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| RPI > SEC Filings for RPI > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
• three neighborhood retail centers totaling 94,337 square feet (Bassett and Spectrum, both located near the Mall of Georgia, and the Addison Place Shops);
• a commercial office building totaling 37,864 square feet that is in its lease-up phase, part of which serves as our corporate headquarters (Northridge Office Building);
• a 62,323 square foot retail center held for redevelopment (Grand Pavilion Retail center); and
• a tract of undeveloped land totaling 44 acres that we hold for investment (Westside).
Recent Developments
Sale of Addison Place
On June 24, 2008, we sold our 403-unit Addison Place apartment community for
$60,000,000 to an unrelated buyer. Addison Place was designed, developed, and
constructed by Roberts Properties, which is owned by Mr. Charles S. Roberts, our
Chief Executive Officer and Chairman of the Board of Directors. The sale
resulted in a gain on sale of $28,348,000. Net cash proceeds at closing totaled
$29,300,000, from which we paid a distribution to our shareholders and
unitholders on August 5, 2008 equal to $0.66 per share/unit, or $5,006,000 in
total. Given the weak U.S. economy and the continued stress in the banking
system, we believed the safest course of action was to distribute only $0.66 per
share/unit and retain the balance of the sales proceeds for working capital and
balance sheet liquidity. As of November 6, 2008, we have approximately
$17,103,000 in cash and cash equivalents. As explained below, we expect to use
approximately $2.2 million of that cash to pay the cash portion of the
distributions we expect to pay to shareholders and unitholders in January 2009
to maintain our status as a REIT.
We have accounted for the operations of Addison Place as discontinued operations
for the three and nine months ended September 30, 2008 and 2007. Accordingly,
the analysis and discussion in this Item 2 focuses on the continuing operations
of our remaining properties. The sale of Addison Place will affect our future
results of operations and our liquidity and capital resources generally as
follows:
• Increased Working Capital. We received net cash proceeds of
approximately $29,300,000 from the sale of Addison Place from which we
paid $5,006,000 in distributions to shareholders and unitholders. As of
November 6, 2008, we have approximately $17,103,000 in cash, from which
we must additional pay cash distributions totaling approximately
$2.2 million to shareholders and unitholders in January 2009 as
described elsewhere in this report.
• Net Cash Provided by Operating Activities from Continuing Operations. A significant portion of the net cash provided by operating activities from continuing operations has in the past been provided by Addison Place. Accordingly, we expect net cash provided by operating activities from continuing operations to be materially lower during the remainder of 2008 and calendar year 2009 than in 2007.
• Reduced Revenues. Revenues for Addison Place were $5,397,000 for 2007, or approximately 68.7% of our total revenue. Accordingly, our revenues will be materially lower during 2008 and 2009 as compared to 2007.
• Reduced Income from Operations. Income from operations provided by Addison Place was $1,796,000 for 2007, compared to a total loss from operations of $24,000 for 2007. Accordingly, we expect our income from operations will be materially lower during the remainder of 2008 and in 2009 than in 2007.
• Reduction in Number of Employees and Associated Costs. Our number of employees has decreased from approximately 12 to 4, and our related costs will decrease materially. Due to our status as a public company, with its associated costs that are largely unrelated to our asset base, the percentage decrease in our overall general and administrative expenses will be materially less than the percentage of our revenues represented by Addison Place.
• Reduced Mortgage Notes Payable. As of the date we closed the sale of Addison Place, we reduced our mortgage debt by a total of $28,833,000.
• Reduced Monthly Mortgage Payments. Monthly mortgage payments for Addison Place were $195,000, or 43.1%, of our total monthly mortgage payments for May 2008, the last month during which we owned Addison Place for the full month. Our monthly mortgage payments have been reduced by this amount.
Recent Loan Renewals
During the quarter ended September 30, 2008, we renewed four loans totaling
$18,245,000 and extended the maturities to various dates during 2010 as well as
reduced the principal amount of the four loans by a total of $1,552,000.
Material Events in 2009
Distributions in Early 2009 to Meet REIT Tax Requirements
We have not paid a regular quarterly dividend since the third quarter of 2001,
and we presently have no plans to resume paying regular quarterly dividends.
