Item 1. Business.
As used herein, the terms “CRLP”, “we”, “us” and “our” refer to Colonial Realty Limited Partnership, a Delaware limited partnership, and its subsidiaries and other affiliates, including, Colonial Properties Services Limited Partnership(“CPSLP”), Colonial Properties Services, Inc (“CPSI”), CLNL Acquisition Sub, LLC and Colonial VRS L.L.C. or, as the context may require, Colonial Realty Limited Partnership only. As used herein, the term the “Trust” includes Colonial Properties Trust, an Alabama real estate investment trust, and one or more of its subsidiaries and other affiliates, including CRLP, CPSLP and Colonial Properties Services, Inc. (“CPSI”), CLNL Acquisition Sub, LLC or, as the context may require, Colonial Properties Trust only.
We are the operating partnership of the Trust, our general partner, which is an owner, developer and operator of multifamily, office and retail properties primarily in the Sunbelt region of the United States. The Trust is a fully-integrated real estate company, which means that it is engaged in the acquisition, development, ownership, management and leasing of commercial real estate property and for-sale residential property. The Trust’s assets are owned by, and substantially all of its business is conducted through, CRLP and its subsidiaries and other affiliates. The Trust holds approximately 81.4% of the interests in us. Our activities include full or partial ownership of a portfolio of 223 properties as of December 31, 2006, located in Alabama, Arizona, California, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Texas, and Virginia, development of new operating properties and for-sale properties, acquisition of existing properties, build-to-suit development, and the provision of management, leasing, and brokerage services for commercial real estate.
As of December 31, 2006, including properties in lease-up, we owned interests in 127 multifamily apartment communities (the “multifamily properties”) containing a total of 38,111 apartment units (including 108 wholly-owned consolidated properties and 19 properties owned through unconsolidated joint-venture entities aggregating 32,227 and 5,884 units, respectively), 53 office properties (the “office properties”) containing a total of approximately 16.9 million square feet of office space (including 30 wholly-owned consolidated properties and 23 partially-owned properties owned through unconsolidated joint-venture entities aggregating approximately 6.5 million and 10.4 million square feet, respectively), 43 retail properties (the “retail properties”) containing a total of approximately 12.7 million square feet of retail space (including 33 wholly-owned consolidated properties and 10 properties owned through unconsolidated joint-venture entities aggregating approximately 7.3 million and 5.4 million square feet, respectively) and parcels of land (the “land”) adjacent to or near certain of these properties. The multifamily properties, the office properties, the retail properties and the land are referred to collectively as the “properties.” As of December 31, 2006, consolidated multifamily, office and retail properties that had achieved stabilized occupancy were 95.5%, 93.5% and 93.1% leased, respectively.
We were formed in Delaware on August 6, 1993. Our executive offices are located at 2101 Sixth Avenue North, Suite 750, Birmingham, Alabama, 35203 and our telephone number is (205) 250-8700.
Formation of the Trust and CRLP
The Trust and CRLP were formed to succeed to substantially all of the interests of Colonial Properties, Inc., an Alabama corporation, its affiliates and certain other entities in a diversified portfolio of multifamily, office, and retail properties located in Alabama, Florida, and Georgia and to the development, acquisition, management, leasing, and brokerage businesses of Colonial Properties, Inc.
Merger with Cornerstone Realty Income Trust
On April 1, 2005, the Trust completed the merger with Cornerstone Realty Income Trust, Inc. (“Cornerstone”), a Virginia corporation, pursuant to an Agreement and Plan of Merger, dated as of October 25, 2004, as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated January 24, 2005 (the “Merger Agreement”). As a result of the merger, we succeeded by operation of law to all of the assets and liabilities of Cornerstone prior to the merger, which consisted of 86 apartment communities with 22,981 apartment homes, a third party property management business, apartment land under development and ownership in four real estate joint ventures.
In connection with the merger, the Trust issued 11,277,358 Colonial common shares, 5,326,349 Colonial Series E preferred depositary shares and 578,358 CRLP common units to former shareholders of Cornerstone. The shares of the Trust issued to the Cornerstone shareholders were registered with the Securities and Exchange Commission on a Registration Statement on Form S-4 (File No. 333-121675).
Acquisitions and Developments
The following table summarizes our acquisitions and developments that were completed in 2006. For the purposes of the following table and throughout this Form 10-K, the size of a multifamily property is measured by the number of units and the size of an office property and retail property is measured in square feet.
(1)
Square footage includes anchor-owned square footage.
(2)
Represents additional
(3)
Amount represents our portion of the acquisition cost, including mortgage debt issued or assumed.
(4)
Represents 50% of the development costs, as we are a 50% equity partner in this development.
Acquisitions
During 2006, we acquired ten wholly-owned multifamily apartment communities, a partial interest in four multifamily apartment communities and additional square footage in an office asset. In addition to these acquisitions, we also acquired certain parcels of land to be used in developments (see Continuing Development Activity below).
Multifamily Properties
Colonial Grand at Huntcliff - On February 3, 2006, we acquired a 20% partnership interest in and took over the management of, Colonial Grand at Huntcliff, a 358-unit multifamily apartment community located in Atlanta, Georgia. Our 20% investment in the partnership was $8.0 million, which consisted of $5.2 million of newly issued mortgage debt and $2.8 million of cash. The cash portion of this investment was funded from borrowings under our unsecured line of credit.
Colonial Village at Matthews - On March 29, 2006, we acquired a 25% partnership interest in and took over the management of, Colonial Village at Matthews, a 370-unit multifamily apartment community located in Charlotte, North Carolina. Our 25% investment in the partnership was $4.9 million, which consisted of $3.7 million of newly issued mortgage debt and $1.2 million of cash. The cash portion of this investment was funded from borrowings under our unsecured line of credit.
Colonial Village at Willow Creek - On May 31, 2006, we acquired a 478-unit multifamily apartment community, Colonial Village at Willow Creek (formerly Meridian Hill), located in Dallas, Texas. The property was acquired for a total purchase price of $39.3 million, which was funded by proceeds from assets sales and borrowings under our unsecured line of credit.
Colonial Grand at McDaniel Farm - On May 31, 2006, we acquired a 424-unit multifamily apartment community, Colonial Grand at McDaniel Farm (formerly Summer Ridge), located in Atlanta, Georgia. The property was acquired for a total purchase price of $41.0 million, which was funded by proceeds from assets sales and borrowings under our unsecured line of credit.
Colonial Village at Shoal Creek - On June 1, 2006, we acquired a 408-unit multifamily apartment community, Colonial Village at Shoal Creek, located in Dallas, Texas. The property was acquired for a total purchase price of $33.9 million, which was funded by proceeds from assets sales and borrowings under our unsecured line of credit.
Colonial Village at Chancellor Park - On June 30, 2006, we acquired a 340-unit multifamily apartment community, Colonial Village at Chancellor Park, located in Charlotte, North Carolina. The property was acquired for a total purchase price of $27.8 million, which was funded by proceeds from assets sales and borrowings under our unsecured line of credit.
Colonial Grand at Scottsdale - On July 31, 2006, we acquired a 180-unit multifamily apartment community, Colonial Grand at Scottsdale (formerly San Cabrilla), located in Phoenix, Arizona. The property was acquired for a total purchase price of $29.6 million, which was funded by proceeds from asset sales and borrowings under our unsecured line of credit.
Colonial Grand at Pleasant Hill - On August 31, 2006, we acquired a 502-unit multifamily apartment community, Colonial Grand at Pleasant Hill, located in Atlanta, Georgia. The property was acquired for a total purchase price of $45.4 million, which was funded by proceeds from asset sales and borrowings under our unsecured line of credit.
Colonial Grand at Shiloh - On September 8, 2006, we acquired a 498-unit multifamily apartment community, Colonial Grand at Shiloh, located in Atlanta, Georgia. The property was acquired for a total purchase price of $50.4 million, which was funded by proceeds from asset sales and borrowings under our unsecured line of credit.
Belterra - On September 13, 2006, we acquired a 10% interest in and took over the management of, a 288-unit multifamily apartment community, Belterra, located in Fort Worth, Texas. Our investment in the partnership was approximately $2.7 million, which consisted of $2.0 million of newly issued mortgage debt and $0.7 million of cash. The cash portion of this investment was funded from borrowings under our unsecured line of credit.
Colonial Village at Oakbend - On September 28, 2006, we acquired a 426-unit multifamily apartment community, Colonial Village at Oakbend, located in Dallas, Texas. The property was acquired for a total purchase price of $32.0 million, which was funded by proceeds from asset sales and borrowings under our unsecured line of credit.
Park Crossing - On November 16, 2006, we acquired a 10% interest in and took over the management of, a 200-unit multifamily apartment community, Park Crossing, located in Fairfield, California. Our investment in the partnership was approximately $3.4 million, which consisted of $2.6 million of newly issued mortgage debt and $0.8 million of cash. The cash portion of this investment was funded from borrowings under our unsecured line of credit.
Colonial Grand at University Center - On November 1, 2006, we acquired a 156-unit multifamily apartment community, Colonial Grand at University Center, located in Charlotte, North Carolina. The property was acquired for a total purchase price of $14.3 million, which was funded by proceeds from asset sales and borrowings under our unsecured line of credit.
Colonial Grand at Cypress Cove - On December 28, 2006, we acquired a 264-unit multifamily apartment community, Colonial Grand at Cypress Cove, located in Charleston, South Carolina. The property was acquired for a total purchase price of $29.1 million which was funded by proceeds from asset sales and borrowings under our unsecured line of credit.
Office Property
The Peachtree - On January 2, 2006, we acquired an additional 50,000 square feet of condominium interests in The Peachtree, a Class A office building located in Atlanta, Georgia. We made our initial investment in the property in August 2005 when we purchased 76% of the condominium interests for $43.8 million. The purchase of the additional square footage increased our ownership to more than 90% of the property. The additional investment of $8.3 million was funded by proceeds from asset sales and borrowings under our unsecured line of credit.
Completed Developments
Multifamily Property
Colonial Grand at Silverado Reserve - During the third quarter of 2006, we completed the development of Colonial Grand at Silverado Reserve, a 238-unit multifamily community located in Austin, Texas. Project costs, including land acquisition costs, were $24.1 million and were funded through our unsecured line of credit.
Retail Properties
Colonial Pinnacle Tutwiler Farms - During the fourth quarter of 2006, we completed the development of Colonial Pinnacle at Tutwiler Farms, a 450,000 square foot development located in Birmingham, Alabama. Project costs, including land acquisition costs, were $33.2 million and were funded through our unsecured line of credit. This property was sold during the fourth quarter.
Colonial Pinnacle Turkey Creek - During the third quarter of 2006, we completed the development of Colonial Pinnacle at Turkey Creek, a 50% joint venture development with Turkey Creek Land Partners. The 477,000 square foot center is located in Knoxville, Tennessee and is anchored by Belk, Bed Bath & Beyond and Regal Theaters. The center also includes other larger format stores, specialty fashion retailers and upscale restaurants. Our portion of project costs, including land acquisition costs, was $39.3 million and was primarily funded through a collateralized construction loan.
Continuing Development Activity
The following table summarizes our properties that are under construction, including undeveloped land, at December 31, 2006:
(1)
Square footage includes anchor-owned square footage for retail properties.
(2)
This project is part of a mixed-use development.
(3)
Development costs represent 25% of total development costs, as we are a 25% partner in this project.
(4)
Development costs represent 40% of total development costs, as we are a 40% partner in this project.
(5)
Development costs represent 50% of total development costs, as we are a 50% partner in this project.
Continuing Multifamily Development Activity
Colonial Grand at Round Rock - During 2006, we continued the development of Colonial Grand at Round Rock, a 422-unit multifamily community located in Austin, Texas. Project development costs, including land acquisition costs, are expected to be $34.5 million and will be funded through our unsecured line of credit. The development is expected to be completed in the first quarter of 2007.
Colonial Grand at Huntersville - During the third quarter of 2006, we acquired 22.5 acres of undeveloped land for $3.6 million and began the development of Colonial Grand at Huntersville, a 250-unit multifamily community located in Charlotte, North Carolina. Project development costs, including land acquisition costs, are expected to be $26.1 million and will be funded through our unsecured line of credit. The development is expected to be completed in the fourth quarter of 2007.
Colonial Grand at Double Creek - During 2006, we continued the development of Colonial Grand at Double Creek, a 300-unit multifamily community located in Austin, Texas. Project development costs, including land acquisition costs, are expected to be $31.8 million and will be funded through our unsecured line of credit. The development is expected to be completed in the first quarter of 2008.
