,
Burlington Capital Group LLC, (formerly known as America First
Companies, LLC) (Burlington), for total
consideration of $7.0 million, including $200,000 of
transaction costs. Prior to this transaction, America First
Properties managed each of the multi-family apartment complexes
owned by the Company. The fees for services provided were
$1.3 million for the year ended December 31, 2004, and
are included in real estate operating expenses in the
Consolidated Statements of Operations and Comprehensive Income
(Loss). As a result of this transaction, the management of the
Companys properties and certain other properties owned by
unaffiliated parties were assumed by the Company.
In connection with each transaction, a Special Committee of the
Board of Directors of the Company (Special
Committee), comprised solely of independent directors of
the Company, negotiated the terms and conditions of the
transaction on behalf of the Company. In each transaction, the
Special Committee retained an independent investment banking
firm to render an opinion as to the fairness to the Company of
the consideration paid for the acquired assets. In accordance
with EITF Issue
No. 04-01,
Accounting for Preexisting Relationships between Parties to a
Business Combination, the Company expensed
$11.6 million and $5.9 million in 2005 and 2004,
respectively, as an allocation of the acquisition price to the
termination of the pre-existing contractual relationships.
On May 26, 2004, the shareholders of the Company approved a
merger with AFREZ, pursuant to the Agreement and Plan of Merger
entered into by the Company and AFREZ on November 25, 2003
(the Merger Agreement). The merger became effective
on June 3, 2004. As a result of the merger, AFREZ was
merged with and into the Company. The Company was the surviving
entity and assumed all of the assets, liabilities and business
operations of AFREZ, including 14 multifamily apartment
properties containing 2,783 rental units located in
Arizona, Florida, Illinois, Michigan, North Carolina, Ohio,
Tennessee and Virginia.
45
The Company issued shares of its common stock and paid cash to
the holders of the limited partner and general partner interests
in AFREZ upon consummation of the merger. Each Unit representing
an assigned limited partnership interest in AFREZ as of the date
of the merger was converted into the right to receive
0.7910 shares of the common stock of the Company and a cash
payment of $0.39 per Unit. Fractional shares were rounded up or
down to the nearest whole number. A total of
5,376,353 shares of the common stock of the Company were
issued to Unit holders in connection with the merger plus a cash
payment of $2.7 million. The general partners 1%
interest in AFREZ was converted into 54,308 shares of the
common stock of the Company plus a cash payment of $27,000.
The Companys real estate assets as of December 31,
2006 and 2005 are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
Building
|
|
|
Value at
|
|
|
Value at
|
|
|
|
|
|
Number
|
|
|
|
|
|
and
|
|
|
December 31,
|
|
|
December 31,
|
|
Property Name
|
|
Location
|
|
of Units
|
|
|
Land
|
|
|
Improvements
|
|
|
2006
|
|
|
2005
|
|
|
Arbor Hills(1)
|
|
Antioch, TN
|
|
|
548
|
|
|
$
|
4,400
|
|
|
$
|
25,898
|
|
|
$
|
30,298
|
|
|
$
|
29,934
|
|
Arbors of Dublin(1)
|
|
Dublin, OH
|
|
|
288
|
|
|
|
1,750
|
|
|
|
15,466
|
|
|
|
17,216
|
|
|
|
|
|
Bluff Ridge Apartments(1)
|
|
Jacksonville, NC
|
|
|
108
|
|
|
|
203
|
|
|
|
3,587
|
|
|
|
3,790
|
|
|
|
3,725
|
|
Brentwood Oaks Apartments(1)
|
|
Nashville, TN
|
|
|
262
|
|
|
|
2,000
|
|
|
|
10,139
|
|
|
|
12,139
|
|
|
|
11,883
|
|
Coral Point Apartments(1)
|
|
Mesa, AZ
|
|
|
337
|
|
|
|
2,240
|
|
|
|
9,551
|
|
|
|
11,791
|
|
|
|
11,627
|
|
Cornerstone Apartments(1)
|
|
Independence, MO
|
|
|
420
|
|
|
|
2,150
|
|
|
|
34,513
|
|
|
|
36,663
|
|
|
|
|
|
Covey at Fox Valley(1)
|
|
Aurora, IL
|
|
|
216
|
|
|
|
1,320
|
|
|
|
10,459
|
|
|
|
11,779
|
|
|
|
11,831
|
|
Elliots Crossing
Apartments(1)
|
|
Tempe, AZ
|
|
|
247
|
|
|
|
1,301
|
|
|
|
9,933
|
|
|
|
11,234
|
|
|
|
11,021
|
|
Fox Hollow Apartments(1)
|
|
High Point, NC
|
|
|
184
|
|
|
|
1,000
|
|
|
|
5,211
|
|
|
|
6,211
|
|
|
|
6,155
|
|
Greenbriar Apartments(1)
|
|
Tulsa, OK
|
|
|
120
|
|
|
|
648
|
|
|
|
3,882
|
|
|
|
4,530
|
|
|
|
4,476
|
|
Highland Park Apartments(1)
|
|
Columbus, OH
|
|
|
252
|
|
|
|
1,562
|
|
|
|
6,496
|
|
|
|
8,058
|
|
|
|
7,911
|
|
Huntsview Apartments(1)
|
|
Greensboro, NC
|
|
|
240
|
|
|
|
1,845
|
|
|
|
6,756
|
|
|
|
8,601
|
|
|
|
8,483
|
|
Jackson Park Place Apartments(1)
|
|
Fresno, CA
|
|
|
296
|
|
|
|
1,400
|
|
|
|
11,023
|
|
|
|
12,423
|
|
|
|
12,239
|
|
Jackson Park Place
Apartments Phase II(1)
|
|
Fresno, CA
|
|
|
80
|
|
|
|
1,425
|
|
|
|
8,828
|
|
|
|
10,253
|
|
|
|
|
|
Lakes of Northdale Apartments(1)
|
|
Tampa, FL
|
|
|
216
|
|
|
|
1,553
|
|
|
|
8,985
|
|
|
|
10,538
|
|
|
|
10,429
|
|
Littlestone of Village Green(1)
|
|
Gallatin, TN
|
|
|
200
|
|
|
|
621
|
|
|
|
10,170
|
|
|
|
10,791
|
|
|
|
10,652
|
|
Misty Springs Apartments
|
|
Daytona Beach, FL
|
|
|
128
|
|
|
|
742
|
|
|
|
4,079
|
|
|
|
4,821
|
|
|
|
4,725
|
|
Monticello Apartments
|
|
Southfield, MI
|
|
|
106
|
|
|
|
565
|
|
|
|
5,338
|
|
|
|
5,903
|
|
|
|
5,856
|
|
Morganton Place(1)
|
|
Fayetteville, NC
|
|
|
280
|
|
|
|
1,400
|
|
|
|
17,062
|
|
|
|
18,462
|
|
|
|
|
|
Oakhurst Apartments(1)
|
|
Ocala, FL
|
|
|
214
|
|
|
|
847
|
|
|
|
8,608
|
|
|
|
9,455
|
|
|
|
9,385
|
|
Oakwell Farms Apartments(1)
|
|
Nashville, TN
|
|
|
414
|
|
|
|
1,946
|
|
|
|
16,413
|
|
|
|
18,359
|
|
|
|
18,172
|
|
Shelby Heights(1)
|
|
Bristol, TN
|
|
|
100
|
|
|
|
175
|
|
|
|
2,994
|
|
|
|
3,169
|
|
|
|
3,140
|
|
The Greenhouse(1)
|
|
Omaha, NE
|
|
|
126
|
|
|
|
730
|
|
|
|
14,916
|
|
|
|
15,646
|
|
|
|
|
|
The Hunt Apartments(1)
|
|
Oklahoma City, OK
|
|
|
216
|
|
|
|
550
|
|
|
|
7,150
|
|
|
|
7,700
|
|
|
|
7,660
|
|
The Park at Countryside(1)
|
|
Port Orange, FL
|
|
|
120
|
|
|
|
647
|
|
|
|
2,775
|
|
|
|
3,422
|
|
|
|
3,367
|
|
The Ponds at Georgetown
|
|
Ann Arbor, MI
|
|
|
134
|
|
|
|
653
|
|
|
|
7,008
|
|
|
|
7,661
|
|
|
|
7,531
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
Building
|
|
|
Value at
|
|
|
Value at
|
|
|
|
|
|
Number
|
|
|
|
|
|
and
|
|
|
December 31,
|
|
|
December 31,
|
|
Property Name
|
|
Location
|
|
of Units
|
|
|
Land
|
|
|
Improvements
|
|
|
2006
|
|
|
2005
|
|
|
The Reserve at Wescott
Plantation(1)
|
|
Summerville, SC
|
|
|
192
|
|
|
|
1,725
|
|
|
|
15,629
|
|
|
|
17,354
|
|
|
|
17,326
|
|
Tregaron Oaks Apartments(1)
|
|
Bellevue, NE
|
|
|
300
|
|
|
|
1,690
|
|
|
|
17,549
|
|
|
|
19,239
|
|
|
|
19,089
|
|
Village at Cliffdale(1)
|
|
Fayetteville, NC
|
|
|
356
|
|
|
|
1,775
|
|
|
|
19,975
|
|
|
|
21,750
|
|
|
|
|
|
Watermans Crossing(1)
|
|
Newport News, VA
|
|
|
260
|
|
|
|
1,620
|
|
|
|
12,966
|
|
|
|
14,586
|
|
|
|
14,445
|
|
Woodberry Apartments(1)
|
|
Asheville, NC
|
|
|
168
|
|
|
|
1,174
|
|
|
|
8,863
|
|
|
|
10,037
|
|
|
|
|
|
The Exchange at Palm Bay(1)
|
|
Palm Bay, FL
|
|
|
72,007
|
(2)
|
|
|
1,296
|
|
|
|
3,074
|
|
|
|
4,370
|
|
|
|
4,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
388,249
|
|
|
|
255,363
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,517
|
)
|
|
|
(36,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
341,732
|
|
|
$
|
219,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Property is encumbered as described in Note 8. |
|
(2) |
|
This is an office/warehouse facility. The figure represents
square feet available for lease to tenants. |
47
|
|
8.
|
Bonds and
Mortgage Notes Payable
|
The Company has financed its multifamily apartment properties
and its commercial property with mortgage debt consisting of
twelve tax-exempt bond financings nine taxable mortgage notes,
and one short-term note at December 31, 2006. Each debt
obligation is secured by a first mortgage or deed of trust on
the property. Bonds and mortgage notes payable as of
December 31, 2006 and 2005 consist of the following
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
|
Interest
|
|
|
Maturity
|
|
Payment and
|
|
Annual
|
|
December 31,
|
|
Collateral
|
|
Rate
|
|
|
Date
|
|
Prepayment or Redemption Terms
|
|
Payments
|
|
2006
|
|
|
2005
|
|
|
Bonds Payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coral Point Apartments and Jackson
Park Place Apartments Phase II
|
|
|
4.97
|
%
|
|
03/01/2028
|
|
Semiannual payment of interest due
each March 1 and September 1. Prepayable at par in
March 2007.
|
|
interest only
|
|
$
|
13,090
|
|
|
$
|
13,090
|
|
Covey at Fox Valley(7)
|
|
|
3.69
|
%(8)
|
|
10/15/2027
|
|
Monthly payments of interest.