However, it has been our informal policy since 2003 to pay distributions from
the sales proceeds of properties we sell. Following this policy, after we sold
Addison Place as described above, we paid a cash distribution to our
shareholders and unitholders on August 5, 2008 equal to $0.66 per share/unit, or
$5,006,000 in total, from the net proceeds of the sale of Addison Place.
Because we have elected to be taxed as a REIT under the Internal Revenue Code,
we are subject to a number of organizational and operating requirements,
including a requirement to distribute 90% of our adjusted taxable income to our
shareholders. As a REIT, we generally are not subject to federal income taxes on
our taxable income we distribute to our shareholders. Given those distribution
requirements, we have now determined that we must pay an additional distribution
to shareholders and unitholders over and above the distribution of $5,006,000,
or $0.66 per share/unit, paid on August 5, 2008 as noted above.
The additional distribution will consist of a combination of cash and our common
stock. The reason for issuing common stock is our need to preserve our cash
during this extraordinary credit crunch and rapidly deteriorating economic
climate. Although the exact amount of the distribution cannot be made until we
close our books and records for the fiscal year ended December 31, 2008, we
currently estimate that we will pay in January 2009 a total of approximately
$2.2 million, or $0.28 per share/unit, in additional cash distributions to
shareholders and unitholders.
In addition to the cash distribution, shareholders will receive additional
shares of our common stock equal to approximately $7.7 million. Unitholders will
receive the same pro rata distribution of our common stock, but only when the
individual unitholder elects to convert his or her units to shares. Shareholders
and unitholders will have the same ownership percentage after the January 2009
distribution as before the distribution.
The amounts of the cash and stock distributions provided above are estimates and
may change based on our financial results for the year ended December 31, 2008.
We expect that our board of directors will declare the distributions in late
December 2008 and that it will pay the distributions in late January 2009.
We have decided to pay 80% of the distributions to shareholders in common stock
to preserve our cash during this extraordinary credit crunch. In particular, we
need cash for the following purposes:
(a) to repay, if necessary, part of the $12,252,000 that we will owe on
April 30, 2009 and will seek to refinance;
(b) to provide the equity required to develop and construct two new apartment communities as we plan; and
(c) to provide working capital to enable us to cover our negative operating cash flow until we complete our development and construction program.
Short-Term Loans Maturing in April 2009
We now have only two loans that mature within the next twelve months, other than
our $2,500,000 line of credit that has no outstanding balance. These two loans
total $12,252,000: the $8,175,000 loan on our Peachtree Parkway land and the
$4,077,000 loan on our Highway 20 land, both of which mature on April 30, 2009.
We intend to refinance these loans with the same lender or with another lender
or lenders. We may be required to pay down the loans in connection with a
refinancing, and to fund any such paydown we may use cash from one or more of
the following sources: our existing cash, contributions of a joint venture
partner, net proceeds from the sale of another property, or equity we raise in a
private offering. If we are unable to refinance these loans in some manner or to
reach agreement with the lender to extend these loans, the lender could
foreclose on our Peachtree Parkway and Highway 20 properties, which would have
material adverse financial and business consequences for us. In that event, we
could be forced to dispose of all or a substantial portion of our properties in
highly unfavorable circumstances.
Continuing Negative Operating Cash Flow
We own six tracts of undeveloped land totaling 148.4 acres. Five of these tracts
- Peachtree Parkway, Westside, Highway 20, Sawmill Village, and North Springs,
which we carry on our balance sheet at a combined value of $53,200,000 - are
currently encumbered with land loans totaling $21,252,000. Our Northridge land
is the only one of our six tracts of undeveloped land that is not encumbered
with a land loan. Because undeveloped land does not generate revenue, the
majority of our negative cash flow is due to the carrying costs (interest
expense and property taxes) on our undeveloped land. In addition, the financial
performance of our four neighborhood retail centers and office building continue
to be challenged by the continued weakness in the national and local economy.
Therefore, for these reasons, as well as the absence of the operating cash flow
we previously received from our Addison Place apartment community, we expect to
continue to generate negative operating cash flow and to operate at a loss for
the foreseeable future.