Colonial Grand at Ayrsley - During 2006, we continued the development of Colonial Grand at Ayrsley, a 368-unit multifamily community located in Charlotte, North Carolina. Project development costs, including land acquisition costs, are expected to be $34.9 million and will be funded through our unsecured line of credit. The development is expected to be completed in the first quarter of 2008.
Colonial Grand at Traditions - During 2006, we continued the development of Colonial Grand at Traditions, a 324-unit multifamily community located in Gulf Shores, Alabama. Project development costs, including land acquisition costs, are expected to be $41.4 million and will be funded through our unsecured line of credit. The development is expected to be completed in the first quarter of 2008.
Colonial Grand at Shelby Farms II - We expect to begin the development of Colonial Grand at Shelby Farms II, a 154-unit multifamily community located in Memphis, Tennessee, in the first quarter of 2007. Project development costs, including land acquisition costs, are expected to be $13.4 million and will be funded through our unsecured line of credit. The development is expected to be completed in the first quarter of 2008.
Colonial Grand at Sweetwater -We expect to begin the development of Colonial Grand at Sweetwater, a 195-unit multifamily community located in Phoenix, Arizona, in the second quarter of 2007. Project development costs, including land acquisition costs, are expected to be $23.5 million and will be funded through our unsecured line of credit. The development is expected to be completed in the third quarter of 2008.
Colonial Grand at Ridell Ranch - We expect to begin the development of Colonial Grand at Ridell Ranch, a 376-unit multifamily community located in Austin, Texas, in the first quarter of 2007. Project development costs, including land acquisition costs, are expected to be $34.3 million and will be funded through our unsecured line of credit. The development is expected to be completed in the third quarter of 2008.
Colonial Grand at Randal Park - We expect to begin the development of Colonial Grand at Randal Park, a 600-unit multifamily community located in Orlando, Florida, in the first quarter of 2008. Project development costs, including land acquisition costs, are expected to be $75.9 million and will be funded through our unsecured line of credit. The development is expected to be completed in the first quarter of 2010.
Colonial Grand at Canyon Creek - During 2006, we continued the development of Colonial Grand at Canyon Creek, a 25% joint venture development with an affiliate of Abacus Capital Group LLC. Colonial Grand at Canyon Creek is a 336-unit multifamily community located in Austin, Texas. Our portion of the project development costs, including land acquisition costs, is expected to be $8.6 million, and will be funded primarily through a construction loan. The development is expected to be completed in the first quarter of 2007.
All of the new multifamily communities in the above listed developments will have numerous amenities, including high-speed internet access, a fitness center, swimming pool and a resident business center.
Continuing Office Development Activity
Northrop Grumman - During 2006, we continued the development of a 110,000 square foot build-to-suit office asset located in Huntsville, Alabama for Northrop Grumman. Project development costs, including land acquisition costs, are expected to be $17.3 million and will be funded through our unsecured line of credit. The development is expected to be completed in the first quarter of 2007.
Colonial Center TownPark 300 - During 2006, we continued the development of Colonial Center TownPark 300, a 150,000 square foot office asset, located in Orlando, Florida. Project development costs, including land acquisition costs, are expected to be $20.6 million and will be funded through our unsecured line of credit. The development, which is part of the mixed use development, Colonial TownPark Lake Mary, is expected to be completed in the first quarter of 2007.
Colonial Brookwood Center - During the second quarter of 2006, we began the development of Colonial Brookwood Center, a 169,000 square foot office asset, located in Birmingham, Alabama. Project development costs, including land acquisition costs, are expected to be $40.3 million and will be funded through our unsecured line of credit. The development is expected to be completed in the third quarter of 2007.
Metropolitan - During the third quarter of 2006, we began the development of Metropolitan, a 155,000 square foot office asset, located in Charlotte, North Carolina. Project development costs, including land acquisition costs, are expected to be $35.2 million and will be funded through our unsecured line of credit. The development, which is part of the mixed use development, Metropolitan, is expected to be completed in the second quarter of 2008.
Continuing Retail Development Activity
Colonial Pinnacle Craft Farms I - During 2006, we continued the development of Colonial Pinnacle at Craft Farms I, a 376,000 square foot development located in Gulf Shores, Alabama. Project development costs, including land acquisition costs, are expected to total $42.5 million and will be funded through our unsecured line of credit. We expect to complete the project in the third quarter of 2007.
Colonial Pinnacle Tutwiler Farm II - During the fourth quarter of 2006, we began the development of Colonial Pinnacle Tutwiler Farm II, an 85,000 square foot development located in Birmingham, Alabama. Project development costs, including land acquisition costs, are expected to total $15.1 million and will be funded through our unsecured line of credit. We expect to complete the project in the third quarter of 2007.
Colonial Promenade Alabaster II - During 2006, we continued the development of Colonial Promenade at Alabaster II, a 354,000 square foot development located in Birmingham, Alabama. Project development costs, including land acquisition costs, are expected to total $21.2 million and will be funded through our unsecured line of credit. We expect to complete the project in the third quarter of 2007.
Colonial Promenade Fultondale - During 2006, we continued the development of Colonial Promenade at Fultondale, a 360,000 square foot development located in north Birmingham, Alabama. Project development costs, including land acquisition costs, are expected to total $24.8 million and will be funded through our unsecured line of credit. We expect to complete the project in the first quarter of 2008.
Colonial Promenade Tannehill - We began the development of Colonial Promenade at Tannehill, a 373,000 square foot development located in Birmingham, Alabama, in the fourth quarter of 2006. Project development costs, including land acquisition costs, are expected to total $41.0 million and will be funded through our unsecured line of credit. We expect to complete the project in the third quarter of 2008.
Metropolitan - During the second quarter of 2006, we began the development of Metropolitan, a 189,000 square foot development located in Charlotte, North Carolina. Project development costs, including land acquisition costs, are expected to total $52.8 million and will be funded through our unsecured line of credit. The development, which is part of the mixed use development, Metropolitan, is expected to be completed in the second quarter of 2008.
Colonial Pinnacle Craft Farms II - We expect to begin the development of Colonial Pinnacle at Craft Farms II, a 67,000 square foot development located in Gulf Shores, Alabama, in the second quarter of 2008. Project development costs, including land acquisition costs, are expected to total $13.5 million and will be funded through our unsecured line of credit. We expect to complete the project in the second quarter of 2009.
Colonial Promenade Smyrna - We began the development of Colonial Promenade at Smyrna, a 50% joint venture development with Blanchard and Calhoun Commercial, in the fourth quarter of 2006. The center is expected to total approximately 410,000 square feet and is located in Nashville, Tennessee. Our portion of project costs, including land acquisition costs, is expected to be $16.0 million and will primarily be funded through a construction loan. We expect to complete the project in the second quarter of 2008.
Continuing For-Sale Development Activity
We are developing each of the for-sale projects discussed below through our taxable REIT subsidiary, CPSI.
Regatta at James Island (formerly Central Park) - During 2006, we continued the development of Regatta at James Island, a 212-unit condominium development located in Charleston, South Carolina. Project development costs, including land acquisition costs, are expected to total $25.0 million and will be funded through our unsecured line of credit. We began sales of completed units in the third quarter of 2006.
Colonial Traditions at Gulf Shores - During 2006, we continued the development of the Colonial Traditions at Gulf Shores, a 371 residential lot development located in Gulf Shores, Alabama. Project development costs, including land acquisition costs, are expected to total $20.0 million and will be funded through our unsecured line of credit. We expect to begin sales of completed lots in the second quarter of 2007.
Southgate on Fairview (formerly Colonial Traditions at South Park) - During 2006, we continued the development of Southgate on Fairview, a 47-unit development located in Charlotte, North Carolina. Project development costs, including land acquisition costs, are expected to total $16.5 million and will be funded through our unsecured line of credit. We expect to begin sales of completed units in the fourth quarter of 2007.
The Renwick - During 2006, we continued the development of the Renwick, an 85-unit development located in Charlotte, North Carolina. Project development costs, including land acquisition costs, are expected to total $24.3 million and will be funded through our unsecured line of credit. We expect to begin sales of completed units in the fourth quarter of 2007.
Regents Park - During the first quarter of 2006, we began the development of Regents Park, a 40% joint venture development with Carter and Associates. This development will consist of 23 townhomes located in Atlanta, Georgia. Our portion of project development costs, including land acquisition costs, is expected to total $15.0 million and will be funded through our unsecured line of credit. We expect to begin sales of completed units in the third quarter of 2007.
Cypress Village - During the first quarter of 2006, we began the development of Cypress Village, which will consist of 88 townhouse units and 108 for-sale residential lots located in Gulf Shores, Alabama. Project development costs, including land acquisition costs, are expected to total $60.3 million and will be funded through our unsecured line of credit. We began selling lots in this development in the fourth quarter of 2006.
Grander - During the first quarter of 2006, we began the development of Grander, a 30-unit development located in Gulf Shores, Alabama. Project development costs, including land acquisition costs, are expected to total $16.6 million and will be funded through our unsecured line of credit. We began selling these units in the fourth quarter of 2006.
Spanish Oaks - During the first quarter of 2006, we began the development of Spanish Oaks, a 200-lot development located in Mobile, Alabama. Project development costs, including land acquisition costs, are expected to total $9.8 million and will be funded through our unsecured line of credit. We expect to begin selling these lots in the first quarter of 2007.
Metropolitan - During the third quarter of 2006, we began the development of Metropolitan, a 98-unit condominium development located in Charlotte, North Carolina. Project development costs, including land acquisition costs, are expected to total $41.2 million and will be funded through our unsecured line of credit. The development is part of the mixed use development, Metropolitan. We expect to begin sales of completed units in the second quarter of 2007.
Dispositions
During 2006, we disposed of 16 multifamily apartment communities and our percentage interest in 20 multifamily apartment communities representing an aggregate of 10,593 units, seven office properties and our percentage interest in six office assets representing an aggregate of approximately 3.5 million square feet and six retail properties representing 1.7 million square feet. Included in the office assets sold are three properties that are part of the Colonial Center Mansell Joint Venture and included in the retail assets sold are four properties that were part of the South Florida Joint Venture. The office and retail assets sold are properties which we continue to manage and lease (see Note 7 - Investment in Partially Owned Entities and Other Arrangements in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K). The multifamily apartment communities, office properties and retail properties were sold for a total sales price of approximately $1.0 billion, which was used to repay a portion of the borrowings under our unsecured line of credit, repay collateralized debt, and fund other investment activities. Additionally, throughout 2006, we sold various parcels of land located adjacent to our existing properties for an aggregate sales price of approximately $7.0 million, which was also used to repay a portion of the borrowings under our unsecured line of credit and to support our investment activities.
The following table is a summary of our operating property disposition activity in 2006:
(footnotes on next page)
(2)
The CMS properties included Colonial Grand at Barrington, Macon, GA; Colonial Village at Hillwood, Montgomery, AL; Colonial Grand at Inverness Lakes, Mobile, AL; and Colonial Village at Stockbridge, Atlanta, GA. During the first quarter of 2006, we disposed of our interests (10% - 15%) in these properties, which is reflected above.
(3)
This disposition included 15 properties which were part of a single transaction - Arabian Trails, Fairway Crossing, La Entrada, and Posada del Este located in Phoenix, AZ; Casas Lindas, Colonial del Rio, Hacienda del Rio, Pinnacle Heights, and Springhill located in Tucson; Desert Lakes, Pinnacle Flamingo West, and Talavera located in Las Vegas, NV; and Pinnacle Estates, Pinnacle High Desert, and Pinnacle High Resort located in Albuquerque, NM. During the fourth quarter of 2006, we disposed of our interests (20% - 24%) in these properties, which is reflected above.
(4)
This disposition, which took place during the second quarter of 2006, included Colonial Center at Mansell Overlook, Colonial Center at Mansell Overlook 400, Shoppes at Mansell and Lakeside at Mansell, which consists of four mid-rise buildings, five low-rise buildings, two retail strip centers, and land available for development. We sold 100% of Colonial Center at Mansell Overlook 400 and retained a 15% interest in the mid-rise buildings, retail strip centers and development land.
(5)
The DRA/Colonial Office JV properties, which were sold during the third quarter of 2006, included Vanguard Center, Charlotte, NC and Tallahassee Center, Tallahassee, FL.
(7)
Retail square footage includes total square footage of asset including anchor owned square footage.
(9)
This disposition, which took place during the fourth quarter of 2006, included two properties - Colonial Pinnacle at Tutwiler Farm and Colonial Promenade at Tutwiler Farm.