Prepayable at any time, subject to a prepayment penalty.
|
|
interest only
|
|
|
12,410
|
|
|
|
12,410
|
|
Brentwood Oaks Apartments(7)
|
|
|
3.44
|
%(1)
|
|
07/15/2031
|
|
Monthly payments of interest.
Prepayable at any time, subject to a prepayment penalty.
|
|
interest only
|
|
|
11,320
|
|
|
|
11,320
|
|
Lakes of Northdale and
Bluff Ridge Apartments
|
|
|
3.73
|
%(2)
|
|
05/15/2012
|
|
Monthly payments of interest.
Prepayable subject to prepayment penalty.
|
|
interest only
|
|
|
9,610
|
|
|
|
9,610
|
|
Jackson Park Place Apartments
|
|
|
5.80
|
%
|
|
01/01/2028
|
|
Monthly payment of principal and
interest. Prepayable at par 1% in January 2007.
|
|
$599
|
|
|
7,262
|
|
|
|
7,434
|
|
The Hunt Apartments
|
|
|
3.30
|
%(3)
|
|
07/01/2029
|
|
Semiannual payment of interest due
each January 15 and July 15. Prepayable at any time.
|
|
interest only
|
|
|
6,930
|
|
|
|
6,930
|
|
Oakhurst Apartments
|
|
|
4.09
|
%(4)
|
|
12/01/2007
|
|
Semiannual payment of interest due
each June 1 and December 1. Prepayable at any time.
|
|
interest only
|
|
|
5,300
|
|
|
|
5,300
|
|
The Exchange at Palm Bay
|
|
|
4.09
|
%(4)
|
|
11/01/2010
|
|
Monthly payment of principal and
interest. Prepayable at any time.
|
|
$449
|
|
|
4,950
|
|
|
|
5,060
|
|
Belvedere Apartments
|
|
|
N/A
|
|
|
N/A(9)
|
|
Semiannual payment of interest due
each June 1 and December 1. Prepayable at par.
|
|
interest only
|
|
|
|
|
|
|
4,800
|
|
Greenbriar Apartments
|
|
|
3.30
|
%(3)
|
|
07/01/2029
|
|
Semiannual payment of interest due
each January 15 and July 15. Prepayable at any time.
|
|
interest only
|
|
|
3,980
|
|
|
|
3,980
|
|
Shelby Heights and The Park at
Countryside
|
|
|
6.10
|
%
|
|
03/01/2022
|
|
Semiannual payment of principal
and/or
interest due each March 1 and September 1. Prepayable
at par + 1% in March 2007.
|
|
range from
$266 to $276
|
|
|
2,660
|
|
|
|
2,760
|
|
Elliots Crossing Apartments
|
|
|
2.82
|
%(5)
|
|
04/01/2030
|
|
Semiannual payment of interest due
each April 1 and October 1. Prepayable at par +1.5% in
April 2009.
|
|
$540
|
|
|
8,153
|
|
|
|
8,146
|
|
Arbor Hills and Littlestone of
Village Green
|
|
|
3.76
|
%(6)
|
|
12/01/2025
|
|
Monthly payments of interest.
Prepayable at any time, subject to a prepayment penalty.
|
|
interest only
|
|
|
26,150
|
|
|
|
26,150
|
|
The Park at
58th
Apartments
|
|
|
N/A
|
|
|
N/A(9)
|
|
Semiannual payment of principal
and/or
interest due each March 1 and September 1. Prepayable
at par + 1% in March 2006.
|
|
range from
$220 to $225
|
|
|
|
|
|
|
2,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,815
|
|
|
$
|
119,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
|
Interest
|
|
|
Maturity
|
|
Payment and
|
|
Annual
|
|
December 31,
|
|
Collateral
|
|
Rate
|
|
|
Date
|
|
Prepayment or Redemption Terms
|
|
Payments
|
|
2006
|
|
|
2005
|
|
|
Mortgage Notes Payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oakwell Farms Apartments
|
|
|
6.94
|
%
|
|
05/01/2009
|
|
Monthly payment of principal and
interest due the 1st of each month. Prepayable subject to a
yield maintenance agreement.
|
|
$1,029
|
|
$
|
11,690
|
|
|
$
|
11,900
|
|
Watermans Crossing
|
|
|
5.52
|
%
|
|
11/01/2012
|
|
Monthly payment of principal and
interest due on the 1st of each month. Prepayable subject
to a yield maintenance agreement.
|
|
$790
|
|
|
10,623
|
|
|
|
10,746
|
|
Huntsview Apartments
|
|
|
5.83
|
%
|
|
01/01/2012
|
|
Monthly payment of principal and
interest due on the 1st of each month. Prepayable subject
to a yield maintenance agreement.
|
|
$509
|
|
|
6,853
|
|
|
|
6,986
|
|
Highland Park Apartments
|
|
|
4.69
|
%
|
|
09/01/2013
|
|
Monthly payment of principal and
interest due on the 1st of each month. Prepayable
90 days prior to maturity.
|
|
$435
|
|
|
6,300
|
|
|
|
6,404
|
|
Fox Hollow Apartments
|
|
|
6.91
|
%
|
|
03/01/2011
|
|
Monthly payment of principal and
interest due on the 1st of each month. Prepayable subject
to a yield maintenance agreement.
|
|
$493
|
|
|
5,871
|
|
|
|
5,960
|
|
Tregaron Oaks Apartments
|
|
|
5.12
|
%
|
|
09/01/2015
|
|
Monthly payments of interest due on
the 1st of each month. Prepayable subject to a yield maintenance
agreement.
|
|
interest only
|
|
|
12,370
|
|
|
|
12,370
|
|
The Reserve at Wescott Plantation
|
|
|
5.75
|
%
|
|
11/01/2044
|
|
Monthly payment of principal and
interest due on the 1st of each month. Prepayable at par
+ 5% in July 2009.
|
|
$788
|
|
|
12,141
|
|
|
|
12,228
|
|
Morganton Place, Village at
Cliffdale and Woodberry Apartments (7)
|
|
|
5.56
|
%
|
|
10/01/2016
|
|
Monthly payments of interest until
October 1, 2012. Monthly payments of principal and interest
from November 1, 2012 until October 1, 2016.
Prepayable subject to a yield maintenance agreement.
|
|
currently
interest only
|
|
|
37,638
|
|
|
|
|
|
Cornerstone Apartments (7)
|
|
|
5.44
|
%
|
|
01/01/2017
|
|
Monthly payments of interest until
January 1, 2012. Monthly payments of principal and interest
from February 1, 2012 until January 1, 2017.
Prepayable subject to a yield maintenance agreement.
|
|
currently
interest only
|
|
|
25,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,986
|
|
|
$
|
66,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumberland Trace
Short-term note
|
|
|
7.88
|
%
|
|
03/28/2007
|
|
Monthly payments of interest.
Prepayable anytime
|
|
|
|
|
8,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
249,651
|
|
|
$
|
185,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In January 2005, the Company entered into an interest rate swap
transaction which fixed the rates on the bonds to 3.44% through
January 2012. |
49
|
|
|
(2) |
|
Bond payable bears interest at a highly rated bond composite
variable rate that is reset weekly and capped at 7.50%, the rate
at
12/31/2006
was 3.98%, averaged 3.73% for the year. |
|
(3) |
|
In June 2004, the Company entered into an interest rate swap
transaction which fixed the rates on the bonds to 3.30%, plus
the 0.65% variable rate spread, through June 2009. |
|
(4) |
|
The interest rate on these bonds is variable based upon the Bond
Market Association average rate plus 0.65%. |
|
(5) |
|
The Company entered into an interest rate swap transactions that
fix the rates on the bond to 2.82%, plus the 0.65% variable rate
spread, through June 2009. |
|
(6) |
|
Bond payable bears interest at a highly rated bond composite
variable rate that is reset weekly and is capped at 4.5%, the
rate at
12/31/2006
was 3.99%, the average for the period was 3.76%. |
|
(7) |
|
Property is included within the credit facility described in
Note 9. The borrowings under the credit facility are
secured by first mortgages on these properties as well as The
Greenhouse and Arbors of Dublin. |
|
(8) |
|
In December 2006, the Company entered into an interest rate swap
transaction that fixed the rate on the bonds to 3.69% through
December 2016. |
|
(9) |
|
The property collateralizing this debt was sold during 2006 and
the related bonds were repaid. |
Accrued interest of $1.7 million as of both
December 31, 2006 and 2005 is included in Accounts payable
and accrued expenses on the Companys Consolidated Balance
Sheets.
As of December 31, 2006, the Companys aggregate
borrowings with maturities during the next five years and
thereafter are as follows (in thousands):
|
|
|
|
|
|
|
Principal
|
|
Maturity
|
|
Amount
|
|
|
2007
|
|
$
|
15,354
|
|
2008
|
|
|
1,280
|
|
2009
|
|
|
12,331
|
|
2010
|
|
|
5,578
|
|
2011
|
|
|
6,420
|
|
Thereafter
|
|
|
208,688
|
|
|
|
|
|
|
|
|
$
|
249,651
|
|
|
|
|
|
|
On September 28, 2006, the Company entered into a Master
Credit Facility and Reimbursement Agreement (the
Facility) with Wells Fargo Bank, N.A. and Fannie
Mae. The Facility was initially established for
$70.5 million and may be expanded with the consent of the
lenders. The Facility provides the Company the ability to borrow
at either fixed or variable interest rates and also enables the
Company to utilize Fannie Mae credit enhancement on tax exempt
bond financings on its existing portfolio or for future property
acquisitions.