The current economy is forcing the owners of real estate to go through a painful
de-leveraging process. Although we believe we have excellent, well-located
assets, a significant amount of our assets consists of undeveloped land that is
generating negative cash flow due to carrying costs as noted above. Our business
plan to reduce our negative cash flow includes the following:
1. converting land loans to construction loans on two of our properties,
given that construction loans fund interest out of draws on the loans;
2. developing and constructing new apartment communities on the land we own, as described below, with the expectation that we will begin to generate positive cash flow as we construct the communities and begin to lease them up;
3. completing the leasing of our retail and office properties; and
4. selling one or more assets.
We may sell one or more assets to independent purchasers or to Roberts
Properties or an affiliate of Roberts Properties, and we are considering forming
joint ventures and raising equity privately. We would use all or substantial
portions of the equity contribution of our joint venture partner, or of the
equity we raise privately, to pay down our debt. We are in discussions with
possible joint venture participants such as life insurance companies, hedge
funds, foreign investors, and local investors as well as Roberts Properties.
Although this strategy will not completely eliminate our negative cash flow, we
believe that it should put us in a stronger position as we pursue our
development/construction activities. We are moving forward with the development
and construction of our next two apartment communities: Northridge and Sawmill
Village.
Despite the tough economy, we believe this is a good time to create multifamily
assets, and our banks have told us that they will consider making construction
loans for that purpose. Because of the rapid slowdown in the economy, we believe
we can build at a lower construction cost than in the recent past. We have
created value for our shareholders in the past by building when construction
costs were lower, generally during economic downturns or recessions. We believe
that any capital we need to fund the construction of a new multifamily property,
in addition to a construction loan and a portion of the Addison Place sales
proceeds, would come from the proceeds of a sale of another property, the
contributions of a joint venture partner, or equity we raise privately.
Results of Operations
Comparison of Three Months Ended September 30, 2008 to Three Months Ended
September 30, 2007
Loss from continuing operations (net of the minority interest of the unitholders
in the operating partnership) increased $862,000, or 142%, from $606,000 for the
three months ended September 30, 2007 to $1,468,000 for the three months ended
September 30, 2008. We explain below the major variances between the three
months ended September 30, 2007 and the three months ended September 30, 2008.
Total operating revenues increased $33,000, or 5.3%, from $620,000 for the three
months ended September 30, 2007 to $653,000 for the three months ended
September 30, 2008. This increase in operating revenues is due primarily to the
increase of straight line rent and above and below market rent of $25,000. The
remaining increase is due primarily to rent increases and other fees.
Operating expenses, consisting of personnel, utilities, repairs and maintenance,
landscaping, property taxes, marketing, insurance, and other expenses, increased
$51,000, or 18.6%, from $274,000 for the three months ended September 30, 2007
to $325,000 for the three months ended September 30, 2008. This increase in
operating expenses is due primarily to a $24,000 increase in property taxes as
well as a $27,000 increase in maintenance personnel and expenses.
General and administrative expenses increased $35,000, or 8.8%, from $399,000
for the three months ended September 30, 2007 to $434,000 for the three months
ended September 30, 2008. This increase was due primarily to an increase of
$27,000 in corporate and retail overhead expenses, and an increase of $9,000 in
land appraisals and legal work.
At September 30, 2008, we recorded a $1,255,000 impairment loss on the
Northridge Office Building. We had no impairment losses during the 2007 period.
See Note 8, Impairment Loss on Northridge Office Building, to the Consolidated
Financial Statements included in this report.
Depreciation expense decreased $7,000, or 2.1%, from $339,000 for the three
months ended September 30, 2007 to $332,000 for the three months ended
September 30, 2008. This decrease was due primarily to a reduction of the
amortization of fair value of leases at the Bassett, Spectrum, and Grand
Pavilion retail centers of $26,000, offset by an increase of $18,000 in
depreciation expense related to tenant improvements.
Interest income increased $127,000, or 438%, from $29,000 for the three months
ended September 30, 2007 to $156,000 for the three months ended September 30,
2008. This increase was due primarily to a significant increase in cash
available for investment from the sale of the Addison Place apartment community.
Interest expense decreased $124,000, or 27.1%, from $457,000 for the three
months ended September 30, 2007 to $333,000 for the three months ended
September 30, 2008. This decrease was due primarily to:
• A decrease of $46,000 of interest expense that was capitalized on our
Northridge, Sawmill Village, and Peachtree Parkway land in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 34,
"Capitalization of Interest Cost"; and
• a decrease of $74,000 in interest paid on two floating rate loans (the Addison Place Shops and the Northridge Office Building) due to a decrease in the 30-day LIBOR rate.