In addition to the operating properties sold during 2006, we also disposed of our majority interest in Colonnade Properties LLC for approximately $2.5 million (see Note 7 - Investment in Partially Owned Entities and Other Arrangements in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K). There was no gain or loss recognized on the disposition. As of December 31, 2006, we had a $3.1 million outstanding note receivable from Colonnade Properties LLC which bears interest at 9% per annum and reaches maturity in 2010.
In some cases, we use disposition proceeds to fund investment activities through tax-deferred exchanges under Section 1031 of the Internal Revenue Code. Certain of the proceeds described above were received into temporary cash accounts pending the fulfillment of Section 1031 exchange requirements. Subsequently, the funds were utilized to repay a portion of the borrowings under our unsecured line of credit or for financing of other investment activities.
For-Sale Projects
During 2006 and 2005, we, through CPSI, sold 607 and 328 condominium units, respectively, at our condominium conversion properties. During 2006, we, through CPSI, also sold five residential lots and 49 condominium units at our for-sale residential development properties. During 2006 and 2005, Gains from sales of property on the Consolidated Statements of Income and Comprehensive Income included $33.9 million ($24.1 million net of income taxes) and $13.3 million ($9.7 million net income taxes), respectively, from these condominium conversion and for-sale residential sales. There were no condominium conversion or for-sale residential sales during 2004. A summary of revenues and costs of condominium conversion and for-sale residential sales for 2006 and 2005 are as follows:
The net gains on condominium conversion unit sales are classified in discontinued operations if we previously operated the related condominium property as an apartment community. For the twelve months ended December 31, 2006, net gains on condominium conversion unit sales of $19.1 million were included in discontinued operations. All gains on condominium conversion unit sales were included in continuing operations for the twelve months ended December 31, 2005. Results of operations for condominium conversion properties that we previously operated as apartment communities are classified in discontinued operations for all years presented in the Consolidated Statements of Income and Comprehensive Income. The condominium conversion properties are reflected in the accompanying Consolidated Balance Sheets as part of real estate assets held for sale, net, and totaled $106.2 million and $66.7 million as of December 31, 2006 and 2005, respectively. The net gains on for-sale residential sales are classified in continuing operations.
During December 2006, we, through CPSI, sold an option to purchase land for a total sales price of $3.2 million. We recognized a gain of $1.5 million, net of income taxes, on the sale.
For cash flow statement purposes, we classify capital expenditures for newly developed for-sale residential communities and for other condominium conversion communities in investing activities. Likewise, the proceeds from the sales of condominium conversion units and for-sale residential sales are also included in investing activities.
Recently, there has been a softening in the condominium and single family housing markets due to increasing mortgage financing rates, increasing supplies of such assets, rising insurance costs, uncertainties related to the cost of energy and a perceived slow down in overall economic activity in the U.S, resulting in lower sales prices and reduced sales velocity. As a result, we recognized a $1.6 million ($1.0 million net of income taxes) impairment on one of our condominium conversion properties during the fourth quarter of 2006. Our determination of this impairment was based on a probability-weighted future cash flow analysis for the property. There can be no assurances of the amount or pace of future for-sale residential sales and closings. Additional softening in the for-sale residential market could result in lower margins on sales and additional impairment of assets. See “Risk Factors - Risks Associated with Our Operations - The development or conversion of for-sale projects could adversely affect our results of operations.”
Recent Events
Property Acquisitions - During January 2007, we acquired two multifamily apartment communities. Colonial Grand at Old Town Scottsdale North (formerly Monte Carlo Apartments) was acquired for $33.8 million and contains 208 units. Colonial Grand at Old Town Scottsdale South (formerly Monaco Apartments) was acquired for $42.2 million and contains 264 units. Both properties are located in Scottsdale, Arizona. The acquisition of these assets was funded with proceeds from asset sales and from borrowings under our unsecured line of credit.
During January 2007, we acquired 15.0 acres of land for $12.0 million to be used for the development of Colonial Grand at Pecos, a 380-unit multifamily apartment community located in Las Vegas, Nevada. The acquisition was funded from borrowings under our unsecured line of credit.
Property Dispositions - During January 2007, we sold seven multifamily apartment communities. The properties include the following:
We used the proceeds from the sale to repay a portion of the borrowings under our unsecured line of credit.
During February 2007, we sold Rivermont Shopping Center, a 73,500 square foot retail asset located in Chattanooga, Tennessee. The asset was sold for a total sales price of $4.2 million and the proceeds were used to repay a portion of the borrowings under our unsecured line of credit.
During February 2007, we sold Colonial Grand at Promenade, a 384-unit multifamily apartment community located in Montgomery, Alabama. The asset was sold for a total sales price of $38.0 million and the proceeds were used to repay a portion of the borrowings under our unsecured line of credit.
During February 2007, we sold our 20% interest in Colonial Grand at Bayshore, a 376-unit multifamily apartment community located in Sarasota, Florida. The asset was sold for $12.0 million, which represents our 20% ownership interest, and the proceeds were used to repay a secured mortgage loan and a portion of the borrowings under our unsecured line of credit.
During February 2007, the DRA / Colonial Office Joint Venture sold St. Petersburg Center, a 675,500 square foot office asset located in Tampa, Florida. The asset was sold for $14.0 million, which represents our 15% ownership interest. We used the proceeds from the sale to repay a secured mortgage loan.
Distribution - During January 2007, the Board of Trustees of the Trust declared a cash distribution to the partners of CRLP in the amount of $0.68 per common partnership unit, totaling $38.6 million. The distribution was made to partners of record as of February 6, 2007 and was paid on February 13, 2007.
Business Strategy
Our business objective is to generate stable and increasing cash flow and portfolio value for our partners through a strategy of:
•
realizing growth in income from our existing portfolio of properties;
•
selectively acquiring additional multifamily apartment communities in growth markets located in the Sunbelt region of the United States;
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developing multifamily, office and retail properties (individually or as mixed-use communities) in growth markets located in the Sunbelt region of the United States, where we have first-hand knowledge of growth patterns and local economic conditions;
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developing merchant build properties and for-sale communities;
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recycling capital by selectively disposing of assets that have reached their maximum investment potential and reinvesting the proceeds into opportunities with more growth potential;
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managing our own properties as well as commercial assets through joint venture investments, which enables us to better control operating expenses and establish long-term relationships with our office and retail tenants;
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completing existing condominium conversion projects;
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maintaining our third-party property management business, which increases cash flow and establishes additional relationships with investors and tenants; and
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employing a comprehensive capital maintenance program to maintain properties in first-class condition.
As previously mentioned, we have undertaken a new strategy to change our asset mix to generate approximately 80% of our net operating income from multifamily apartment communities and are accelerating our plan of focusing on the multifamily business. Accordingly, over the next six to twelve months, we plan to sell the majority of our wholly-owned office assets and retail assets into a series of joint ventures, in which we would retain a minority interest, and which we expect to manage. In addition, other retail assets are expected to be sold outright. Our business strategy and the implementation of that strategy are determined by the Board of Trustees of the Trust and may be changed from time to time.
Once the anticipated sale transactions are complete, we currently estimate that annualized net operating income from multifamily operations will be approximately 80% of our total net operating income, compared to approximately 50% as of December 31, 2006. While there will be less capital allocated to the commercial businesses, we currently expect to retain our development, leasing and management expertise. We expect to continue our emphasis on value creation through development of multifamily, office, mixed-use and open-air shopping center properties. Furthermore, we expect to continue to take advantage of our expertise in the commercial markets by focusing on development and opportunistic value creation, including mixed-use projects. It is currently anticipated that the proceeds from any sales transactions would be used to reduce our leverage and make a special distribution to the holders of the Trust’s common shares. It is also currently anticipated that common unitholders in CRLP would receive a special distribution in connection with these transactions. However, any such distributions would be subject to approval by the Board of Trustees of the Trust. See Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - General.” We are in the process of identifying potential joint venture partners and buyers for our commercial assets to be sold. Thus, the terms of any joint venture arrangements and asset sale transactions have not yet been negotiated, and no assurances can be given as to the structure or terms of such transactions (including the terms or nature of any distributions to unitholders) or the impacts of such transactions on our financial condition or results of operations. See “Risk Factors - Risks Associated with our Current Strategy to Change our Asset Mix.”
Financing Strategy
We seek to maintain a well-balanced, conservative and flexible capital structure by:
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maintaining conservative debt service and fixed charge coverage ratios in order to sustain our investment grade status;
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extending and sequencing the maturity dates of our debt;
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borrowing primarily at fixed rates; and
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generally pursuing long-term debt financings and refinancings on an unsecured basis.
We believe that these strategies have enabled, and should continue to enable, us to access the debt and equity capital markets to fund debt refinancings and the acquisition and development of additional properties.
We may modify our borrowing policy and may increase or decrease our ratio of debt to gross asset value in the future. To the extent that the Board of Trustees of the Trust determines to seek additional capital, we may raise such capital through additional equity offerings, debt financings, asset dispositions or retention of cash flow (subject to provisions in the Internal Revenue Code of 1986, as amended, requiring the distribution by a REIT of a certain percentage of taxable income and taking into account taxes that would be imposed on undistributed taxable income) or a combination of these methods.
We have historically funded our acquisition and development activities primarily through proceeds received from the disposition of assets, unsecured senior notes offerings and advances on our unsecured bank line of credit. For additional information regarding current year financing activities and year-end balances, refer to Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.
Property Management
We are experienced in the management and leasing of multifamily, office and retail properties and believe that the management and leasing of our own portfolio has helped maintain consistent income growth and has resulted in reduced operating expenses from the properties. The third-party management, leasing and brokerage businesses conducted through CPSI have provided us both with a source of cash flow that is relatively stable and with the benefits of economies of scale in conjunction with the management and leasing of our own properties. These businesses also allow us to establish additional relationships with tenants who may require additional office or retail space and help us to identify potential acquisitions.
Operational Structure
We currently manage our business through three operating divisions: multifamily, office and retail. We have centralized functions that are common to each division, including accounting, information technology and administrative services. Decisions regarding acquisitions, developments and dispositions are also centralized. Generally, each division has an Executive Vice President that oversees growth and operations and has a separate management team that is responsible for acquiring, developing, and leasing properties within each division. This structure allows us to utilize specialized management personnel for each operating division. Although these divisions operate independently from one another, we believe that constant communication among the Executive Vice Presidents provides us with unique synergies allowing us to take advantage of a variety of investment opportunities. In addition, we believe our three division structure allows us to better manage the development of mixed-use projects. See Note 8 - Segment Information in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for information on our three segments and the reconciliation of total segment revenues to total revenues, total segment net operating income to income from continuing operations and minority interest for the years ended December 31, 2006, 2005 and 2004, and total divisional assets to total assets for the years ended December 31, 2006 and 2005. Information regarding our segments contained in such Note 8 - Segment Information in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K is incorporated by reference herein. Additional information with respect to each of the operating divisions is set forth below:
Multifamily Division. Our multifamily division is responsible for all aspects of multifamily operations, including day-to-day management and leasing of our 127 multifamily apartment communities, as well as providing third-party management services for apartment communities in which we do not have an ownership
interest or have a non-controlling ownership interest. Additionally, all of our condominium conversion properties and related sales are managed by the multifamily division.
Office Division. Our office division is responsible for all aspects of our commercial office operations, including the management and leasing services for our 53 office properties, as well as third-party management services for office properties in which we do not have an ownership interest and for brokerage services in other office property transactions.
Retail Division. Our retail division is responsible for all aspects of our retail operations, including the management and leasing services for our 43 retail properties, as well as third-party management services for retail properties in which we do not have an ownership interest and for brokerage services in other retail property transactions.
Competition
The ownership, development, operation and leasing of multifamily, office and retail properties are highly competitive. We compete with domestic and foreign financial institutions, other REITs, life insurance companies, pension trusts, trust funds, partnerships and individual investors for the acquisition of properties. See Item 1A
Item 1A. Risk Factors
Set forth below are the risks that we believe are material to investors who purchase or own our common, preferred or debt securities. Our units are redeemable for cash or, at the election of the Trust, on a one-for-one basis for the Trust’s common shares of beneficial interest. You should consider carefully the following risks, together with the other information contained in and incorporated by reference in this Annual Report on Form 10-K, and the descriptions included in our consolidated financial statements and accompanying notes.
Risks Associated with our Current Strategy to Change our Asset Mix
We are in the process of changing our business plan to focus predominately on multifamily properties and face certain risks inherent in the implementation of this strategy.