As of December 31, 2006 the Facility had been expanded, and
the Company had utilized $63.1 million to partially finance
the acquisitions of Morganton Place, Village at Cliffdale,
Woodberry Apartments, and Cornerstone Apartments. The Company
has also utilized Fannie Maes credit enhancement on its
Brentwood Oaks and Covey at Fox Valley bonds payable. As of
December 31, 2006, the Company had a total of
$86.2 million outstanding under the Facility, and has the
ability, until September 28, 2007, to borrow an additional
$21.6 million at a fixed interest rate of 5.68%. Any
borrowings under the Facility will have a term of 10 years
from the date of the transaction. The specific amounts borrowed
and payment terms are described in Note 8.
The Facility contains representations, warranties, terms and
conditions customary for transactions of this type with Fannie
Mae. These include covenants limiting the Companys
subsidiary borrowers ability to (1) transfer
ownership interests in the subsidiary borrowers or in the real
estate mortgaged as collateral for the Facility, (2) enter
into certain transactions with affiliates, (3) make
distributions to the Company during the continuation of a
Potential Event of Default or an Event of Default (as those
terms are defined in the Facility), and (4) initiate any
public process or make public application to convert any of the
mortgaged properties to a condominium or cooperative.
50
The Facility also contains financial covenants that require the
Company to maintain at all times (a) a Net Worth (defined
as total shareholders equity plus accumulated
depreciation) of not less than $100 million, (b) cash
and cash equivalents (as defined in the Facility) of not less
than $3 million, and (c) a total balance of cash, cash
equivalents and investments in publicly-traded common or
preferred stock of not less than $4 million. The Company is
in compliance with such covenants.
The Facility contains certain events of default, including
(1) failure to pay principal, interest or any other amount
owing on any other obligation under the Facility when due,
(2) material incorrectness of representations and
warranties when made, (3) breach of covenants,
(4) failure to comply with requirements of any Governmental
Authority (as defined in the Facility) beyond specified cure
periods, (5) bankruptcy and insolvency and (6) entry
by a court of one or more judgments against the borrowers or the
Company in the aggregate amount in excess of $250,000 that
remain unbonded, undischarged or unstayed for a certain number
of days after the entry thereof. If any event of default occurs
and is not cured within applicable grace periods set forth in
the Facility or waived, all loans and other obligations could
become due and immediately payable and the Facility could be
terminated.
|
|
10.
|
Interest
Rate Swap and Cap Agreements
|
The Company may enter into interest rate swap and cap agreements
to manage or hedge its interest rate risk on its bonds and
mortgage notes payable. In the absence of a specific and
effective hedging relationship, interest rate swaps and caps are
accounted for as free standing financial instruments which are
marked to market each period through the statement of operations.
As of December 31, 2006, the Company had two interest rate
swaps which qualified, and have been designated as cash flow
hedges of changes in variable interest rates. The notional
amounts and terms are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Receive
|
|
|
Notional
|
|
|
Pay
|
|
|
|
Maturity
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Variable to Fixed
|
|
January 15, 2012
|
|
$
|
11,320
|
|
|
|
3.44
|
%(1)
|
|
$
|
11,320
|
|
|
|
3.44
|
%
|
Variable to Fixed
|
|
December 15, 2016
|
|
$
|
12,410
|
|
|
|
3.80
|
%(2)
|
|
$
|
12,410
|
|
|
|
3.69
|
%
|
|
|
|
(1) |
|
Weighted average Bond Market Association rate for the year ended
December 31, 2006. |
|
(2) |
|
Swap was entered into on December 15, 2006. Amount is the
average Bond Market rate for the last two weeks of 2006. |
The swaps fair market value was $92,000 and $109,000 at
December 31, 2006 and 2005, respectively, and is included
within Other assets on the Companys Consolidated Balance
Sheets. Changes in the fair market value of the interest rate
swaps are recorded as a component of Accumulated Other
Comprehensive Income in the Consolidated Statements of
Shareholders Equity. The amount of ineffectiveness on
these hedges is not material. As the term of the variable rate
bonds exceed the term of the interest rate swaps, the Company
will be exposed to variability in changes in interest rates upon
the maturity of the swaps.
The following interest rate swap and cap contracts owned by the
Company do not qualify for hedge accounting and thus are
accounted for as free standing financial instruments which are
marked to market each period through the statement of operations
as a component of interest expense. As of December 31,
2006, notional amounts and terms are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps and Caps
|
|
|
|
|
|
|
|
|
Counterparty
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Receive/
|
|
|
Notional
|
|
|
Pay
|
|
|
|
|
|
|
Maturity
|
|
Amount
|
|
|
Cap Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
|
Fixed to Variable
|
|
September 20, 2007
|
|
$
|
5,300
|
(4)
|
|
|
7.13
|
%
|
|
$
|
5,300
|
(4)
|
|
|
4.09
|
%(3)
|
|
|
|
|
Fixed to Variable
|
|
December 6, 2007
|
|
$
|
4,950
|
(1)(4)
|
|
|
7.75
|
%
|
|
$
|
4,950
|
(1)(4)
|
|
|
4.09
|
%(3)
|
|
|
|
|
Fixed to Variable
|
|
January 22, 2009
|
|
$
|
8,300
|
(4)
|
|
|
5.38
|
%
|
|
$
|
8,300
|
(4)
|
|
|
4.09
|
%(3)
|
|
|
|
|
Fixed to Variable
|
|
July 13, 2009
|
|
$
|
6,930
|
(4)
|
|
|
7.25
|
%
|
|
$
|
6,930
|
(4)
|
|
|
4.09
|
%(3)
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps and Caps
|
|
|
|
|
|
|
|
|
Counterparty
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Receive/
|
|
|
Notional
|
|
|
Pay
|
|
|
|
|
|
|
Maturity
|
|
Amount
|
|
|
Cap Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
|
Fixed to Variable
|
|
July 13, 2009
|
|
$
|
3,980
|
(4)
|
|
|
7.50
|
%
|
|
$
|
3,980
|
(4)
|
|
|
4.09
|
%(3)
|
|
|
|
|
Variable to Fixed
|
|
February 3, 2009
|
|
$
|
8,100
|
|
|
|
3.44
|
%(2)
|
|
$
|
8,100
|
|
|
|
2.82
|
%
|
|
|
|
|
Variable to Fixed
|
|
June 25, 2009
|
|
$
|
10,910
|
|
|
|
3.44
|
%(2)
|
|
$
|
10,910
|
|
|
|
3.30
|
%
|
|
|
|
|
Interest Rate Cap
|
|
December 22, 2009
|
|
$
|
13,400
|
|
|
|
4.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
Interest Rate Cap
|
|
December 22, 2009
|
|
$
|
12,750
|
|
|
|
4.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
Interest Rate Cap
|
|
September 15, 2011
|
|
$
|
11,320
|
|
|
|
6.22
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
(1) |
|
Notional amount is tied to the Exchange at Palm Bay bond payable
and adjusts downward as principal payments are made on the bond
payable. |
|
(2) |
|
Weighted average Bond Market Association rate for the year ended
December 31, 2006. |
|
(3) |
|
Weighted average Bond Market Association rate for the year ended
December 31, 2006 plus 0.65%. |
|
(4) |
|
These are total return swaps. |
The fair market value of these interest rate swap and cap
agreements is included in Other assets on the Companys
Consolidated Balance Sheets in the amount of $222,000 and
$401,000 as of December 31, 2006 and 2005. Changes in the
fair market value of the interest rate swaps and caps that do
not qualify for hedge accounting are recognized as a component
of Interest expense in the Consolidated Statements of Operations
and Comprehensive Income (Loss). For the years ended
December 31, 2006, 2005 and 2004, the Company recognized
increases (decreases) of interest expense of $179,000, $(85,000)
and $(273,000), respectively, related to these agreements.
|
|
11.
|
Borrowings
under Repurchase Agreements
|
Borrowings under repurchase agreements as of December 31,
2006 and 2005 consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
|
|
|
|
Interest
|
|
|
Maturity
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
Collateral
|
|
Rate
|
|
|
Date
|
|
Payment Schedule
|
|
2006
|
|
|
2005
|
|
|
|
|
|
Repurchase agreements
collateralized by agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA Pool #759197
|
|
|
|
|
|
repaid
|
|
Interest payments and principal
due at maturity
|
|
$
|
|
|
|
$
|
15,427
|
|
|
|
|
|
FNMA Pool #670676
|
|
|
|
|
|
repaid
|
|
Interest payments and principal
due at maturity
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,927
|
|
|
|
|
|
Other repurchase agreements,
collateralized by GNMA certificates of the following 100% owned
properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Misty Springs
|
|
|
|
|
|
repaid
|
|
Interest payments and principal
due at maturity
|
|
|
|
|
|
|
2,919
|
|
|
|
|
|
Waters Edge
|
|
|
5.32
|
%
|
|
01/27/2007
|
|
Interest payments and principal
due at maturity
|
|
|
1,400
|
|
|
|
3,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
|
|
|
|
Interest
|
|
|
Maturity
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
Collateral
|
|
Rate
|
|
|
Date
|
|
Payment Schedule
|
|
2006
|
|
|
2005
|
|
|
|
|
|
Monticello
|
|
|
5.32
|
%
|
|
01/26/2007
|
|
Interest payments and principal
due at maturity
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Ponds at Georgetown
|
|
|
5.33
|
%
|
|
01/29/2007
|
|
Interest payments and principal
due at maturity
|
|
|
6,925
|
|
|
|
6,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,825
|
|
|
$
|
36,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest of approximately $8,000 and approximately
$72,000 as of December 31, 2006 and 2005 is included in
Accounts payable and accrued expenses on the Companys
Consolidated Balance Sheets.
The Company intends to either repay or renew the repurchase
agreements as they come due with new repurchase agreements
having similar terms (see Note 22).
Notes payable were acquired as a result of the Companys
merger with AFREZ, as described in Note 6. These notes were
originally issued by AFREZ in a
roll-up
transaction of two partnerships, Capital Source L.P. and Capital
Source L.P. II (the Cap Source Partnerships) on
December 31, 2000. The notes bear interest at the rate
equal to 120% of the annual applicable federal rate for debt
instruments with a term of not over three years as determined by
the Internal Revenue Code and applicable regulations thereunder.