Legal settlement decreased $60,000 from $60,000 for the three months ended September 30, 2007 to $0 for the three months ended September 30, 2008. This decrease was due to a legal settlement we made in the 2007 period.
Amortization of deferred financing and leasing costs increased $19,000, or
55.9%, from $34,000 for the three months ended September 30, 2007 to $53,000 for
the three months ended September 30, 2008. This increase was due primarily to an
increase of loan costs on our land loans as well as an increase of leasing costs
for our four retail centers and office building.
Comparison of Nine Months Ended September 30, 2008 to Nine Months Ended
September 30, 2007
Loss from continuing operations (net of the minority interest of the unitholders
in the operating partnership) increased $210,000, or 8.3%, from $2,525,000 for
the nine months ended September 30, 2007 to $2,735,000 for the nine months ended
September 30, 2008. We explain below the major variances between the nine months
ended September 30, 2007 and the nine months ended September 30, 2008.
Total operating revenues increased $100,000, or 5.4%, from $1,845,000 for the
nine months ended September 30, 2007 to $1,945,000 for the nine months ended
September 30, 2008. This increase in operating revenues is due primarily to an
increase of $38,000 in straight line rent and above and below market rent. The
remaining increase is primarily due to rent increases and new leases.
Operating expenses, consisting of personnel, utilities, repairs and maintenance,
landscaping, property taxes, marketing, insurance, and other expenses, increased
$35,000, or 3.9%, from $905,000 for the nine months ended September 30, 2007 to
$940,000 for the nine months ended September 30, 2008. This decrease in
operating expenses is due primarily to an increase in maintenance personnel and
expenses.
General and administrative expenses increased $81,000, or 6.8%, from $1,198,000
for the nine months ended September 30, 2007 to $1,279,000 for the nine months
ended September 30, 2008. This increase was due primarily to increases in
professional services and in corporate overhead expenses.
The write-off of fair value/market value of leases (net) decreased $46,000 from
$46,000 for the nine months ended September 30, 2007 to $0 for the nine months
ended September 30, 2008. This decrease was due primarily to two early lease
terminations at the Grand Pavilion retail center during the first nine months of
2007 compared to no early lease terminations during the first nine months of
2008.
At September 30, 2008, we recorded a $1,255,000 impairment loss on the
Northridge Office Building. We had no impairment losses during the 2007 period.
See Note 8, Impairment Loss on Northridge Office Building, to the Consolidated
Financial Statements included in this report.
Depreciation expense decreased $32,000, or 3.1%, from $1,018,000 for the nine
months ended September 30, 2007 to $986,000 for the nine months ended
September 30, 2008. This decrease was due primarily to a reduction of the
amortization of the fair market value of leases for the Bassett, Spectrum, and
Grand Pavilion retail centers of $69,000, offset by an increase of $36,000 in
depreciation expense related to tenant improvements.
Interest income increased $58,000, or 46.4%, from $125,000 for the nine months
ended September 30, 2007 to $183,000 for the nine months ended September 30,
2008. This increase was due primarily to a significant increase in cash
available for investment from the sale of the Addison Place apartment community.
Interest expense decreased $954,000, or 46.3%, from $2,062,000 for the nine
months ended September 30, 2007 to $1,108,000 for the nine months ended
September 30, 2008. This decrease was due primarily to:
• an increase of $532,000 of interest expense that was capitalized on our
Northridge, Sawmill Village, and Peachtree Parkway land in accordance
with SFAS No. 34, "Capitalization of Interest Cost"; and
• a $442,000 reduction in interest paid on six floating rate loans (Addison Place Shops, Northridge Office Building, Peachtree Parkway, Highway 20, Sawmill Village, and Westside) due to a decrease in the 30-day LIBOR rate.
These amounts were offset by a $26,000 increase in interest paid on our line of
credit due to a balance outstanding on our line of credit during the first nine
months of 2008 compared to no balance outstanding during the first nine months
of 2007.
Legal settlement decreased $60,000 from $60,000 for the nine months ended
September 30, 2007 to $0 for the nine months ended September 30, 2008. This
decrease was due to a legal settlement we made in the 2007 period.