In connection with our recently announced strategic plan to focus on multifamily properties, over the next six to twelve months we plan to sell the majority of our wholly-owned office and retail assets into a series of joint ventures in which we anticipate retaining a minority interest, and which we currently expect to manage. In addition, we expect to sell other office and retail assets outright. We currently estimate that, once the anticipated sales are complete, our annualized net operating income from multifamily operations will represent approximately 80 percent of our total net operating income, as compared to approximately 50 percent of our total net operating income as of December 31, 2006. The implementation of this strategy will be subject to various risks, including the following:
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potential disruptions in our operations;
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the diversion of management’s attention from day-to-day operations to the disposition of our office and retail assets;
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we may experience difficulties and incur unanticipated expenses relating to the proposed dispositions;
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we may not achieve anticipated cost savings and operating efficiencies from our focus on multifamily properties; and
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multifamily properties may not perform as well as we anticipate due to various factors, including changes in economic conditions and the demand for multifamily properties generally.
We are currently in the process of identifying joint venture partners and buyers for the commercial assets to be sold. As such, the terms of any joint venture arrangements and asset sale transactions have not yet been negotiated, and no assurances can be made as to the structure, price or other terms of such transactions or the impact of such transactions on our business, financial condition and results of operations. Furthermore, any joint ventures that we form in connection with this strategy will involve risks not customarily associated with our wholly-owned properties. See “Risk Factors-Risks Associated with Our Operations-Our joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners and our exposure to potential losses from the actions of our joint venture partners.”
As a result of our strategic plan to focus predominately on multifamily properties, our revenues will be significantly influenced by demand for multifamily properties generally, and a decrease in such demand would likely have a greater adverse effect on our revenues than if we owned a more diversified real estate portfolio.
As discussed above, we intend to change the asset mix of our portfolio and focus predominately on multifamily properties. As a result of this strategy, we will be subject to greater extent to risks inherent in investments in a single industry. A decrease in the demand for multifamily properties would likely have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio. Tenant demand at multifamily properties has been and could be adversely affected by weakness in the national, regional and local economies, changes in job growth, household formation or population growth in our markets, changes in interest rates or changes in supply of, or demand for, similar or competing multifamily properties in an area. To the extent that any of these conductions occur, they are likely to affect market rents at multifamily properties, which could cause a decrease in our rental revenue. Any such decrease could impair our ability to satisfy our substantial debt service obligations or make distributions to our unitholders.
Risks Associated with Real Estate
We face numerous risks associated with the real estate industry that could adversely affect our results of operations through decreased revenues or increased costs.
As a real estate company, we are subject to various changes in real estate conditions, any negative trends of which may adversely affect our results of operations through decreased revenues or increased costs. These conditions include:
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worsening of national and regional economic conditions, as well as the local economic conditions in our principal market areas;
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the existence and quality of the competition, such as the attractiveness of our property as compared to our competitors’ properties based on considerations such as convenience of location, rental rates, amenities and safety record;
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increased operating costs, including increased real property taxes, maintenance, insurance and utilities costs;
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weather conditions that may increase or decrease energy costs and other weather-related expenses;
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oversupply of multifamily, office or retail space or a reduction in demand for real estate in the markets in which our properties are located;
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a favorable interest rate environment that may result in a significant number of potential tenants of our multifamily properties deciding to purchase homes instead of renting; and
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changing trends in the demand by consumers for merchandise offered by retailers conducting business at our retail properties.
Moreover, other factors may affect our results of operations adversely, including changes in government regulations and other laws, rules and regulations governing real estate, zoning or taxes, changes in interest rate levels, the availability of financing and potential liability under environmental and other laws and other unforeseen events, most of which are discussed elsewhere in the following risk factors. Any or all of these factors could materially adversely affect our results of operations through decreased revenues or increased costs.
Real estate investments are illiquid, and therefore we may not be able to sell our properties in response to economic changes which could adversely affect our results of operations or financial condition.
Real estate investments generally are relatively illiquid and as a result we may not be able to sell a property or properties quickly or on favorable terms in response to changes in the economy or other conditions when it otherwise may be prudent to do so. This inability to respond quickly to changes in the performance of our properties could adversely affect our results of operations if we cannot sell an unprofitable property. Our financial condition could also be adversely affected if we were, for example, unable to sell one or more of our properties in order to meet our debt obligations upon maturity. In addition, the tax laws applicable to REITs require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of properties that otherwise would be in our best interest. Therefore, we may be unable to vary our portfolio promptly in response to market conditions, which may adversely affect our financial position.
We are subject to significant regulation, which could adversely affect our results of operations through increased costs and/or an inability to pursue business opportunities.
Local zoning and use laws, environmental statutes and other governmental requirements may restrict our development, expansion, rehabilitation and reconstruction activities. These regulations may prevent or delay us from taking advantage of economic opportunities. If we fail to comply with these requirements, governmental authorities may impose fines on us or private litigants may be awarded damages against us. In addition, we cannot predict what requirements may be enacted in the future or that such a requirement will not increase our costs of regulatory compliance or prohibit us from pursuing business opportunities that could be profitable to us.
Compliance or failure to comply with the Americans with Disabilities Act could result in substantial costs.
Under the Americans with Disabilities Act of 1990, or ADA, and various state and local laws, all public accommodations and commercial facilities, including office buildings, must meet certain federal requirements related to access and use by disabled persons. Compliance with these requirements could involve removal of structural barriers from certain disabled persons’ entrances. Other federal, state and local laws may require modifications to or restrict further renovations of our properties with respect to such means of access. Noncompliance with the ADA or related laws or regulations could result in the imposition of fines by government authorities, the award to private litigants of damages against us or the incurrence of additional costs associated with bringing the properties into compliance.
Risks Associated with Our Operations
The development or conversion of for-sale projects could adversely affect our results of operations.
We intend to develop for-sale assets and may continue to convert existing apartment communities into condominium units for sale. For-sale development and conversion activities may be conducted through wholly-owned affiliated companies or through joint ventures. Our for-sale development and conversion activities may expose us to the following risks:
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we may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations, which could result in increased development costs and/or lower than expected sales;
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local real estate market conditions, such as oversupply or reduction in demand, may result in reduced or fluctuating sales;
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we may incur development or conversion costs for a property that exceed original estimates due to increased materials, labor or other costs or unforeseen environmental conditions, which could make completion of the property uneconomical;
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land, insurance and construction costs continue to increase in our markets and may continue to increase in the future and we may be unable to attract rents, or sales prices with respect to for-sale product, that compensate for these increases in costs;
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for-sale properties under development or acquired for development usually generate little or no cash flow until completion of development and sale of a significant number of homes or condominium units and may experience operating deficits after the date of completion and until such homes or condominium units are sold;
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we may abandon development or conversion opportunities that we have already begun to explore, and we may fail to recover expenses already incurred in connection with exploring any such opportunities;
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buyers may be unable to qualify for financing;
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sale prices may be lower than anticipated;
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we may be unable to close on sales of individual units under contract; and
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we could be subject to liability claims from condominium associations or others asserting that construction performed was defective, resulting in litigation and/or settlement discussions.
Recently, there has been a softening in the condominium and single family housing markets due to increasing mortgage financing rates, increasing supplies of such assets, rising insurance costs, uncertainties related to the cost of energy and a perceived slow down in overall economic activity in the U.S, resulting in lower sales prices and reduced sales velocity. There can be no assurances of the amount or pace of future for-sale residential sales and closings. Additional softening in the for-sale residential market could result in lower margins on sales and additional impairment of assets.
Our properties may not generate sufficient rental income to pay our expenses if we are unable to lease our new properties or renew leases or re-lease space at our existing properties as leases expire, which may adversely affect our operating results.
We derive the majority of our income from tenants who lease space from us at our properties. A number of factors may adversely affect our ability to attract tenants at favorable rental rates and generate sufficient income, including:
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local conditions such as an oversupply of, or reduction in demand for, multifamily, office or retail properties;
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the attractiveness of our properties to residents, shoppers and tenants;
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decreases in market rental rates; and
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our ability to collect rent from our tenants.
If we cannot generate sufficient income to pay our expenses, maintain our properties and service our debt as a result of any of these factors, our operating results may be adversely affected.
The tenants at our multifamily properties generally enter into leases with an initial term ranging from six months to one year. Tenants at our office properties generally enter into leases with an initial term ranging from three to ten years and tenants at our retail properties generally enter into leases with an initial term ranging from one to ten years. As leases expire at our existing properties, tenants may elect not to renew them. Even if the tenants do renew or if we can re-lease the space, the terms of renewal or re-leasing, including the cost of required renovations may be less favorable than current lease terms. In addition, for new properties, we may be unable to attract enough tenants and the occupancy rates and rents may not be sufficient to make the property profitable. If we are unable to renew the leases or re-lease the space at our existing properties promptly and/or lease the space at our new properties, or if the rental rates upon renewal or re-leasing at existing properties are significantly lower than expected rates, our operating results will be negatively affected.
We may not be able to control our operating costs or our expenses may remain constant, even if our revenues decrease, causing our results of operations to be adversely affected.
Factors that may adversely affect our ability to control operating costs include:
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the need to pay for insurance and other operating costs, including real estate taxes, which could increase over time;
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the need periodically to repair, renovate and re-lease space;
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the cost of compliance with governmental regulation, including zoning and tax laws;
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the potential for liability under applicable laws;
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interest rate levels; and
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the availability of financing.
If our operating costs increase as a result of any of the foregoing factors, our results of operations may be adversely affected.
The expense of owning and operating a property is not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property. As a result, if revenues drop, we may not be able to reduce our expenses accordingly. Costs associated with real estate investments, such as real estate taxes, loan payments and maintenance generally will not be reduced even if a property is not fully occupied or other circumstances cause our revenues to decrease. If a property is mortgaged and we are unable to meet the mortgage payments, the lender could foreclose on the mortgage and take the property, resulting in a further reduction in net income.
An economic downturn, a natural disaster or an act of terrorism in an area in which our properties are concentrated could adversely affect our results of operations or financial condition.
Substantially all of our properties are located in the Sunbelt region of the United States. In particular, we derived approximately 78.0% of our net operating income in 2006 from top quartile cities located in the Sunbelt region. If the Sunbelt region of the United States, and in particular the areas of or near Birmingham, Charlotte, Orlando, Atlanta, Dallas or Fort Worth experience a slowdown in the economy, a natural disaster or an act of terrorism, our results of operations and financial condition may be negatively affected as a result of decreased revenues, increased costs or damage or loss of assets.
Tenant bankruptcies and downturns in tenants’ businesses may adversely affect our operating results by decreasing our revenues.
At any time, a tenant may experience a downturn in its business that may weaken its financial condition. As a result, our tenants may delay lease commencement, cease or defer making rental payments or declare bankruptcy. A bankruptcy filing by or relating to one of our tenants would bar all efforts by us to collect pre-bankruptcy debts from that tenant, or their property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims, and there are restrictions under bankruptcy laws that limit the amount of the claim we can make if a lease is rejected. As a result, it is likely that we will recover substantially less than the full value of any unsecured claims we hold from a bankrupt tenant. The bankruptcy or financial difficulties of any of our tenants may negatively affect our operating results by decreasing our revenues.
Risks associated with the property management, leasing and brokerage businesses could adversely affect our results of operations by decreasing our revenues.
In addition to the risks we face as a result of our ownership of real estate, we face risks relating to the property management, leasing and brokerage businesses of CPSI, including risks that:
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management contracts or service agreements with third-party owners will be terminated and lost to competitors;
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contracts will not be renewed upon expiration or will not be available for renewal on terms consistent with current terms; and
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leasing and brokerage activity generally may decline.
Each of these developments could adversely affect our results of operations by decreasing our revenues.
We could incur significant costs related to environmental issues which could adversely affect our results of operations through increased compliance costs or our financial condition if we become subject to a significant liability.
Under federal, state and local laws and regulations relating to the protection of the environment, a current or previous owner or operator of real property, and parties that generate or transport hazardous substances that are disposed of on real property, may be liable for the costs of investigating and remediating hazardous substances on or under or released from the property and for damages to natural resources. The federal Comprehensive Environmental Response, Compensation & Liability Act, and similar state laws, generally impose liability on a joint and several basis, regardless of whether the owner, operator or other responsible party knew of or was at fault for the release or presence of hazardous substances. In connection with the ownership or operation of our properties, we could be liable in the future for costs associated with investigation and remediation of hazardous substances released at such properties. The costs of any required remediation and related liability as to any property could be substantial under these laws and could exceed the value of the property and/or our assets. The presence of hazardous substances, or the failure to properly remediate those substances may result in our being liable for damages suffered by a third party and may adversely affect our ability to sell or rent a property or to borrow funds using the property as collateral. In addition, environmental laws may impose restrictions on the manner in which we use our properties or operate our business, and these restrictions may require expenditures for compliance. The restrictions themselves may change from time to time, and these changes may result in additional expenditures in order to achieve compliance. We cannot assure you that a material environmental claim or compliance obligation will not arise in the future. The costs of defending against any claims of liability, of remediating a contaminated property, or of complying with future environmental requirements could be substantial and affect our operating
results. In addition, if a judgment is obtained against us or we otherwise become subject to a significant environmental liability, our financial condition may be adversely affected.