The annual interest rate on the notes is calculated by averaging
such interest rates for each month. The average rate for 2006
was 5.84%. The notes provide for annual installments of accrued
interest payable on the 15th of each January. The unpaid
principal balance and any accrued but unpaid interest is due
January 15, 2008. These notes were repaid in January, 2007
(see Note 22).
|
|
13.
|
Investments
in Securities
|
The following table presents the components of the carrying
value of the Companys investments in securities as of
December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Equity Securities
|
|
$
|
3,394
|
|
|
$
|
141
|
|
|
$
|
(9
|
)
|
|
$
|
3,526
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency Securities
|
|
$
|
18,485
|
|
|
$
|
|
|
|
$
|
(296
|
)
|
|
$
|
18,189
|
|
Corporate Equity Securities
|
|
|
4,010
|
|
|
|
87
|
|
|
|
(24
|
)
|
|
|
4,073
|
|
During the first quarter of 2006 the Company decided to divest
substantially all of its investment in agency securities and at
that time determined that it would not recover the previously
unrecognized losses recorded in accumulated other comprehensive
income. As a result of this determination the Company recognized
an impairment loss of $344,000. This loss was equal to the
difference between the Companys basis in the agency
securities and their fair market value on March 31, 2006.
On April 24, 2006, the Company completed the sale of the
agency securities for $15.7 million, which resulted in the
recognition of a $53,000 loss in the second quarter of 2006.
Prior to the sale of the agency securities, they served as
collateral for approximately $17.9 million of borrowings
under repurchase agreements. The proceeds from the sale of the
agency securities were utilized to repay the repurchase
agreement borrowings and accrued interest thereon.
|
|
14.
|
Transactions
with Related Parties
|
Advisory
Agreement
Prior to the Companys December 30, 2005 merger with
America First Apartment Advisory Corporation (the
Advisor) the Company received management and
advisory services from the Advisor. These services were
53
provided under an Advisory Agreement (the
Agreement), which included the following provisions:
(i) the Advisor administered the
day-to-day
operations of the Company; (ii) the Advisor acted as the
authorized agent on behalf of the Company in connection with the
identification, evaluation, purchase, financing, operation and
disposition of all real estate assets; (iii) the Advisor
provided the executive and administrative personnel and services
required for the operation of the Company; (iv) the Advisor
maintained the financial records and performed the financial
reporting of the Company; and (v) the Advisor provided
information to the Board of Directors on an on-going basis.
In connection with these services, the Company made the
following payments to the Advisor and its Affiliates (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Administrative fees- general(1)
|
|
$
|
1,586
|
|
|
$
|
1,200
|
|
Administrative fees- agency
securities(2)
|
|
|
60
|
|
|
|
154
|
|
Property management fees(3)
|
|
|
|
|
|
|
1,300
|
|
Property acquisition fees(4)
|
|
|
456
|
|
|
|
371
|
|
Reimbursement of direct and
allocated costs(5)
|
|
|
2,132
|
|
|
|
2,894
|
|
|
|
|
(1) |
|
Administrative fees general This
fee equaled 0.55% per annum of the sum of: (i) the
original principal amount of the bonds originally issued to a
predecessor to the Company; (ii) the purchase price paid by
the Company for new assets that are held by the Company;
(iii) the outstanding principal of mezzanine financing
provided by the Company to unaffiliated owners of residential
real estate, plus (iv) the value of properties acquired in
a merger with America First Real Estate Investment Partners,
L.P. with and into the Company. Such fees are included in
General and administrative expenses in the Consolidated
Statements of Operations and Comprehensive Income (loss). |
|
(2) |
|
Administrative fees agency securities- This
fee equaled 0.25% per annum of the outstanding principal
balance of all agency securities held by the Company plus an
incentive equal to 20% of the amount by which the total net
interest income realized by the Company from its portfolio of
agency securities during each calendar month exceeded the
average dollar amount of shareholders equity invested in
agency securities during the month times the composite dividend
yield reported by the National Association of Real Estate
Investment Trusts for equity REITs which invest in residential
apartment properties. |
|
(3) |
|
Property management fees Until
November 8, 2004, an affiliate of the Advisor, America
First Properties, provided property management services for the
multifamily properties owned by the Company. The fees for
services provided represented the lower of: (i) costs
incurred in managing the properties, or (ii) customary fees
for such services determined by reference to national statistics. |
|
(4) |
|
Property acquisition fees The Advisor
received a fee of 1.25% of the gross purchase price of real
estate assets for identifying, evaluating and acquiring real
estate assets on behalf of the Company. |
|
(5) |
|
Reimbursement of direct and allocated costs
The Company reimbursed the Advisor and its affiliate for certain
costs and expenses that it incurred in connection with the
carrying out of the Companys business activities. |
Office
Lease
For the year ended December 31, 2006, the Company incurred
expenses of $173,000 to lease office space from The Burlington
Capital Group, LLC, which is an affiliate of certain directors
of the Company.
Mezzanine
Loan
In September 2005, the Company loaned $7.4 million to
America First Communities Offutt Developer, LLC (the
Developer), which is an affiliate of certain
directors of the Company. The funds were used by the Developer
to partially finance the military housing privatization project
at Offutt Air Force Base in Bellevue, Nebraska. The loan
agreement required quarterly payment of principal and interest
commencing December 1, 2005, with the final
54
installment scheduled for September 1, 2009. During 2005,
the Company recognized $286,000 of interest income related to
this loan. On February 27, 2006, the Developer prepaid the
loan. The Company received total proceeds of $7.4 million,
including $7.1 million for repayment of the then
outstanding principal balance, $237,000 of accrued interest and
an early termination fee of $89,000.
The Company adopted a Stock Option Plan (the Plan)
on April 1, 2002 to permit awards of equity based
compensation and dividend equivalent rights (DERs)
to individuals providing services to the Company. In May 2006,
the Companys shareholders approved amendments to the Plan
(including renaming it as the 2006 Equity Incentive Plan) which
added stock appreciation rights, restricted stock, restricted
stock units, and performance units to the types of awards
available under the Plan. The Plan is administered by the
Compensation Committee of the Board of Directors and allows for
the aggregate issuance of the aforementioned awards for up to
750,000 shares of common stock. As of December 31,
2006, the Company had only granted stock options and DERs under
the Plan. The exercise price of the options is determined based
upon the closing stock price on the date of grant.
Stock option activity for the period ended December 31,
2006 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
Balance at January 1, 2004
|
|
|
40,000
|
|
|
$
|
8.73
|
|
|
$
|
87,600
|
|
Cancelled
|
|
|
(5,000
|
)
|
|
|
8.73
|
|
|
|
(10,950
|
)
|
Exercised
|
|
|
(5,000
|
)
|
|
|
8.73
|
|
|
|
(10,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
30,000
|
|
|
|
8.73
|
|
|
|
65,700
|
|
Granted
|
|
|
31,000
|
|
|
|
12.87
|
|
|
|
99,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
61,000
|
|
|
|
10.83
|
|
|
|
165,520
|
|
Granted
|
|
|
101,467
|
|
|
|
16.70
|
|
|
|
479,939
|
|
Exercised
|
|
|
(10,000
|
)
|
|
|
8.73
|
|
|
|
(21,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
152,467
|
|
|
$
|
14.88
|
|
|
$
|
623,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2006
|
|
|
63,367
|
|
|
$
|
13.13
|
|
|
$
|
221,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 8, 2006, the Company granted a total of 5,000
non-qualified stock options (NQSOS) to acquire common stock at
an exercise price of $14.07 per share. On August 9,
2006, 44,800 NQSOS were granted at an exercise price of
$14.80 per share. On November 15, 2006 an additional
51,667 NQSOS were granted at an exercise price of
$18.60 per share. The options vest 25% on the grant date
and 25% on each of the next three anniversaries of the grant
date. These options had an aggregate fair value of approximately
$480,000 on their grant dates.
During the year ended December 31, 2005, the Company
granted a total of 31,000 NQSOS at a weighted average exercise
price of $12.87 per share. The fair value of these options
was approximately $100,000. The options vest 25% on the grant
date and 25% on each of the next three anniversaries of the
grant date. There were no stock option grants made during the
year ended December 31, 2004. All stock option grants made
during 2006 and 2005 also included dividend equivalent rights.
The Company currently expects that all options granted will vest.
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model, with the
following weighted-average assumptions for options granted in:
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Risk-free interest rate
|
|
4.72%
|
|
4.30%
|
Expected life
|
|
6 years
|
|
6 years
|
Volatility
|
|
15%
|
|
12%
|
Estimated fair value
|
|
$4.73
|
|
$3.22
|
The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant. The assumed expected life
of the stock options is based upon the simplified
method allowed by Securities and Exchange Commission
55
Staff Accounting Bulletin No. 107. Volatility is based
upon the historical volatility of the Companys stock
price. As of December 31, 2006, the outstanding options
have a remaining average contractual life of 9.1 years. The
average contractual life for the exercisable options at
December 31, 2006 is 8.3 years. Compensation expense,
based upon the graded vesting schedule, for stock based
compensation was $178,000, $62,000 and $21,000 for the years
ended December 31, 2006, 2005 and 2004, respectively, and
is included within General and administrative expenses on the
Consolidated Statements of Operations and Comprehensive Income
(Loss). The Company expects to recognize an additional $358,000
of compensation costs related to previously awarded stock option
grants which will vest during the next 3.6 years.
|
|
16.
|
Fair
Value of Financial Instruments
|
The following methods and assumptions were used by the Company
in estimating the fair value of its financial instruments:
Cash and cash equivalents, restricted cash, investments in
agency securities, investments in corporate, equity securities,
accounts payable, dividends payable, interest rate swaps,
interest rate caps, and borrowings under repurchase agreements:
Fair value approximates the carrying value of such assets
and liabilities due to their accounting policy
and/or
short-term nature.
Bonds and mortgage notes payable and notes payable: Fair value
is generally based on estimated future cash flows discounted
using the quoted market rate of similar obligations. Refer to
the table below for the carrying amount and estimated fair value
of such instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
As of December 31, 2005
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Bonds and mortgage notes payable
|
|
$
|
249,651
|
|
|
$
|
253,273
|
|
|
$
|
185,764
|
|
|
$
|
193,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
2,413
|
|
|
$
|
2,413
|
|
|
$
|
2,413
|
|
|
$
|
2,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys interest rate swap and cap agreements create
credit risk. Credit risk arises from the potential failure of
counterparties to perform in accordance with the terms of their
contracts. The Companys risk management policies define
parameters of acceptable market risk and limit exposure to
credit risk. Credit exposure resulting from derivative financial
instruments is represented by their fair value amounts,
increased by an estimate of potential adverse position exposure
arising from changes over time in interest rates, maturities and
other relevant factors. The Company does not anticipate
non-performance by any of its counterparties.