Amortization of deferred financing and leasing costs increased $33,000, or
30.8%, from $107,000 for the nine months ended September 30, 2007 to $140,000
for the nine months ended September 30, 2008. This increase was due primarily to
an increase of loan costs on our land loans as well as an increase of leasing
costs for our four retail centers and office building.
Liquidity and Capital Resources
Overview
We have made significant progress during 2008 with regard to our liquidity and
balance sheet flexibility. On June 24, 2008, we closed the sale of our 403-unit
Addison Place apartment community for $60,000,000, which resulted in net cash
proceeds of approximately $29,300,000. From the cash proceeds of the Addison
Place sale, we paid a distribution of $0.66 per share/unit, or $5,006,000 in
total, on August 5, 2008 to our shareholders and unitholders of record on
July 10, 2008.
During the quarter ended September 30, 2008, we improved our balance sheet
flexibility by renewing four loans totaling $18,245,000, extending the
maturities of those loans to various dates during 2010, and paying down the
principal amount of those loans by a total of $1,552,000. We now have only two
land loans totaling $12,252,000 that mature within the next twelve months. These
two loans are the $8,175,000 loan on our Peachtree Parkway land and the
$4,077,000 loan on our Highway 20 land, both of which mature on April 30, 2009.
On August 28, 2008, we renewed our $2,500,000 unsecured, revolving line of
credit to provide funds for short-term working capital purposes. The line of
credit matures on September 1, 2009. As of November 6, 2008, there was no
outstanding balance on the line of credit.
Sources and Uses of Capital
At September 30, 2008, we had $116,037,000 in total assets, of which
$17,912,000, or 15.4%, consisted of cash. As of November 6, 2008, we held
$17,103,000 in cash and cash equivalents. We believe that our most important
uses of our capital resources will be:
(a) to provide approximately $2.2 million to pay the cash portion of the
distributions we expect to pay to shareholders and unitholders in
January 2009 to maintain our status as a REIT as described above;
(b) to repay, if necessary, part of the $12,252,000 that we will owe on April 30, 2009;
(c) to provide the equity required to develop and construct two new apartment communities; and
(d) to provide working capital to enable us to cover our negative operating cash flow until we complete our development and construction program.
Our cash resources are inadequate to cover the above uses fully. To raise additional capital, we may sell one or more assets to a third party or to Roberts Properties or an affiliate of Roberts Properties, and we are considering forming joint ventures and raising equity privately.
Short- and Long-Term Liquidity Outlook
Our operating revenues are not adequate to provide short-term (12 months)
liquidity for the payment of all direct rental operating expenses, interest, and
scheduled amortization of principal on mortgage debt. We are currently using the
cash proceeds from the sale of Addison Place to meet our short-term liquidity
requirements, including general and administrative expenses, and improvements
and renovations at existing properties. If we are unable to secure construction
and permanent financing or otherwise refinance our short-term debt, we may be
forced to sell one or more properties to repay our short-term debt. We expect to
meet our long-term liquidity requirements, including future developments and
debt maturities, from the proceeds of construction and permanent loans, and if
necessary, from the sale of properties. We believe that any capital we need to
fund the construction of a new multifamily property, in addition to a
construction loan and the proceeds of the sale of Addison Place, would come from
the proceeds of a sale of another property, the contributions of a joint venture
partner, or equity we raise privately.
Comparison of Nine Months Ended September 30, 2008 to Nine Months Ended
September 30, 2007
Cash and cash equivalents increased $17,309,000 during the nine months ended
September 30, 2008 compared to a decrease of $2,806,000 during the nine months
ended September 30, 2007. The change is due to an increase in cash provided by
investing activities of $56,390,000 offset by an increase in cash used in
operating activities of $305,000 and an increase in cash used in financing
activities of $35,970,000, as described in more detail below.
Net cash used in operating activities increased $305,000 from using $615,000 of
cash during the nine months ended September 30, 2007 to using $920,000 of cash
during the nine months ended September 30, 2008. The decrease is due to:
• a $673,000 decrease in cash provided by discontinued operations
(Addison Place);
• a $642,000 increase in restricted cash;
• a $273,000 increase in the loss from continuing operations (before minority interest);
• a $113,000 decrease in amounts due to affiliates;
• a $58,000 decrease in the amortization of above and below market leases;
. . .
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