On December 29, 1998, we acquired Bel Air Mall in Mobile, Alabama. During the course of our environmental due diligence, we identified several different areas of the property in which contamination is present. One of those areas involves drycleaner solvent; the others involve petroleum contamination. The Alabama Department of Environmental Management (ADEM) is overseeing the investigation and cleanup of the drycleaner contamination. Under the terms of the purchase and sale agreement, the former owner of the property purchased a $10 million environmental insurance policy (including paying the $275,000 up front deductible) and established an escrow account totaling $1,000,000 to cover any costs associated with investigation and remediation of the contaminated areas not covered by the insurance policy. Under the agreement the seller performed all required remediation of the drycleaner contamination and received a “no further action” letter from ADEM. In addition, the seller completed the remediation process for an out parcel at the Bel Air Mall, previously occupied by an Amoco Gas station. Although we sold the Bel Air Mall to the GPT Joint Venture, in which we retained a 10% interest , we remain exposed to residual environmental liability (in addition to our exposure as a current 10% owner), as a previous owner.
Costs associated with moisture infiltration and resulting mold remediation may be costly.
As a general matter, concern about indoor exposure to mold has been increasing as such exposure has been alleged to have a variety of adverse effects on health. As a result, there has been a number of lawsuits in our industry against owners and managers of apartment communities relating to moisture infiltration and resulting mold. The terms of our property and general liability policies generally exclude certain mold-related claims. Should an uninsured loss arise against us, we would be required to use our funds to resolve the issue, including litigation costs. We make no assurance that liabilities resulting from moisture infiltration and the presence of or exposure to mold will not have a future impact on our business, results of operations and financial condition.
Uninsured or underinsured losses could adversely affect our financial condition.
As of December 31, 2006, we are self insured up to $1.1 million, $1.7 million and $1.8 million for general liability, workers’ compensation and property insurance, respectively. We are also self insured for health insurance and responsible for claims up to $125,000 per claim and up to $1.0 million per person, according to plan policy limits. If the actual costs incurred to cover such uninsured claims are significantly greater than our budgeted costs, our financial condition will be adversely affected.
We carry comprehensive liability, fire, extended coverage and rental loss insurance in amounts that we believe are in line with coverage customarily obtained by owners of similar properties and appropriate given the relative risk of loss and the cost of the coverage. There are, however, certain types of losses, such as lease and other contract claims, acts of war or terrorism, acts of God, and in some cases, earthquakes, hurricanes and flooding that generally are not insured because such coverage is not available or it is not available at commercially reasonable rates. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in the damaged property, as well as the anticipated future revenue from the property. The costs associated with property and casualty renewals may be higher than anticipated. We cannot predict at this time if in the future we will be able to obtain full coverage at a reasonable cost. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it impractical or undesirable to use insurance proceeds to replace a property after it has been damaged or destroyed. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged.
Competition for acquisitions could reduce the number of acquisition opportunities available to us and result in increased prices for properties, which could adversely affect our return on properties we purchase.
We compete with other major real estate investors with significant capital for attractive investment opportunities in multifamily, office and retail properties. These competitors include publicly traded REITs, private REITs, domestic and foreign financial institutions, life insurance companies, pension trusts, trust funds, investment banking firms, private institutional investment funds and national, regional and local real estate investors. The current market for acquisitions continues to be extremely competitive. This competition could increase the demand for multifamily, office or retail properties, and therefore reduce the number of suitable acquisition opportunities available to us and increase the prices paid for such acquisition properties. As a result, our expected return from investment in these properties would deteriorate.
We may be unable to successfully integrate and effectively manage the properties we acquire, which could adversely affect our results of operations.
So long as we are able to obtain capital on commercially reasonable terms, we intend to continue to selectively acquire multifamily, office and retail properties that meet our criteria for investment opportunities, are consistent with our business strategies and we believe will be profitable or will enhance the value of our portfolio, as a whole. The success of these acquisitions will depend, in part, on our ability to efficiently integrate the acquired properties into our organization, and apply our business, operating, administrative, financial and accounting strategies and controls to these acquired properties. As a result of the rapid growth of our portfolio, we cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems or hire and retain sufficient operational staff to integrate these properties into our portfolio and manage any future acquisitions of additional properties without operating disruptions or unanticipated costs. As we develop or acquire additional properties, we will be subject to risks associated with managing new properties, including tenant retention and mortgage default. In addition, acquisitions or developments may cause disruptions in our operations and divert management’s attention away from day-to-day operations, which could impair our relationships with our current tenants and employees. In addition, our profitability may suffer because of acquisition-related costs or amortization costs for acquired goodwill and other intangible assets. If we are unable to successfully integrate the acquired properties into our operations, our results of operations may be adversely affected.
We may not be able to achieve the anticipated financial and operating results from our acquisitions, which would adversely affect our operating results.
We will continue to acquire multifamily, office or retail properties only if they meet our criteria and we believe that that they will enhance our future financial performance and the value of our portfolio. Our belief, however, is based on and is subject to risks, uncertainties and other factors, many of which are forward-looking and are uncertain in nature or are beyond our control. In addition, some of these properties may have unknown characteristics or deficiencies or may not complement our portfolio of existing properties. As a result, some properties may be worth less or may generate less revenue than, or simply not perform as well as, we believed at the time of the acquisition, thereby negatively affecting our operating results.
We may be unable to develop new properties or redevelop existing properties successfully, which could adversely affect our results of operations due to unexpected costs, delays and other contingencies.
To complement our acquisition strategy, we will continue to develop new properties or expand or redevelop existing properties as opportunities arise. However, there are significant risks associated with our development activities in addition to those generally associated with the ownership and operation of developed properties. These risks include the following:
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significant expenditure of money and time on projects that may be delayed or never be completed;
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higher than projected construction costs;
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lack of availability of debt or equity financing on acceptable terms;
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failure to meet anticipated occupancy or rent levels;
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failure to obtain zoning, occupancy or other governmental approvals;
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changes in applicable zoning and land use laws may require us to abandon projects prior to their completion, resulting in the loss of development costs incurred up to the time of abandonment; and
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late completion because of construction delays, delays in the receipt of zoning, occupancy and other approvals or other factors outside of our control.
In addition, if a project is delayed, certain tenants may have the right to terminate their leases. Any one or more of these risks may cause us to incur unexpected costs in connection with our development strategy, which would negatively affect our results of operations.
Our joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners and our exposure to potential losses from the actions of our joint venture partners.
As of December 31, 2006, we had ownership interests in 30 joint ventures and anticipate entering into additional joint venture arrangements as part of our strategy to change our asset mix to generate approximately 80% of our net operating income from multifamily properties, compared to approximately 50% as of December 31, 2006. Our investments in joint ventures involve risks not customarily associated with our wholly-owned properties, including the following:
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we share decision-making authority with some of our joint venture partners regarding major decisions affecting the ownership or operation of the joint venture and the joint venture properties, such as the sale of the properties or the making of additional capital contributions for the benefit of the properties, which may prevent us from taking actions that are opposed by those joint venture partners;
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prior consent of our joint venture partners is required for a sale or transfer to a third party of our interests in the joint venture, which restricts our ability to dispose of our interest in the joint venture;
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our joint venture partners might become bankrupt or fail to fund their share of required capital contributions, which may delay construction or development of a joint venture property or increase our financial commitment to the joint venture;
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our joint venture partners may have business interests or goals with respect to the joint venture properties that conflict with our business interests and goals, which could increase the likelihood of disputes regarding the ownership, management or disposition of such properties;
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disputes may develop with our joint venture partners over decisions affecting the joint venture properties or the joint venture, which may result in litigation or arbitration that would increase our expenses and distract our officers and/or trustees from focusing their time and effort on our business, and possibly disrupt the day-to-day operations of the property such as by delaying the implementation of important decisions until the conflict or dispute is resolved; and
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we may suffer losses as a result of the actions of our joint venture partners with respect to our joint venture investments.
Risks Associated with Our Indebtedness and Financing
We have substantial indebtedness and our cash flow may not be sufficient to make required payments on our indebtedness or repay our indebtedness as it matures.
We rely on debt financing for our business. As of December 31, 2006, the amount of our total debt was approximately $2.8 billion, consisting of $2.4 billion of consolidated debt and $0.4 billion of our pro rata share of joint venture debt. Due to our high level of debt, we may be required to dedicate a substantial portion of our funds from operations to servicing our debt, and our cash flow may be insufficient to meet required payments of principal and interest.
If a property were mortgaged to secure payment of indebtedness and we were unable to meet mortgage payments, the mortgagee could foreclose upon that property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies.
In addition, if principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow will not be sufficient in all years to repay all maturing debt. Most of our indebtedness does not require significant principal payments prior to maturity. However, we will need to raise additional equity capital, obtain collateralized or unsecured debt financing, issue private or public debt, or sell some of our assets to either refinance or repay our indebtedness as it matures. We cannot assure you that these sources of financing or refinancing will be available to us at reasonable terms or at all. Our inability to obtain financing or refinancing to repay our maturing indebtedness, and our inability to refinance existing indebtedness on reasonable terms, may require us to make higher interest and principal payments, issue additional equity securities, or sell some of our assets on disadvantageous terms, all or any of which may result in foreclosure of properties, partial or complete loss on our investment and otherwise adversely affect our financial conditions and results of operation.
Our degree of leverage could limit our ability to obtain additional financing which would negatively impact our results of operation and financial condition.
As of December 31, 2006, our consolidated borrowings and pro rata share of unconsolidated borrowings totaled approximately $2.8 billion, which represented approximately 48.1% of our total market capitalization. Total market capitalization represents the sum of the outstanding indebtedness (including our share of joint venture indebtedness), the total liquidation preference of all our preferred units and the total market value of our common units, based on the closing price of the Trust’s common shares as of December 31, 2006. Our organizational documents do not contain any limitation on the incurrence of debt. Our leverage and any future increases in our leverage could adversely affect our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes which would negatively impact our results of operation and financial condition.
Due to the amount of our variable rate debt, rising interest rates would adversely affect our results of operation.
As of December 31, 2006, we had approximately $239.4 million of variable rate debt outstanding, consisting of $105.0 million of our consolidated debt and $134.4 million of our pro rata share of variable rate unconsolidated joint venture debt. While we have sought to refinance our variable rate debt with fixed rate debt or cap our exposure to interest rate fluctuations by using interest rate swap agreements where appropriate, failure to hedge effectively against interest rate changes may adversely affect our results of operations. In addition, as opportunities arise, we may borrow additional money with variable interest rates in the future. As a result, a significant increase in interest rates would adversely affect our results of operations.
We have entered into debt agreements with covenants that restrict our operating activities, which could adversely affect our results of operations, and violation of these restrictive covenants could adversely affect our financial condition through debt defaults or acceleration.
Our credit facility contains numerous customary restrictions, requirements and other limitations on our ability to incur debt, including restrictions related to:
•
collateralized debt to total asset value ratio;
•
fixed charge coverage ratio;
•
total liabilities to total asset value ratio;
•
total permitted investments to total asset value ratio; and
•
unencumbered leverage ratio.
In addition, the indenture under which our senior unsecured debt is issued contains financial and operating covenants including coverage ratios. Our indenture also limits our ability to:
•
incur collateralized and unsecured indebtedness;
•
sell all or substantially all or our assets; and
•
engage in mergers, consolidations and acquisitions.
These restrictions will continue to hinder our operational flexibility through limitations on our ability to incur additional indebtedness, pursue certain business initiatives or make other changes to our business. These limitations could adversely affect our results of operations. In addition, violations of these covenants could cause the declaration of defaults and any related acceleration of indebtedness, which would result in adverse consequences to our financial condition.
Our inability to obtain sufficient third party financing could adversely affect our results of operations and financial condition because we depend on third party financing for our development, expansion or acquisition activities.