The Company is subject to various legal proceedings and claims
that arise in the ordinary course of business. These matters are
frequently covered by insurance. If it has been determined that
a loss is probable to occur, the estimated amount of the loss is
expensed in the financial statements. While the resolution of
these matters cannot be predicted with certainty, management
believes the final outcome of such matters known to it will not
have a material adverse effect on the Companys financial
statements.
56
|
|
18.
|
Net
Income (Loss) Per Share
|
Basic earnings per share (EPS) is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
reduction in EPS that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock. EPS under the basic and diluted computation are as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Loss from continuing operations
|
|
$
|
(346
|
)
|
|
$
|
(14,761
|
)
|
|
$
|
(8,794
|
)
|
Income from discontinued operations
|
|
|
19,903
|
|
|
|
25,713
|
|
|
|
6,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders basic and diluted
|
|
$
|
19,557
|
|
|
$
|
10,952
|
|
|
$
|
(2,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding basic and diluted
|
|
|
11,037
|
|
|
|
10,513
|
|
|
|
8,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.03
|
)
|
|
$
|
(1.40
|
)
|
|
$
|
(1.07
|
)
|
Income from discontinued operations
|
|
|
1.80
|
|
|
|
2.44
|
|
|
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.77
|
|
|
$
|
1.04
|
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computation of diluted EPS for the years ended
December 31, 2006, 2005 and 2004 excluded 152,467, 61,000
and 30,000, respectively, of outstanding stock options because
the effect of these securities would have been anti-dilutive as
the Company incurred a loss from continuing operations for the
year.
|
|
19.
|
Employee
Benefit Plans
|
With the acquisition of certain employment agreements from
America First Properties Management Company LLC, in November
2004, the Company assumed the America First PM Group, Inc.
401(k) Plan (the Plan) which is a defined
contribution plan that satisfies the requirements of
Section 401(a) of the Internal Revenue Code. Eligible
employees may contribute up to the maximum annual amount as set
by the Internal Revenue Service. The Company matches
contributions to the Plan of $0.25 for each $1.00 contributed by
the participant. All matching contributions vest immediately. In
addition, each year the Company may make additional
discretionary, qualified non-elective employer contributions to
the Plan. Such contributions to the Plan are allocated among
eligible participants in the proportion of their salaries to the
total salaries of all participants. The Companys matching
contribution to this plan was $63,000, $53,000 and $10,000 for
the years ended December 31, 2006, 2005 and 2004,
respectively. To date, there have been no discretionary,
qualified non-elective contributions made. The Plan is funded on
a current basis.
|
|
20.
|
Impairment
of Intangible Assets
|
In connection with the November 2004 acquisition of certain
property management assets from America First Properties
Management Companies, LLC, the Company assumed property
management agreements for five apartment complexes owned by
unrelated third parties. These contracts were recorded as an
intangible asset in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets. During the first quarter of 2006, the
Company purchased The Greenhouse, which was one of the
properties for which it previously provided management services.
Additionally, the Company became aware that a significant
percentage of the other properties for which it provides third
party management services were expected to be sold during 2006.
As a result, the Company determined that a portion of the
intangible asset was impaired and recorded a charge of $199,000.
57
The Companys reportable segments consist of its
multifamily apartment properties and its commercial property.
Prior to their second quarter 2006 sale, the Companys
investment in agency securities comprised a third reportable
segment.
The Company defines each of its multifamily apartment properties
as an individual operating segment. It has determined that all
multifamily apartment properties have similar economic
characteristics and meet the other criteria which permit the
multifamily apartment properties to be aggregated into one
reportable segment, that being the acquiring, holding, operating
and selling of multifamily apartment properties. Prior to the
second quarter of 2006, the Companys chief operating
decision-maker assessed operating results based upon segment net
income. Concurrent with the sale of the agency securities, the
chief operating decision-maker began to assess operating
performance of the remaining operating segments based upon net
operating income. Net operating income, as defined by the
Company, differs from net income in that it excludes
depreciation, amortization, interest expense, and interest
income from the determination of profit or loss. The Company has
recast the segment results for the years ended December 31,
2005 and 2004 for the new basis of presentation.
The Companys commercial property is defined as a separate
individual operating segment. The Companys chief operating
decision-maker assesses and measures segment operating results
based on net operating income at the commercial property level.
The following table details certain key financial information
for the Companys reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
$
|
48,356
|
|
|
$
|
38,555
|
|
|
$
|
25,477
|
|
Commercial
|
|
|
778
|
|
|
|
652
|
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
49,134
|
|
|
|
39,207
|
|
|
|
26,320
|
|
Other
|
|
|
223
|
|
|
|
382
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
49,357
|
|
|
$
|
39,589
|
|
|
$
|
26,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
$
|
27,379
|
|
|
$
|
19,948
|
|
|
$
|
11,178
|
|
Commercial
|
|
|
547
|
|
|
|
451
|
|
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net operating income
|
|
|
27,926
|
|
|
|
20,399
|
|
|
|
11,832
|
|
Property management expense
|
|
|
(1,039
|
)
|
|
|
(799
|
)
|
|
|
(132
|
)
|
General and administrative expenses
|
|
|
(5,335
|
)
|
|
|
(5,656
|
)
|
|
|
(3,865
|
)
|
Depreciation expense
|
|
|
(10,436
|
)
|
|
|
(7,748
|
)
|
|
|
(4,951
|
)
|
In-place lease amortization
|
|
|
(1,728
|
)
|
|
|
(2,674
|
)
|
|
|
(2,130
|
)
|
Intangible asset impairment
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
Contract termination costs
|
|
|
|
|
|
|
(11,619
|
)
|
|
|
(5,911
|
)
|
Interest expense
|
|
|
(11,231
|
)
|
|
|
(8,771
|
)
|
|
|
(5,140
|
)
|
Interest income, other income and
expenses, net
|
|
|
1,696
|
|
|
|
2,107
|
|
|
|
1,503
|
|
Income from discontinued operations
|
|
|
706
|
|
|
|
1,107
|
|
|
|
56
|
|
Gain (loss) on sales of real estate
|
|
|
19,197
|
|
|
|
24,606
|
|
|
|
5,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,557
|
|
|
$
|
10,952
|
|
|
$
|
(2,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Assets (as of year end)
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
$
|
370,351
|
|
|
$
|
248,162
|
|
|
$
|
232,709
|
|
Commercial
|
|
|
2,126
|
|
|
|
2,541
|
|
|
|
2,881
|
|
Other
|
|
|
13,287
|
|
|
|
83,256
|
|
|
|
61,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
385,764
|
|
|
$
|
333,959
|
|
|
$
|
297,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
$
|
9,903
|
|
|
$
|
8,206
|
|
|
$
|
4,775
|
|
Commercial
|
|
|
210
|
|
|
|
161
|
|
|
|
233
|
|
Other
|
|
|
1,118
|
|
|
|
404
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,231
|
|
|
$
|
8,771
|
|
|
$
|
5,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
|
$
|
11,775
|
|
|
$
|
10,139
|
|
|
$
|
6,865
|
|
Commercial
|
|
|
201
|
|
|
|
176
|
|
|
|
199
|
|
Other
|
|
|
188
|
|
|
|
107
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,164
|
|
|
$
|
10,422
|
|
|
$
|
7,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues are comprised of fees earned from the management
of properties owned by third parties. Other assets include
investments in corporate equity securities, unrestricted cash,
non-property specific restricted cash, and other corporate
related assets. The Company does not derive any of its
consolidated revenues from foreign countries and does not have
any major customers that individually account for 10% or more of
the Companys consolidated revenues.
On January 25, 2007, the Company drew down $10 million
of the $21.6 million available under the Facility described
in Note 9 at the pre-determined fixed rate of 5.68%. The
proceeds from the loan were utilized to repay $7.9 million
of the $12.8 million outstanding repurchase agreements.
This transaction allowed the Company to fix the interest rates
on formerly revolving borrowings at a rate which is comparable
to the current variable rates being paid on this debt. The
remaining proceeds were utilized to repay the $2.4 million
of notes payable outstanding.
On January 31, 2007, the Company completed the divestiture
of Cumberland Trace Apartments for proceeds of
$10.9 million, net of closing costs of $176,000. In
connection with the sale, the short term note of
$8.9 million was repaid. There was no gain or loss
recognized on the sale.
59
|
|
23.
|
Summary
of Quarterly Results of Operations (Unaudited)
|
(Amounts in thousand, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Year Ended December 31, 2006
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total revenues
|
|
$
|
11,046
|
|
|
$
|
11,845
|
|
|
$
|
12,462
|
|
|
$
|
14,004
|
|
Operating expenses
|
|
|
(8,983
|
)
|
|
|
(9,719
|
)
|
|
|
(10,033
|
)
|
|
|
(11,210
|
)
|
Other income, net
|
|
|
(2,075
|
)
|
|
|
(2,279
|
)
|
|
|
(2,362
|
)
|
|
|
(3,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(12
|
)
|
|
|
(153
|
)
|
|
|
67
|
|
|
|
(248
|
)
|
Income from discontinued operations
|
|
|
184
|
|
|
|
17,457
|
|
|
|
74
|
|
|
|
2,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
172
|
|
|
$
|
17,304
|
|
|
$
|
141
|
|
|
$
|
1,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations, basic and diluted, per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
Income from discontinued
operations, basic and diluted, per share
|
|
|
0.02
|
|
|
|
1.58
|
|
|
|
0.01
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, basic and diluted, per
share
|
|
$
|
0.02
|
|
|
$
|
1.57
|
|
|
$
|
0.01
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Year Ended December 31, 2005
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total revenues
|
|
$
|
9,207
|
|
|
$
|
9,537
|
|
|
$
|
10,169
|
|
|
$
|
10,676
|
|
Operating expenses
|
|
|
(8,702
|
)
|
|
|
(8,530
|
)
|
|
|
(8,646
|
)
|
|
|
(21,426
|
)
|
Other income, net
|
|
|
(1,786
|
)
|
|
|
(1,859
|
)
|
|
|
(1,660
|
)
|
|
|
(1,741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(1,281
|
)
|
|
|
(852
|
)
|
|
|
(137
|
)
|
|
|
(12,491
|
)
|
Income from discontinued operations
|
|
|
300
|
|
|
|
345
|
|
|
|
3,762
|
|
|
|
21,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(981
|
)
|
|
$
|
(507
|
)
|
|
$
|
3,625
|
|
|
$
|
8,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations,
basic and diluted, per share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(1.19
|
)
|
Income from discontinued
operations, basic and diluted, per share
|
|
|
0.03
|
|
|
|
0.02
|
|
|
|
0.36
|
|
|
|
2.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), basic and
diluted, per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.35
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the 2006 discontinued operations, amounts differ from
previously filed quarterly reports.
Basic and diluted earnings per share are calculated
independently for each of the quarters presented. Accordingly,
the sum of the quarterly earnings per share amounts may not
agree with the total year.
60
Schedule III
AMERICA
FIRST APARTMENT INVESTORS, INC.
REAL
ESTATE AND ACCUMULATED DEPRECIATION
AS OF
DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized
|
|
|
|
|
|
|
|
|
|
|
Subsequent
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost to Company
|
|
|
to Acquisition
|
|
Description
|
|
|
|
|
|
|
|
|
Building
|
|
|
Building
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
and
|
|
|
and
|
|
Property Name
|
|
Location
|
|
of Units
|
|
|
Encumbered
|
|
|
Land
|
|
|
Improvements
|
|
|
Improvements
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Arbor Hills
|
|
Antioch, TN
|
|
|
548
|
|
|
|
(a
|
)
|
|
$
|
4,400
|
|
|
$
|
25,336
|
|
|
$
|
562
|
|
Arbors of Dublin
|
|
Dublin, OH
|
|
|
288
|
|
|
|
(b
|
)
|
|
|
1,750
|
|
|
|
15,085
|
|
|
|
381
|
|
Bluff Ridge Apartments
|
|
Jacksonville, NC
|
|
|
108
|
|
|
|
(a
|
)
|
|
|
203
|
|
|
|
3,502
|
|
|
|
85
|
|
Brentwood Oaks Apartments
|
|
Nashville, TN
|
|
|
262
|
|
|
|
(b
|
)
|
|
|
2,000
|
|
|
|
9,837
|
|
|
|
302
|
|
Coral Point Apartments
|
|
Mesa, AZ
|
|
|
337
|
|
|
|
(a
|
)
|
|
|
2,240
|
|
|
|
8,960
|
|
|
|
591
|
|
Cornerstone Apartments
|
|
Independence, MO
|
|
|
420
|
|
|
|
(b
|
)
|
|
|
2,150
|
|
|
|
34,513
|
|
|
|
|
|
Covey at Fox Valley
|
|
Aurora, IL
|
|
|
216
|
|
|
|
(b
|
)
|
|
|
1,320
|
|
|
|
10,028
|
|
|
|
431
|
|
Cumberland Trace
|
|
Fayetteville, NC
|
|
|
248
|
|
|
|
(a
|
)
|
|
|
1,175
|
|
|
|
9,162
|
|
|
|
21
|
|
Elliots Crossing Apartments
|
|
Tempe, AZ
|
|
|
247
|
|
|
|
(a
|
)
|
|
|
1,301
|
|
|
|
9,694
|
|
|
|
239
|
|
Fox Hollow Apartments
|
|
High Point, NC
|
|
|
184
|
|
|
|
(a
|
)
|
|
|
1,000
|
|
|
|
5,046
|
|
|
|
165
|
|
Greenbriar Apartments
|
|
Tulsa, OK
|
|
|
120
|
|
|
|
(a
|
)
|
|
|
648
|
|
|
|
3,673
|
|
|
|
209
|
|
Highland Park Apartments
|
|
Columbus, OH
|
|
|
252
|
|
|
|
(a
|
)
|
|
|
1,562
|
|
|
|
6,207
|
|
|
|
289
|
|
Huntsview Apartments
|
|
Greensboro, NC
|
|
|
240
|
|
|
|
(a
|
)
|
|
|
1,845
|
|
|
|
6,576
|
|
|
|
180
|
|
Jackson Park Place Apartments
|
|
Fresno, CA
|
|
|
296
|
|
|
|
(a
|
)
|
|
|
1,400
|
|
|
|
10,710
|
|
|
|
313
|
|
Jackson Park Place
Apartments Phase II
|
|
Fresno, CA
|
|
|
80
|
|
|
|
(a
|
)
|
|
|
1,425
|
|
|
|
8,807
|
|
|
|
21
|
|
Lakes of Northdale Apartments
|
|
Tampa, FL
|
|
|
216
|
|
|
|
(a
|
)
|
|
|
1,553
|
|
|
|
8,390
|
|
|
|
595
|
|
Littlestone of Village Green
|
|
Gallatin, TN
|
|
|
200
|
|
|
|
(a
|
)
|
|
|
621
|
|
|
|
9,942
|
|
|
|
228
|
|
Misty Springs Apartments
|
|
Daytona Beach, FL
|
|
|
128
|
|
|
|
|
|
|
|
742
|
|
|
|
3,827
|
|
|
|
252
|
|
Monticello Apartments
|
|
Southfield, MI
|
|
|
106
|
|
|
|
|
|
|
|
565
|
|
|
|
5,274
|
|
|
|
64
|
|
Morganton Place
|
|
Fayetteville, NC
|
|
|
280
|
|
|
|
(b
|
)
|
|
|
1,400
|
|
|
|
17,031
|
|
|
|
31
|
|
Oakhurst Apartments
|
|
Ocala, FL
|
|
|
214
|
|
|
|
(a
|
)
|
|
|
847
|
|
|
|
8,381
|
|
|
|
227
|
|
Oakwell Farms Apartments
|
|
Nashville, TN
|
|
|
414
|
|
|
|
(a
|
)
|
|
|
1,946
|
|
|
|
15,759
|
|
|
|
654
|
|
Shelby Heights
|
|
Bristol, TN
|
|
|
100
|
|
|
|
(a
|
)
|
|
|
175
|
|
|
|
2,953
|
|
|
|
41
|
|
The Exchange at Palm Bay
|
|
Palm Bay, FL
|
|
|
72,007
|
(c)
|
|
|
(a
|
)
|
|
|
1,296
|
|
|
|
2,483
|
|
|
|
591
|
|
The Greenhouse
|
|
Omaha, NE
|
|
|
126
|
|
|
|
(b
|
)
|
|
|
730
|
|
|
|
14,803
|
|
|
|
113
|
|
The Hunt Apartments
|
|
Oklahoma City, OK
|
|
|
216
|
|
|
|
(a
|
)
|
|
|
550
|
|
|
|
7,069
|
|
|
|
81
|
|
The Park at Countryside
|
|
Port Orange, FL
|
|
|
120
|
|
|
|
(a
|
)
|
|
|
647
|
|
|
|
2,617
|
|
|
|
158
|
|
The Ponds at Georgetown
|
|
Ann Arbor, MI
|
|
|
134
|
|
|
|
|
|
|
|
653
|
|
|
|
6,822
|
|
|
|
186
|
|
The Reserve at Wescott Plantation
|
|
Summerville, SC
|
|
|
192
|
|
|
|
(a
|
)
|
|
|
1,725
|
|
|
|
15,601
|
|
|
|
28
|
|
Tregaron Oaks
|
|
Bellevue, NE
|
|
|
300
|
|
|
|
(a
|
)
|
|
|
1,690
|
|
|
|
17,399
|
|
|
|
150
|
|
Village at Cliffdale
|
|
Fayetteville, NC
|
|
|
356
|
|
|
|
(b
|
)
|
|
|
1,775
|
|
|
|
19,951
|
|
|
|
24
|
|
Watermans Crossing
|
|
Newport News, VA
|
|
|
260
|
|
|
|
(a
|
)
|
|
|
1,620
|
|
|
|
12,717
|
|
|
|
249
|
|
Waters Edge Apartments
|
|
Lake Villa, IL
|
|
|
108
|
|
|
|
|
|
|
|
486
|
|
|
|
4,601
|
|
|
|
146
|
|
Woodberry Apartments
|
|
Asheville, NC
|
|
|
168
|
|
|
|
(b
|
)
|
|
|
1,174
|
|
|
|
8,842
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,614
|
|
|
$
|
351,598
|
|
|
$
|
7,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
(a) |
|
Property is encumbered as described in Note 8 to the
Consolidated Financial Statements. |
|
(b) |
|
Property is encumbered and included within the credit facility
described in Note 9 to the Consolidated Financial
Statements. |
|
(c) |
|
Property is an office/warehouse facility. The figure represents
square feet available for lease to tenants. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
Accumulated
|
|
|
Date of
|
|
|
Date
|
|
|
Depreciable
|
|
Property Name
|
|
Land
|
|
|
Improvements
|
|
|
Total(b),(c)
|
|
|
Depreciation(d)
|
|
|
Construction
|
|
|
Acquired
|
|
|
Life
|
|
|
Arbor Hills
|
|
$
|
4,400
|
|
|
$
|
25,898
|
|
|
$
|
30,298
|
|
|
$
|
(1,904
|
)
|
|
|
1988
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Arbors of Dublin
|
|
|
1,750
|
|
|
|
15,466
|
|
|
|
17,216
|
|
|
|
(453
|
)
|
|
|
1988
|
|
|
|
2006
|
|
|
|
27.5 years
|
|
Bluff Ridge Apartments
|
|
|
203
|
|
|
|
3,587
|
|
|
|
3,790
|
|
|
|
(335
|
)
|
|
|
1988
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Brentwood Oaks Apartments
|
|
|
2,000
|
|
|
|
10,139
|
|
|
|
12,139
|
|
|
|
(947
|
)
|
|
|
1986
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Coral Point Apartments
|
|
|
2,240
|
|
|
|
9,551
|
|
|
|
11,791
|
|
|
|
(5,196
|
)
|
|
|
1986
|
|
|
|
1991
|
|
|
|
27.5 years
|
|
Cornerstone Apartments
|
|
|
2,150
|
|
|
|
34,513
|
|
|
|
36,663
|
|
|
|
0
|
|
|
|
2004
|
|
|
|
2006
|
|
|
|
27.5 years
|
|
Covey at Fox Valley
|
|
|
1,320
|
|
|
|
10,459
|
|
|
|
11,779
|
|
|
|
(6,911
|
)
|
|
|
1987
|
|
|
|
1989
|
|
|
|
27.5 years
|
|
Cumberland Trace
|
|
|
1,175
|
|
|
|
9,183
|
|
|
|
10,357
|
|
|
|
0
|
|
|
|
1973
|
|
|
|
2006
|
|
|
|
27.5 years
|
|
Elliots Crossing Apartments
|
|
|
1,301
|
|
|
|
9,933
|
|
|
|
11,234
|
|
|
|
(928
|
)
|
|
|
1987
|
|
|
|
2004
|
|
|
|
31.5 years
|
|
Fox Hollow Apartments
|
|
|
1,000
|
|
|
|
5,211
|
|
|
|
6,211
|
|
|
|
(534
|
)
|
|
|
1987
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Greenbriar Apartments
|
|
|
648
|
|
|
|
3,882
|
|
|
|
4,530
|
|
|
|
(1,138
|
)
|
|
|
1985
|
|
|
|
1998
|
|
|
|
27.5 years
|
|
Highland Park Apartments
|
|
|
1,562
|
|
|
|
6,496
|
|
|
|
8,058
|
|
|
|
(660
|
)
|
|
|
1987
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Huntsview Apartments
|
|
|
1,845
|
|
|
|
6,756
|
|
|
|
8,601
|
|
|
|
(637
|
)
|
|
|
1987
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Jackson Park Place Apartments
|
|
|
1,400
|
|
|
|
11,023
|
|
|
|
12,423
|
|
|
|
(3,854
|
)
|
|
|
1985
|
|
|
|
1997
|
|
|
|
27.5 years
|
|
Jackson Park Place
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apartments
Phase II
|
|
|
1,425
|
|
|
|
8,828
|
|
|
|
10,253
|
|
|
|
(134
|
)
|
|
|
1990
|
|
|
|
2006
|
|
|
|
27.5 years
|
|
Lakes of Northdale Apartments
|
|