To qualify as a REIT, the Trust must distribute to its shareholders each year at least 90% of our REIT taxable income, excluding any net capital gain. Because of these distribution requirements, it is not likely that we will be able to fund all future capital needs from income from operations. As a result, as we continue to develop or acquire new properties or expand existing properties, we will continue to rely on third-party sources of capital, including lines of credit, collateralized or unsecured debt (both construction financing and permanent debt), and equity issuances. These sources, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential and our current and potential future earnings. Moreover, additional equity offerings of the Trust may result in substantial dilution of our partners’ interests, and additional debt financing may substantially increase our leverage. There can be no assurance that we will be able to obtain the financing necessary to fund new development or project expansions or our acquisition activities on terms favorable to us or at all. If we are unable to obtain sufficient level of third party financing to fund our growth, our results of operations and financial condition may be adversely affected.
Our senior notes do not have an established trading market; therefore, holders of our notes may not be able to sell their notes.
Each series of our senior notes is a new issue of securities with no established trading market. We do not intend to apply for listing of any series of notes on any national securities exchange. The underwriters in an offering of senior notes may advise us that they intend to make a market in the notes, but they are not obligated to do so and may discontinue market making at any time without notice. We can give no assurance as to the liquidity of or any trading market for any series of our notes.
Risks Associated with Our Organization
Some of the Trust’s trustees and officers have conflicts of interest and could exercise influence in a manner inconsistent with the holders of interests in CRLP.
As a result of their substantial ownership of common units, Messrs. Thomas Lowder, the Trust’s Chairman of the Board, James Lowder and Harold Ripps, each of whom is a Trustee of the Trust, could seek to exert influence over our decisions as to sales or re-financings of particular properties we own. Any such exercise of influence could produce decisions that are not in the best interest of all of the holders of interests in us.
The Lowder family and their affiliates hold interests in a company that has performed insurance brokerage services with respect to our properties. This company may perform similar services for us in the future. As a result, the Lowder family may realize benefits from transactions between this company and us that are not realized by other holders of interests in us. In addition, Thomas and James Lowder, as trustees of the Trust, may be in a position to influence us to do business with companies in which the Lowder family has a financial interest. Our policies may not be successful in eliminating the influence
of conflicts. Moreover, transactions with companies controlled by the Lowder family, if any, may not be on terms as favorable to us as we could obtain in an arms-length transaction with a third party.
Restrictions on the acquisition and change in control of the Trust may have adverse effects on the value of our common units.
Various provisions of the Trust’s Declaration of Trust restrict the possibility for acquisition or change in control of the Trust, even if the acquisition or change in control were in the unitholders’ interest. As a result, the value of our common units may be less than they would otherwise be in the absence of such restrictions.
The Trust’s Declaration of Trust contains ownership limits and restrictions on transferability. The Trust’s Declaration of Trust contains certain restrictions on the number of Trust common shares and preferred shares that individual shareholders may own which is intended to ensure that the Trust maintains its qualification as a REIT. In order for the Trust to qualify as a REIT, no more than 50% of the value of the Trust’s outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year and the shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. To help avoid violating these requirements, the Trust’s Declaration of Trust contains provisions restricting the ownership and transfer of its shares in certain circumstances. These ownership limitations provide that no person may beneficially own, or be deemed to own by virtue of the attribution provisions of the Code, more than:
•
9.8%, in either number of shares or value (whichever is more restrictive), of any class of outstanding shares of the Trust;
•
5% in number or value (whichever is more restrictive), of the outstanding common shares and any outstanding excess shares of the Trust; and
•
in the case of certain excluded holders related to the Lowder family: 29% by one individual; 34% by two individuals; 39% by three individuals; or 44% by four individuals.
These ownership limitations may be waived by the Board of Trustees of the Trust if it receives representations and undertakings of certain facts for the protection of the Trust’s REIT status, and if requested, an IRS ruling or opinion of counsel.
The Trust’s Declaration of Trust permits the Board of Trustees to issue preferred shares with terms that may discourage a third party from acquiring the Trust. The Trust’s Declaration of Trust permits the Board of Trustees of the Trust to issue up to 20,000,000 preferred shares, having those preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption as determined by the Board of Trustees of the Trust. Thus, the Board of Trustees of the Trust could authorize the issuance of preferred shares with terms and conditions that could have the effect of discouraging a takeover or other transaction in which some or a majority of shares might receive a premium for their shares over the then-prevailing market price of shares.
The Trust’s Declaration of Trust and Bylaws contain other possible anti-takeover provisions. The Trust’s Declaration of Trust and Bylaws contain other provisions that may have the effect of delaying, deferring or preventing an acquisition or change in control of the Trust, and, as a result could prevent our unitholders from being paid a premium for their common units over the then-prevailing market prices. These provisions include:
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a prohibition on shareholder action by written consent;
•
the ability to remove trustees only at a meeting of shareholders called for that purpose, by the affirmative vote of the holders of not less than two-thirds of the shares then outstanding and entitled to vote in the election of trustees;
•
the limitation that a special meeting of shareholders can be called only by the president or chairman of the board or upon the written request of shareholders holding outstanding shares representing at least 25% of all votes entitled to be cast at the special meeting;
•
the advance written notice requirement for shareholders to nominate a trustee before a meeting of shareholders; and
•
the requirement that the amendment of certain provisions of the Trust’s Declaration of Trust relating to the removal of trustees, the termination of the Trust and any provision that would have the effect of amending these provisions, require the affirmative vote of the holders of two-thirds of the Trust’s shares then outstanding.
The Board of Trustees of the Trust has adopted a shareholder rights plan that could discourage a third party from making a proposal to acquire the Trust.
In 1998, the Board of Trustees of the Trust adopted a shareholder rights plan, which may discourage a third party from making a proposal to acquire the Trust. Under the plan, preferred purchase rights, which are attached to the Trust’s common shares, generally will be triggered upon the acquisition of 20% or more of the Trust’s outstanding common shares, unless the rights are redeemed or exchanged. If triggered, these rights would entitle the Trust’s shareholders other than the acquirer to purchase 1/10,000th of a Colonial Series 1998 preferred share at a price of $92.00, subject to adjustment. The plan expires by its terms on November 1, 2008.
We may change our business policies in the future, which could adversely affect our financial condition or results of operations.
Our major policies, including our policies with respect to development, acquisitions, financing, growth, operations, debt capitalization and distributions, are determined by the Board of Trustees of the Trust. Although it has no present intention to do so, the Board of Trustees of the Trust may amend or revise these and other policies from time to time. A change in these policies could adversely affect our financial condition or results of operations, including our ability to service debt.
Risks Associated with Income Tax Laws
The Trust’s failure to qualify as a REIT could have adverse tax consequences.
We believe that the Trust has qualified for taxation as a REIT for federal income tax purposes commencing with the taxable year ended December 31, 1993. The Trust intends to continue to meet the requirements for taxation as a REIT, but we cannot assure that the Trust will qualify as a REIT. We have not requested and do not plan to request a ruling from the IRS that the Trust qualifies as a REIT and the statements in this Form 10-K are not binding on the IRS or any court. As a REIT, the Trust generally will not be subject to federal income tax on the income that the Trust distributes currently to its shareholders. Many of the REIT requirements are highly technical and complex. The determination that the Trust is a REIT requires an analysis of various factual matters and circumstances that may not be totally within its control. For example, to qualify as a REIT, at least 95% of the Trust’s gross income must come from sources that are itemized in the REIT tax laws. The Trust is generally prohibited from owning more than 10% of the voting securities or more than 10% of the value of the outstanding securities of any one issuer, subject to certain exceptions, including an exception with respect to certain debt instruments and corporations electing to be “taxable REIT subsidiaries.” The Trust is also required to distribute to shareholders at least 90% of its REIT taxable income (excluding capital gains). The fact that the Trust holds most of its assets through CRLP further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize the Trust’s REIT status. Furthermore, Congress or the Internal Revenue Service might make changes to the tax laws and regulations, or the courts might issue new rulings that make it more difficult, or impossible, for the Trust to remain qualified as a REIT.
If the Trust fails to qualify as a REIT for federal income tax purposes, and is unable to avail itself of certain savings provisions set forth in the Internal Revenue Code, it would be subject to federal income tax at regular corporate rates. If the Trust failed to qualify as a REIT, the Trust would have to pay significant income taxes, which would reduce net earnings available for investment or distribution to its shareholders. This would likely have a significant adverse affect on the value of the Trust’s securities and, as a result, on the redemption value of our units. In addition, the Trust would no longer be required to make any distributions to its shareholders, but we would still be required to distribute quarterly substantially all of our net cash revenues (other than capital contributions) to our unitholders, including the Trust. If the Trust fails to qualify as a REIT for federal income tax purposes and is able to avail itself of one or more of the statutory savings provisions in order to maintain its REIT status, the Trust would nevertheless be required to pay penalty taxes of $50,000 or more for each such failure. Moreover, the Trust’s failure to qualify as a REIT also would cause an event of default under our credit facility and may adversely affect our ability to raise capital and to service our debt.
Even if the Trust qualifies as a REIT, we and our subsidiaries will be required to pay some taxes.
Any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes as entities separate from the Trust’s taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. The Trust has elected to treat Colonial Properties Services, Inc. as a taxable REIT subsidiary, and may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by the taxable REIT subsidiaries if the economic arrangements between the REIT, the REIT’s tenants, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of the Trust’s income even though as a REIT it is not subject to federal income tax on that income because not all states and localities treat REITs the same as they are treated for federal income tax purposes. To the extent that we and our affiliates, including the Trust, are required to pay federal, state and local taxes, less cash will be available for distributions to our unitholders and the Trust’s shareholders.
If the IRS were to challenge successfully our status as a partnership for federal income tax purposes, the Trust would cease to qualify as a REIT and suffer other adverse consequences.
We believe that we qualify to be treated as a partnership for federal income tax purposes. As a partnership, we are not subject to federal income tax on our income. Instead, each of our partners, including the Trust, is required to pay tax on such partner’s allocable share of its income. However, we will be treated as a corporation for federal income tax purposes if we are a “publicly traded partnership,” unless at least 90% of our income is qualifying income as defined in the Internal Revenue Code.
We believe that we are not a publicly traded partnership and, in addition, we believe that we would have sufficient qualifying income, which includes real property rents and other passive income, to ensure that we would be taxed as a partnership even if we were a publicly traded partnership. No assurance can be provided, however, that the IRS will not challenge our status as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating us as a corporation for federal income tax purposes, the Trust would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. If we fail to qualify as a partnership for federal income tax purposes or the Trust fails to qualify as a REIT, either failure would cause an event of default under our credit facility and may adversely affect our ability to raise capital and to service our debt. Also, our failure to qualify as a partnership would cause us to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to our partners, including the Trust.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
General
As of December 31, 2006, our real estate portfolio included 223 properties consisting of whole or partial ownership interests, located in 12 states in the Sunbelt region of the United States. We maintain non-controlling partial interests of 5% to 50% in 52 of the 223 operating properties. The following table sets forth certain summary information about the properties as of December 31, 2006:
Summary of Properties
Multifamily Properties
The 127 multifamily apartment communities, including those properties in lease-up, contain a total of 38,111 garden-style apartments and range in size from 80 to 586 units. 14 multifamily properties (containing a total of 4,936 apartment units) are located in Alabama, one multifamily property (containing a total of 180 units) is located in Arizona, one multifamily property (containing a total of 200 units) is located in California, ten multifamily properties (containing a total of 3,574 units) are located in Florida, 20 multifamily properties (containing a total of 5,704 units) are located in Georgia, two multifamily properties (containing a total of 498 units) are located in Mississippi, thirty multifamily properties (containing a total of 8,571 units) are located in North Carolina, nine multifamily properties (containing a total of 2,285 units) are located in South Carolina, four multifamily properties (containing a total of 1,263 units) are located in Tennessee, 25 multifamily properties (containing a total of 7,758 units) are located in Texas and 11 multifamily properties (containing a total of 3,142 units) are located in Virginia. Each of the multifamily properties is established in its local market and provides residents with numerous amenities, which may include a swimming pool, exercise room, jacuzzi, clubhouse, laundry room, tennis court(s), and/or a playground. All of the multifamily properties are managed by us.
The following table sets forth certain additional information relating to the multifamily properties as of and for the year ended December 31, 2006.
Multifamily Properties
The following table sets forth the total number of units including those in lease-up, percent leased and average base rental rate per unit as of the end of each of the last five years for our multifamily properties:
Office Properties
The 53 office properties, including those properties in lease-up, contain a total of approximately 16.9 million net rentable square feet. 17 of the office properties are located in Alabama (representing 18.0% of the office portfolio’s net rentable square feet), 20 are located in Florida (representing 40.3% of the office portfolio’s net rentable square feet), eight are located in Atlanta, Georgia (representing 22.6% of the office portfolio’s net rentable square feet), one is located in Rockville, Maryland, two are located in Charlotte, North Carolina, one is located in Memphis, Tennessee, and four are located in Texas (representing 12.9% of the office portfolio’s net rentable square feet). The office properties range in size from approximately 29,988 square feet to 1,199,200 square feet. All of the office properties are managed by us, with the exception of two properties acquired in the Colonial / DRA Office Joint Venture.