|
1,553
|
|
|
|
8,985
|
|
|
|
10,538
|
|
|
|
(850
|
)
|
|
|
1985
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Littlestone of Village Green
|
|
|
621
|
|
|
|
10,170
|
|
|
|
10,791
|
|
|
|
(3,292
|
)
|
|
|
1987
|
|
|
|
1998
|
|
|
|
27.5 years
|
|
Misty Springs Apartments
|
|
|
742
|
|
|
|
4,079
|
|
|
|
4,821
|
|
|
|
(381
|
)
|
|
|
1988
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Monticello Apartments
|
|
|
565
|
|
|
|
5,338
|
|
|
|
5,903
|
|
|
|
(505
|
)
|
|
|
1988
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Morganton Place
|
|
|
1,400
|
|
|
|
17,062
|
|
|
|
18,462
|
|
|
|
(157
|
)
|
|
|
1994
|
|
|
|
2006
|
|
|
|
27.5 years
|
|
Oakhurst Apartments
|
|
|
847
|
|
|
|
8,608
|
|
|
|
9,455
|
|
|
|
(1,919
|
)
|
|
|
1987
|
|
|
|
2000
|
|
|
|
27.5 years
|
|
Oakwell Farms Apartments
|
|
|
1,946
|
|
|
|
16,413
|
|
|
|
18,359
|
|
|
|
(4,559
|
)
|
|
|
1986
|
|
|
|
1999
|
|
|
|
27.5 years
|
|
Shelby Heights
|
|
|
175
|
|
|
|
2,994
|
|
|
|
3,169
|
|
|
|
(1,714
|
)
|
|
|
1987
|
|
|
|
1991
|
|
|
|
27.5 years
|
|
The Exchange at Palm Bay
|
|
|
1,296
|
|
|
|
3,074
|
|
|
|
4,370
|
|
|
|
(2,099
|
)
|
|
|
1988
|
|
|
|
1990
|
|
|
|
27.5 years
|
|
The Greenhouse
|
|
|
730
|
|
|
|
14,916
|
|
|
|
15,646
|
|
|
|
(502
|
)
|
|
|
1990
|
|
|
|
2006
|
|
|
|
27.5 years
|
|
The Hunt Apartments
|
|
|
550
|
|
|
|
7,150
|
|
|
|
7,700
|
|
|
|
(2,086
|
)
|
|
|
1984
|
|
|
|
1998
|
|
|
|
27.5 years
|
|
The Park at Countryside
|
|
|
647
|
|
|
|
2,775
|
|
|
|
3,422
|
|
|
|
(979
|
)
|
|
|
1983
|
|
|
|
1996
|
|
|
|
27.5 years
|
|
The Ponds at Georgetown
|
|
|
653
|
|
|
|
7,008
|
|
|
|
7,661
|
|
|
|
(662
|
)
|
|
|
1988
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
The Reserve at Wescott
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plantation
|
|
|
1,725
|
|
|
|
15,629
|
|
|
|
17,354
|
|
|
|
(759
|
)
|
|
|
2004
|
|
|
|
2005
|
|
|
|
27.5 years
|
|
Tregaron Oaks
|
|
|
1,690
|
|
|
|
17,549
|
|
|
|
19,239
|
|
|
|
(909
|
)
|
|
|
1996
|
|
|
|
2005
|
|
|
|
27.5 years
|
|
Village at Cliffdale
|
|
|
1,775
|
|
|
|
19,975
|
|
|
|
21,750
|
|
|
|
(183
|
)
|
|
|
1990
|
|
|
|
2006
|
|
|
|
27.5 years
|
|
Watermans Crossing
|
|
|
1,620
|
|
|
|
12,966
|
|
|
|
14,586
|
|
|
|
(1,249
|
)
|
|
|
1987
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Waters Edge Apartments
|
|
|
486
|
|
|
|
4,747
|
|
|
|
5,233
|
|
|
|
(401
|
)
|
|
|
1988
|
|
|
|
2004
|
|
|
|
27.5 years
|
|
Woodberry Apartments
|
|
|
1,174
|
|
|
|
8,863
|
|
|
|
10,037
|
|
|
|
(81
|
)
|
|
|
1987
|
|
|
|
2006
|
|
|
|
27.5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,614
|
|
|
$
|
359,226
|
|
|
$
|
403,840
|
|
|
$
|
(46,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
(b) |
|
Reconciliation of Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance beginning of
year
|
|
$
|
280,192
|
|
|
$
|
283,068
|
|
|
$
|
150,591
|
|
Acquisition of real estate
|
|
|
139,767
|
|
|
|
36,415
|
|
|
|
145,592
|
|
Sales of real estate
|
|
|
(19,826
|
)
|
|
|
(39,192
|
)
|
|
|
(14,287
|
)
|
Write-off of fully depreciated
assets
|
|
|
|
|
|
|
(2,185
|
)
|
|
|
|
|
Improvements
|
|
|
3,706
|
|
|
|
2,086
|
|
|
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of year
|
|
$
|
403,839
|
|
|
$
|
280,192
|
|
|
$
|
283,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Assets held for sale
|
|
|
(15,590
|
)
|
|
|
(24,829
|
)
|
|
|
(63,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
388,249
|
|
|
$
|
255,363
|
|
|
$
|
219,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
As of December 31, 2006, the aggregate cost of the
Companys real estate assets for Federal income tax
purposes is approximately $377.4 million. |
|
(d) |
|
Reconciliation of Accumulated Depreciation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance beginning of
year
|
|
$
|
40,459
|
|
|
$
|
42,567
|
|
|
$
|
35,693
|
|
Depreciation expense
|
|
|
10,248
|
|
|
|
7,640
|
|
|
|
4,934
|
|
Write-off of fully depreciated
assets
|
|
|
|
|
|
|
(2,185
|
)
|
|
|
|
|
Current year depreciation on
discontinued operations
|
|
|
376
|
|
|
|
1,569
|
|
|
|
2,171
|
|
Accumulated depreciation of
discontinued operations
|
|
|
(4,165
|
)
|
|
|
(9,132
|
)
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,918
|
|
|
$
|
40,459
|
|
|
$
|
42,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation of
assets held for sale
|
|
|
(401
|
)
|
|
|
(4,259
|
)
|
|
|
(11,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation of
continuing operations
|
|
$
|
46,517
|
|
|
$
|
36,200
|
|
|
$
|
30,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
There were no disagreements with the Companys independent
accountants on accounting principles and practices or financial
disclosure during the fiscal years ended December 31, 2006
and 2005.
|
|
Item 9A.
|
Controls
and Procedures.
|
(a) Evaluation of disclosure controls and
procedures. The Companys Chief Executive
Officer and Chief Financial Officer have reviewed and evaluated
the effectiveness of the Companys disclosure controls and
procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that the Companys current
disclosure controls and procedures are effective, providing them
with material information relating to the Company as required to
be disclosed in the reports the Company files or submits under
the Exchange Act on a timely basis.
(b) Changes in internal controls over financial
reporting. There were no changes in the
Companys internal control over financial reporting during
the Companys most recent fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.
Management
Report On Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act as a process designed by, or under the
supervision of, the Companys principal executive and
principal financial officers and effected by the Companys
Board, management and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with Generally Accepted Accounting Principles (GAAP)
and includes those policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and Directors of the Company; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate
because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2006. In making this assessment, the
Companys management used criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on
its assessment, the Companys management believes that, as
of December 31, 2006, the Companys internal control
over financial reporting was effective based on that criteria.
The Companys independent registered public accounting
firm, Deloitte & Touche LLP, has issued an audit report
on managements assessment of the Companys internal
control over financial reporting. This report appears on the
following page of this annual report on
Form 10-K.
64
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of America First
Apartment Investors, Inc.
We have audited managements assessment, included in the
accompanying Management Report On Internal Control Over
Financial Reporting, that America First Apartment Investors,
Inc. and subsidiaries (the Company) maintained
effective internal control over financial reporting as of
December 31, 2006 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2006 of
the Company and our report dated March 7, 2007 expressed an
unqualified opinion on those financial statements and financial
statement schedule.