The following table sets forth certain additional information relating to the office properties as of and for the year ended December 31, 2006.
Office Properties
(1)
All office properties are 100% owned by us with the exception of those noted in (7) below.
(2)
Year initially completed and, where applicable, most recent year in which the property was substantially renovated or in which an additional phase of the property was completed.
(3)
Total Annualized Base Rent includes all base rents for our wholly-owned properties and our partially-owned properties.
(4)
Total Office Property Revenue for 2006 is our share (based on our percentage ownership of the property) of the total office property revenue, unless otherwise noted.
(5)
Percent of Total Office 2006 Property Revenue represents each property’s proportionate share of revenue from our 53 office properties, including partially owned properties.
(6)
This property is currently in lease-up (LU) and is not included in the Percent Leased and Average Base Rent per Leased Square Foot property totals.
(7)
We hold a 15% - 33.33% non-controlling interest in these joint ventures.
(8)
These properties were transferred to a joint venture with UBS Wealth Management. We retained a 15% interest in these properties through a non-controlling interest in this joint venture.
(9)
Represents revenues from January 1, 2006 through the date the property was sold during 2006.
(10)
Represents revenues from the date of our acquisition of this property in 2006 through December 31, 2006.
The following table sets out a schedule of the lease expirations for leases in place as of December 31, 2006, for our office properties (including all lease expirations for partially-owned properties).
The following sets forth the net rentable area, total percent leased and average base rent per leased square foot for each of the last five years for our office properties:
Retail Properties
The 43 retail properties, including those properties in lease-up, contain a total of approximately 12.7 million square feet (including space owned by anchor tenants). 19 of the retail properties are located in Alabama (representing 40.9% of the retail portfolio’s gross rentable area), eight are located in Florida (representing 13.2% of the retail portfolio’s gross rentable area), five are located in Georgia (representing 15.9% of the retail portfolio’s gross rentable area), four are located in North Carolina (representing 7.1% of the retail portfolio’s gross rentable area), one is located in South Carolina (representing 5.0% of the retail portfolio’s gross rentable area), two are located in Tennessee (representing 5.2% of the retail portfolio’s gross rentable area), three are located in Texas (representing 8.7% of the retail portfolio’s gross rentable area), and one is located in Virginia (representing 4.0% of the retail portfolio’s gross rentable area). All of the retail properties, with the exception of Parkway Place, are managed by us.
The following table sets forth certain information relating to the retail properties as of and for the year ended December 31, 2006.
Retail Properties
The following table sets out a schedule of the lease expirations for leases in place as of December 31, 2006, for our retail properties (including all lease expirations for partially-owned properties):
The following table sets forth the total gross retail area, percent leased and average base rent per leased square foot as of the end of each of the last five years for the retail properties:
Undeveloped Land
We own various parcels of land which are held for future developments. Land adjacent to multifamily properties typically will be considered for potential development of another phase of an existing multifamily property if we determine that the particular market can absorb additional apartment units. For expansions at office and retail properties, we own parcels both contiguous to the boundaries of the properties, which would accommodate additional office buildings, expansion of the shopping center, and outparcels which are suitable for restaurants, financial institutions, hotels, or free standing retailers.
Property Markets
The table below sets forth certain information with respect to the geographic concentration of the properties as of December 31, 2006.
Geographic Concentration of Properties
(1)
Units (in this table only) refer to multifamily apartment units.
(2)
NRA refers to net rentable area of office space.
(3)
GRA refers to gross retail area, which includes gross leasable area and space owned by anchor tenants.
(4)
Includes our proportionate share of revenue from those multifamily, office and retail properties accounted for under the equity method and our share of revenue of the properties disposed in 2006.
(5)
Excludes construction revenues and other non-property related revenue.
We believe that the demographic and economic trends and conditions in the markets where our properties are located indicate a potential for continued growth in property net operating income. Our properties are located in a variety of distinct submarkets within Alabama, Arizona, California, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Texas and Virginia. However, Birmingham, Alabama; Orlando, Tampa and Miami, Florida; Atlanta, Georgia; Charlotte and Raleigh, North Carolina; and Dallas and Houston, Texas are our primary markets. We believe that our markets in these 12 states, which are characterized by stable and increasing population and employment growth, should continue to provide a steady demand for multifamily, office and retail properties.
Mortgage Financing
As of December 31, 2006, we had approximately $2.4 billion of collateralized and unsecured indebtedness outstanding with a weighted average interest rate of 6.1% and a weighted average maturity of 5.5 years. Of this amount, approximately $0.5 billion was collateralized mortgage financing and $1.9 billion was unsecured debt. Our mortgaged indebtedness was secured by 39 of our consolidated properties and carried a weighted average interest rate of 6.9% and a weighted average maturity of 4.5 years. The following table sets forth our collateralized and unsecured indebtedness in more detail.
Mortgage Debt and Notes Payable
(dollars in thousands)
(1)
Certain of the properties were developed in phases and separate mortgage indebtedness may encumber each of the various phases. In the listing of property names, CG has been used as an abbreviation for Colonial Grand, CP as an abbreviation for Colonial Promenade, CS as an abbreviation for Colonial Shoppes and CV as an abbreviation for Colonial Village.
(2)
The maturity date noted represents the date on which credit enhancement expires for the tax-exempt municipal bonds put in place as part of the original financing for the property. The stated maturity date for the loans is August 1, 2022.
(3)
This unsecured credit facility bears interest at a variable rate, based on LIBOR plus a spread of 80 basis points. The facility also includes a competitive bid feature that allows us to convert up to $250 million under the line of credit to a fixed rate, for a fixed term not to exceed 90 days. At December 31, 2006, we had $85.0 million outstanding under the competitive bid feature.
(4)
Represents mortgage or note payable assumed in the Cornerstone acquisition.
(5)
Represents variable rate debt.
(6)
Represents floating rate debt that has been swapped to a fixed rate of 5.473%.
In addition, the properties in which we own partial interests (and are not consolidated in our financial statements) also are subject to existing mortgage indebtedness. Our pro-rata share of such indebtedness as of December 31, 2006 was as follows:
(1)
Represents variable rate debt.
Item 3.
Item 3. Legal Proceedings.
Neither we nor any of our properties are presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us or the properties, other than routine litigation arising in the ordinary course of business, which is expected to primarily be covered by liability insurance.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our unitholders during the fourth quarter of 2006.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters.
There is no established market trading for the units. As of February 26, 2007, there were 98 holders of record of units.
We have made consecutive quarterly distributions since our formation in the third quarter of 1993. Our ability to make distributions depends on a number of factors, including net cash provided by operating activities, capital commitments and debt repayment schedules. Holders of units are entitled to receive distributions when, as and if declared by the Board of Trustees of the Trust out of any funds legally available for that purpose.
The following table sets forth the distributions per common unit paid by us during the periods noted:
Item 6.
Item 6. Selected Financial Data.
The following table sets forth selected financial and operating information on a historical basis for CRLP for each of the five years ended December 31, 2006. The following information should be read together with our consolidated financial statements and notes thereto included in Item 8 of this Form 10-K. Our historical results may not be indicative of future results due to our current strategy to change our asset mix to generate approximately 80% of our net operating income from multifamily properties (see Note 1 - Organization and Basis of Presentation in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the consolidated financial condition and consolidated results of operations (i) should be read together except as otherwise noted, with the consolidated financial statements of CRLP and notes thereto contained in Item 8 of this Form 10-K, and (ii) does not reflect any potential impacts associated with our current strategy to change our asset mix to generate approximately 80% of our net operating income from multifamily properties.
General
CRLP is the operating partnership of the Trust. The Trust’s shares are listed on the New York Stock Exchange. The Trust is a self-administered equity REIT that owns, develops and operates multifamily, office and retail properties in the Sunbelt region of the United States. The Trust is a fully-integrated real estate company, which means that it is engaged in the acquisition, development, ownership, management and leasing of commercial real estate property. Our activities include full or partial ownership of a diversified portfolio of 223 properties, including lease-ups, as of December 31, 2006, located in Alabama, Arizona, California, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Texas, and Virginia, development of new operating properties and for-sale properties, acquisition of existing properties, build-to-suit development, and the provision of management, leasing, and brokerage services for commercial real estate.
As a lessor, the majority of our revenue is derived from tenants under existing leases at our properties. Therefore, our operating cash flow is dependent upon the rents that we are able to charge to our tenants, and the ability of these tenants to make their rental payments.
The following table summarizes certain key operating performance measures for our consolidated properties as of and for the years ended December 31, 2006 and 2005:
(1)
Economic Occupancy represents scheduled base rents, less vacancy loss, all concessions adjusted for straight-line (including but not limited to: renewals, move-ins, models, employee units), and bad debts divided by scheduled base rents.
(2)
Retail Property Base Rent per Square Foot excludes anchor tenants and tenants with a leasable area greater than 10,000 square feet.
(3)
Tennant Gross Sales per Square Foot are for mall properties only and excludes tenants with a leasable area greater than 10,000 square feet.
As shown in the table above, multifamily occupancy rates increased slightly in 2006. However, effective rents per unit increased significantly as multifamily fundamentals continued to strengthen. Growth in effective rents was also impacted by our asset recycling program through which we sold properties in slower-growth markets and acquired properties in higher-growth markets, such as Atlanta, Austin, Charlotte, and Dallas. Capital expenditures per unit increased during 2006 due to the timing of improvements made to older properties acquired in the Cornerstone Merger. We expect to continue to invest in quality multifamily properties in high-growth markets. As a result of the anticipated change in our asset mix discussed below, we expect to continue to have greater exposure to the economic trends specific to the multifamily sector, such as:
•
changes in job growth, household formation and population growth in our markets;
•
changes in interest rates;
•
supply and demand for apartment properties in our current markets; and
•
competition, which could limit our ability to secure attractive investment opportunities, lease apartment properties, or increase or maintain rents.
As shown in the table above, physical occupancy of our office properties increased from 92.1% in 2005 to 94.7% in 2006. The increase is primarily due to leasing activity at the properties acquired during 2005. Same store occupancy decreased slightly from 95.2% in 2005 to 95.0% in 2006. Average rental rates increased in 2006 by 3.4% to $19.25 per square foot from $18.62 per square foot in 2005. The increase is due to higher rental rates in Tampa, Orlando, Birmingham and Atlanta. Lease transactions of 1.5 million square feet were completed for the consolidated portfolio in 2006, including 799,000 square feet of new leases. Average tenant improvements and leasing commissions have increased 11.8% from 2005. This is primarily a result of several large, long term transactions in our higher rental rate locations.
During 2006, our retail division opened a new shopping center development which is 98% leased as of December 31, 2006. We sold outright two shopping centers, one being a new shopping center development that opened in 2006. We also sold four shopping centers into a joint venture in which we initially retained a 10% interest and then later in the year sold the remaining 10% interest in those properties. These transactions triggered the shifts in the base rent per square foot indicators above due to the fact that the properties sold averaged higher rents per square foot. With the strong leasing activity in both anchor and specialty tenant space representing a total of 2.1 million square feet of transactions, the occupancy of our consolidated properties increased significantly during 2006 to 93.1% from 90.2% at the end of 2005. Additionally, our retention rate on renewals during 2006 was 86%. Our consolidated mall sales per square foot grew 3.6% over the previous year. With 15 properties slated to be sold and others to be transferred to joint ventures in which we will maintain a minority interest in 2007, we believe our operating metrics will continue to reflect changes in our portfolio mix.
We are also currently developing eight shopping centers, which we expect upon completion will total approximately 2.2 million square feet of retail space, as part of our focus on expanding our portfolio in “lifestyle” and “power” centers as well as mixed-use developments. Generally, the developments will be slated as “merchant build” to be sold upon stabilization outright or to a joint venture in which we would retain a minority interest.
Our business strategy and the implementation of that strategy are determined by our Board of Trustees of the Trust and may change from time to time. Our current strategy has been to change our asset mix to generate approximately 80% of our net operating income from multifamily properties, compared to approximately 50% as of December 31, 2006. In November 2006, we announced the acceleration of our plan to focus on the multifamily business. To implement this strategy, over the next six to 12 months, we plan to sell the majority of our wholly-owned office assets and retail assets into a series of joint ventures in which we would retain a minority interest, and which we expect to manage. In addition, other retail assets are expected to be sold outright.