Omaha, Nebraska
March 7, 2007
65
|
|
Item 9B.
|
Other
Information.
|
None
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant and Corporate
Governance.
|
The information about directors required to be furnished
pursuant to this Item 10 is incorporated by reference to
the Companys Definitive Proxy Statement for its 2007
Annual Meeting of Shareholders to be filed with the SEC pursuant
to Regulation 14A within 120 days after
December 31, 2006 (the Proxy Statement) under
the heading ELECTION OF DIRECTORS. The information
about the executive officers of the Company who are not also
directors of the Company is as follows:
|
|
|
|
|
|
|
Name
|
|
Position Held
|
|
Position Held Since
|
|
James J. Egan
|
|
Executive Vice President, Chief
Investment Officer
|
|
|
2005
|
|
Paul L. Beldin
|
|
Vice President, Chief Financial
Officer, Treasurer and Secretary
|
|
|
2005
|
|
James J. Egan, 42, was named Chief Investment Officer of
the Company in November 2005. Prior to joining the Company,
Mr. Egan served as Senior Vice President for Development at
ING Clarion Partners in New York. From April 1999 to July 2004,
he was at DRA Advisors in New York, serving in a number of
positions, including Director of Acquisitions and Development.
Paul L. Beldin, 33, was named Chief Financial Officer of
the Company in December 2005. Mr. Beldin joined America
First Companies as the Companys Controller in May 2005.
Prior to joining the Company, he was a senior manager at
Deloitte and Touche LLP, where he was employed from August 1996
to May 2005.
Section 16(a)
Beneficial Ownership Reporting Compliance
The information required to be furnished pursuant to
Section 16 (a) of the Securities Exchange Act of 1934
is incorporated by reference to the Proxy Statement under the
heading Section 16(a) Beneficial Ownership Reporting
Compliance.
Code of
Ethical Conduct and Code of Conduct
The Company has adopted a Code of Ethical Conduct for its senior
executive and financial officers as required by Section 406
of the Sarbanes-Oxley Act of 2002. As such this Code of Ethical
Conduct covers all executive officers of the Company. The
Company has also adopted a Corporate Code of Conduct applicable
to all directors, officers and employees which is designed to
comply with the listing requirements of the NASDAQ Stock Market.
Both the Code of Ethical Conduct and the Corporate Code of
Conduct are available on the Companys website at
www.apro-reit.com.
|
|
Item 11.
|
Executive
Compensation.
|
The information required to be furnished pursuant to this
Item 11 is incorporated by reference to the Proxy Statement
under the heading Compensation of Executive Officers.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters.
|
The information required to be furnished pursuant to this
Item 12 is incorporated by reference to the Proxy Statement
under the heading Ownership of Our Common Stock by Our
Directors and Officers and Principal Shareholders and
Equity Compensation Plan Information.
66
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence.
|
The information required to be furnished pursuant to this
Item 13 is incorporated by reference to the Proxy Statement
under the heading Certain Relationships and Related
Transactions.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required to be furnished pursuant to this
Item 14 is incorporated by reference to the Proxy Statement
under the heading Accounting Fees and Services.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a) The following documents are filed as part of this
report:
|
|
|
|
1.
|
Financial Statements. The following financial statements of the
Company are included in response to Item 8 of this report:
|
Reports of Independent Registered Public Accounting Firms.
Consolidated Balance Sheets of the Company and Subsidiaries as
of December 31, 2006 and 2005.
Consolidated Statements of Operations and Comprehensive Income
(Loss) of the Company and Subsidiaries for the three years ended
December 31, 2006.
Consolidated Statements of Shareholders Equity of the
Company and Subsidiaries for the three years ended
December 31, 2006.
Consolidated Statements of Cash Flows of the Company and
Subsidiaries for the three years ended December 31, 2006.
Notes to the Consolidated Financial Statements of the Company
and Subsidiaries.
|
|
|
|
2.
|
Financial Statement Schedules. The information required to be
set forth in the financial statement schedule is included in
Schedule III Real Estate and Accumulated
Depreciation as of December 31, 2006 filed in response to
Item 8 of this report.
|
|
|
3.
|
Exhibits. The following exhibits were filed as required by
Item 15(a) (3) of this report. Exhibit numbers refer
to the paragraph numbers under Item 601 of
Regulation S-K:
|
|
|
|
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger among
the Company and America First Apartment Advisory Corporation and
The Burlington Capital Group dated December 30, 2005
(incorporated herein by reference to the Current report on
Form 8-K
filed January 5, 2006).
|
|
2
|
.2
|
|
Agreement and Plan of Merger,
dated November 25, 2003, between the Company and America
First Real Estate Investment Partners, L.P. and Amendment to
Agreement and Plan of Merger, dated February 10, 2004
(incorporated by reference to Exhibit 2.1 to Amendment
No. 2 to the Companys Registration Statement on
Form S-4
(Commission File
No. 333-111036)
filed by the Company on February 25, 2004).
|
|
2
|
.3
|
|
Agreement and Plan of Merger,
dated June 18, 2002, between the Company and America First
Apartment Investors, L.P. (incorporated by reference to
Exhibit 2.1 to the Companys Registration Statement on
Form S-4
(Commission File No.
333-90690)
filed by the Company on June 18, 2002).
|
|
3
|
.1
|
|
Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Companys Registration Statement on
Form S-4
(Commission File
No. 333-90690)
filed by the Company on June 18, 2002).
|
|
3
|
.2
|
|
Bylaws of the Company
(incorporated by reference to Exhibit 3.2 to the
Companys Registration Statement on
Form S-4
(Commission File
No. 333-90690)
filed by the Company on August 1, 2002).
|
67
|
|
|
|
|
|
4
|
.1
|
|
Specimen of Common Stock
Certificate of the Company (incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on
Form S-4
(Commission File No.
333-90690)
filed by the Company on June 18, 2002).
|
|
10
|
.1
|
|
Agreement of Sale and Purchase by
and between the Company and TCG Acquisitions, Inc. (incorporated
herein by reference to the Current report on
Form 8-K
filed September 9, 2005).
|
|
10
|
.2
|
|
Loan and Security Agreement the
Company and America First Communities Offutt Developer, LLC
(incorporated herein by reference to the Current report on
Form 8-K
filed September 21, 2005).
|
|
10
|
.3
|
|
Agreement of Purchase and Sale by
and between the Company and Tregaron Oaks, LLC (incorporated
herein by reference to the Current report on
Form 8-K
filed June 1, 2005).
|
|
10
|
.4
|
|
Agreement of Purchase and Sale by
and between the Company and Wescott Reserve, LLC (incorporated
herein by reference to the Current report on
Form 8-K
filed June 8, 2005).
|
|
10
|
.5
|
|
Agreement of Purchase and Sale by
and between the Company and NALS Austin, LLC (incorporated
herein by reference to the Current report on
Form 8-K
filed June 23, 2005).
|
|
10
|
.6
|
|
Agreement of Purchase and Sale
dated January 18, 2006, by and between America First
Apartment Investors, Inc. and Retirement Centers Corporation
(incorporated herein by reference to the Current report on
Form 8-K
filed January 24, 2006).
|
|
10
|
.7
|
|
Agreement of Purchase and Sale
dated April 27, 2006 by and between the Company and Brady
Sullivan Properties, LLC, a New Hampshire limited liability
company (incorporated by reference to Exhibit 10 to the
Current Report on
Form 8-K
filed May 2, 2006).
|
|
10
|
.8
|
|
Master Credit Facility and
Reimbursement Agreement, dated September 28, 2006, by and
between the Company and Wells Fargo Bank, N.A. and Fannie Mae
(incorporated by reference to exhibit 10 to the Current Report
on
Form 8-K
filed October, 4, 2006).
|
|
10
|
.9
|
|
Agreement of Purchase and Sale
dated September 12, 2006, by and between the Company and
UDR of NC, Limited Partnership, a North Carolina limited
partnership (incorporated by reference to Exhibit 10 to the
Current Report on
Form 8-K
filed September 18, 2006).
|
|
10
|
.10
|
|
Agreement of Purchase and Sale
effective October 21, 2006, by and between the Company and
The R&S Apartment Land, LLC, a Missouri limited liability
company (incorporated by reference to Exhibit 10 to the
Current Report on
Form 8-K
filed October 30, 2006).
|
|
10
|
.11
|
|
The Companys 2006 Equity
Incentive Plan (incorporated by reference to Exhibit B to
the Companys definitive proxy statement of the Company
(Commission file No. 000-49986) filed by the Company on
April 4, 2006).
|
|
10
|
.12
|
|
Employment Agreement between the
Company and John H. Cassidy (incorporated by reference to
Exhibit 10.1 to the Current Report on
Form 8-K
filed February 23, 2007).
|
|
10
|
.13
|
|
Employment Agreement between the
Company and James J. Egan (incorporated by reference to
Exhibit 10.2 to the Current Report on
Form 8-K
filed February 23, 2007).
|
|
10
|
.21
|
|
Employment Agreement between the
Company and Paul L. Beldin (incorporated by reference to
Exhibit 10.3 to the Current Report on
Form 8-K
filed February 23, 2007).
|
|
21
|
.
|
|
Subsidiaries of the Company.
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
24
|
.
|
|
Powers of Attorney
|
|
31
|
.1
|
|
Certification of CEO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of CFO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of CEO pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of CFO pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
AMERICA FIRST APARTMENT INVESTORS, INC.
|
Date: March 7, 2007
|
|
/s/ John
H. Cassidy
John
H. Cassidy
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Company and in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
By /s/ Michael
B. Yanney*
Michael
B. Yanney
|
|
Chairman of the Board and Director
|
|
Date: March 7, 2007
|
|
|
|
|
|
By /s/ John
H. Cassidy
John
H. Cassidy
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President, Chief Executive Officer
and Director
(Principal Executive Officer)
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Date: March 7, 2007
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By /s/ Paul
L. Beldin
Paul
L. Beldin
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|
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
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Date: March 7, 2007
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By /s/ George
J. Behringer*
George
J. Behringer
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|
Director
|
|
Date: March 7, 2007
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By /s/ George
V. Janzen*
George
V. Janzen
|
|
Director
|
|
Date: March 7, 2007
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|
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By /s/ George
H. Krauss*
George
H. Krauss
|
|
Director
|
|
Date: March 7, 2007
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Director
|
|
Date: March 7, 2007
|
|
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By /s/ Lisa
Y. Roskens*
Lisa
Y. Roskens
|
|
Director
|
|
Date: March 7, 2007
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By /s/ John
Schlegel*
John
Schlegel
|
|
Director
|
|
Date: March 7, 2007
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By /s/ Steven
W. Seline*
Steven
W. Seline
|
|
Director
|
|
Date: March 7, 2007
|
|
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*By John H. Cassidy, Attorney in
Fact
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/s/ John
H.
Cassidy John
H. Cassidy
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