We currently estimate that once the anticipated joint venture and asset sale transactions are complete, annualized net operating income from multifamily operations would be approximately 80% of our total net operating income. While there will be less capital allocated to the commercial businesses, we currently expect to retain our development, leasing and management expertise. We expect to continue our emphasis on value creation through development of multifamily, office, mixed-use and open-air shopping center properties. Furthermore, we expect to continue to take advantage of our expertise in the commercial markets by focusing on development and opportunistic value creation, including mixed-use projects. It is currently anticipated that the proceeds from any joint venture and asset sale transactions would be used to reduce our leverage and make a special distribution to the holders of common shares; however, any such distribution would be subject to approval by the Board of Trustees of the Trust. At this point, we are in the process of identifying joint venture partners and buyers for the commercial assets to be sold. Thus, the terms of any joint venture arrangements and asset sale transactions have not yet been negotiated, and no assurances can be given as to the structure or terms of such transactions or the impacts of such transactions on our financial condition, results of operations and operating metrics.
Recent Activity
Fluctuations in our results of operations from period to period are affected by acquisitions, dispositions, new developments placed in service and other business transactions resulting from our efforts to develop new properties and expand existing properties.
In our multifamily division, we made numerous acquisitions and dispositions. During 2006, we acquired 10 wholly-owned apartment communities with 3,676 apartment homes and partnership interests in four other apartment communities with 1,216 apartment homes. These properties were acquired in Atlanta, Georgia; Charlotte, North Carolina; Charleston, South Carolina; Dallas, Texas; Fairfield, California; Fort Worth, Texas; and Phoenix, Arizona. As part of our asset recycling program, we disposed of 16 wholly-owned apartment communities with 5,608 apartment homes and 20 partially-owned multifamily apartment communities with 4,985 apartment homes.
In our office division, we added 50,000 square feet of rentable space in 2006 by acquiring additional square footage at The Peachtree, located in Atlanta, Georgia. We capitalized on increased market values in the office division by divesting of seven wholly owned and six partially owned office assets aggregating 3.5 million square feet.
In our retail division, we sold four properties located in South Florida and two properties located in Birmingham, Alabama aggregating a total of 1.7 million square feet. We will retain the management and leasing responsibilities at all six properties.
Colonial Grand at Silverado Reserve is a multifamily development that was completed in 2006 adding an additional 238 apartment homes to our multifamily portfolio. During 2006, we also completed the development of Colonial Pinnacle Tutwiler Farm, a 450,000 square foot retail power center located in north Birmingham, Alabama. This property was sold during the fourth quarter. Additionally, we completed the development of Colonial Pinnacle Turkey Creek, a 477,000 square foot retail center located in Knoxville, Tennessee, in which we have a 50% partnership interest.
At December 31, 2006, we had a development pipeline approaching $1.0 billion with numerous projects set to be completed throughout 2007 and 2008. In the multifamily division, ten ground up developments for Colonial Grand apartment communities are planned, four of which are in Austin, Texas, two in Charlotte, North Carolina and one each in Gulf Shores, Alabama, Memphis, Tennessee, Phoenix, Arizona and Orlando, Florida. Upon completion, these developments are expected to add approximately 3,325 apartment homes to our portfolio. In the office division, we continued with the development of two assets, one located in Huntsville, Alabama and one in Orlando, Florida, that are expected to add an additional 260,000 square feet of space to our portfolio. We broke ground on two other developments in the office division, a 169,000 square foot development in Birmingham, Alabama and a 155,000 square foot development in Charlotte, North Carolina, both of which are part of mixed-use developments. In the retail division, we have eight open-air shopping center developments underway. Four centers are located in Birmingham, Alabama, two are in Gulf Shores, Alabama, one is in Charlotte, North Carolina and one is in Nashville, Tennessee. With the completion of these developments during 2007 and 2008, the retail division is expected to have approximately 2.2 million additional square feet of retail space.
During 2006, we continued the development of four condominium projects, two of which are located in Charlotte, North Carolina, while one each is located in Charleston, South Carolina and in Gulf Shores, Alabama. One of the developments in Charlotte began selling completed units during the third quarter of 2006. The other developments are expected to be completed during 2007. During 2006, we also converted three previously operated multifamily apartment communities into condominiums properties. Two of these conversion properties are located in Orlando, Florida and the other is in Charleston, South Carolina. The South Carolina property was 100% sold at December 31, 2006. We also continued with the sales of units at the two condominium conversion properties located in Jensen Beach and Delray Beach, Florida that were acquired in 2005. We have four other for-sale residential developments under way including three in south Alabama and one in Charlotte, North Carolina. These developments are expected to include lots and townhomes.
In August 2006, we completed a $275 million senior notes offering. We used the proceeds received from this offering to reduce the outstanding balance on our unsecured line of credit (see Note 9 - Notes and Mortgages Payable in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
Comparison of the year ended December 31, 2006 to the year ended December 31, 2005
Base rent for the year ended December 31, 2006 increased $43.3 million or 12.5% as compared with the year ended December 31, 2005. Base rent increased $40.9 million due to acquisitions during 2005 and 2006 and $30.7 million as a result of the Cornerstone merger. These increases were offset by a decrease of $41.4 million resulting from the sale of 14
properties to three joint ventures during 2005 and 2006. The remaining increase is primarily a result of increased rents in our same property portfolio across all three divisions.
Percentage rent for the year ended December 31, 2006 decreased $2.0 million or 63.1% as compared with the year ended December 31, 2005. The decrease was due to the sale of six malls to the GPT Joint Venture (see Note 7 - Investment in Partially Owned Entities and other Arrangements in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
Construction revenues and construction expenses of $30.5 million and $29.4 million, respectively, for the year ended December 31, 2006 are a result of third party services provided by our construction company. Our construction company had not begun providing services to third parties during the year ended December 31, 2005. These construction and development services were provided to the joint venture, CG at Canyon Creek, in which we own a 25% partnership interest. All revenues and expenses associated with our percent interest are eliminated in consolidation.
Tenant recoveries for the year ended December 31, 2006 decreased $7.8 million or 25.3% as compared with the year ended December 31, 2005. There was a decrease of $12.3 million as a result of the sale of 14 properties to three joint ventures during 2005 and 2006, which was offset by $1.5 million from acquisitions completed in 2005 and 2006 and increased same property tenant recoveries of $2.7 million.
Other property related revenue for the year ended December 31, 2006 increased $8.1 million or 33.8% as compared with the year ended December 31, 2005. Of the increase, $4.3 million is attributable to the Cornerstone merger and $3.7 million is attributable to properties acquired in 2006 and 2005, which was partially offset by a $3.2 million decrease resulting from the sale of 14 properties to three joint ventures during 2005 and 2006. The remaining increase is a result of ancillary income from our existing properties.
Other non-property related revenue for the year ended December 31, 2006 increased $9.8 million as compared with the year ended December 31, 2005. The increase is primarily due to an increase in property management and other fees of $9.5 million as a result of additional third party management agreements.
Property operating expenses of our operating properties for the year ended December 31, 2006 increased $13.1 million or 14.0% as compared to the year ended December 31, 2005. The increase is due primarily to $7.4 million in salaries and benefits and $8.8 million in general operating expenses resulting from the Cornerstone merger and properties acquired during 2006 and 2005. These increases were offset by a reduction in property operating expenses resulting from the sale of 14 commercial properties to three joint ventures during 2005 and 2006.
Taxes, licenses and insurance for our operating properties for the year ended December 31, 2006 increased $7.9 million or 18.1% as compared to the year ended December 31, 2005. Of the increase, $6.3 million is related to properties acquired in 2006 and 2005, $3.6 million is related to the Cornerstone assets and $3.2 million is related to increased expenses at our existing properties. These expenses were partially offset by a decrease in expenses resulting from the sale of 14 properties to three joint ventures during 2005 and 2006.
Property management expenses, which represent regional supervision and accounting costs related to property operations, were $12.6 million for the year ended December 31, 2006, which is consistent with prior year expenses.
General and administrative corporate expenses for the year ended December 31, 2006 increased $1.6 million as compared to the year ended December 31, 2005, but remained consistent year over year as a percentage of total property revenues. This is primarily attributable to an increase in salaries and other incentives associated with the growth of the Company and an additional quarter of overhead costs in 2006 associated with the Cornerstone merger.
Management fee and other expense, which represents expenses related to property management and other services provided to third parties, increased $8.0 million for the year ended December 31, 2006 as compared to the year ended December 31, 2005. The increase is primarily due to an increase in property management and leasing expenses as a result of additional third party management agreements.
Depreciation and amortization expenses for the year ended December 31, 2006 decreased $6.2 million or 3.9% as compared to the year ended December 31, 2005. Depreciation and amortization expense decreased $18.1 million as a result of the sale of 14 properties to three joint ventures during 2005 and 2006 and $18.8 million due to reduced amortization expenses related to properties acquired in the Cornerstone merger. These decreases were offset by an increase of $21.5 million in depreciation and amortization expenses associated with other properties acquired in 2006 and 2005 and the remaining increase is due to completed developments placed into service during 2006 and 2005.
Impairment of $1.6 million for the year ended December 31, 2006 was recorded on one of our condominium conversion properties as a result of the softening in the condominium and single family housing markets during 2006 (See Note 4 - Property Acquisitions and Dispositions in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
Interest expense for the year ended December 31, 2006 increased $2.5 million, or 2.0%, to $126.4 million as compared to the year ended December 31, 2005. The increase reflects the issuance of $275 million of senior notes on August 29, 2006, which was offset by principal reductions of debt during 2006 of approximately $260.6 million and the net reduction in our revolving credit facilities of $24.7 million during the year.
Interest income for the year ended December 31, 2006 increased $3.4 million or 76.3% as compared to the year ended December 31, 2005. The increase is a result of a $24.6 million increase in notes receivable in 2006 compared to 2005 (see Note 2 - Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
Income from partially-owned entities for the year ended December 31, 2006 increased $33.9 million as compared to the year ended December 31, 2005. This increase is primarily due to the gain recognized on the sale of our interests in 15 multifamily apartment communities which were part of the DRA Southwest Joint Venture (see Note 7 - Investment in Partially Owned Entities and other Arrangements in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K). The increase was offset by our interest in the net loss of the DRA / Colonial Office Joint Venture for 2006 primarily related to depreciation and amortization.
Gains on hedging activities for the year ended December 31, 2006 increased $4.6 million as compared to the year ended December 31, 2005. This increase is a result of changes in the fair value of an economic hedge totaling approximately $2.7 million and the gain recognized on the settlement of a forward starting interest rate swap of approximately $2.9 million, for which the originally hedged future debt issuance is probable of not occurring (see Note 10 - Derivative Instruments in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
Gains from sales of property included in continuing operations for the year ended December 31, 2006 decreased $26.0 million to $80.4 million as compared to the year ended December 31, 2005. The decrease is primarily attributable to larger gains on sales of properties to joint ventures during 2005, offset by an increase in gains on sales of land, undepreciated property, condominium units and for-sale residential sales.
Other income (expense) for the year ended December 31, 2006 decreased $3.3 million as compared to the year ended December 31, 2005. The decrease is primarily a result of $4.0 million received as a result of forfeited earnest money in 2005.
Income from discontinued operations for the year ended December 31, 2006 decreased $10.0 million as compared to the year ended December 31, 2005. At December 31, 2006, we had classified nine multifamily apartment communities containing approximately 2,200 units and 15 retail assets containing approximately 3.4 million square feet as held for sale. The operating property sales that occurred in 2006 and 2005 (with no continuing involvement), which resulted in a gain on disposal of $121.0 million and $182.1 million, respectively, are classified as discontinued operations (see Note 4 - Property Acquisitions and Dispositions in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
Preferred share issuance costs write-off for the year ended December 31, 2006 included the write-off of issuance costs associated with the Series C and Series E preferred shares, which resulted from the redemption or repurchase of such shares during 2006 (see Note 12 - Cash Contributions in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
Comparison of the year ended December 31, 2005 to the year ended December 31, 2004
Base rent for the year ended December 31, 2005 increased $145.2 million or 72.4% as compared with the year ended December 31, 2004. Base rent increased $92.6 million as a result of the Cornerstone merger, $36.6 million due to acquisition activity and $5.5 million as result of completed developments in 2005. The remaining increase is primarily a result of a decrease in move-in concessions at our multifamily properties and an increase in occupancy in all three divisions.
Percentage rent for the year ended December 31, 2005 increased $0.7 million or 30.6% as compared with the year ended December 31, 2004. The increase was primarily due to an increase in gross sales per square foot at our retail malls and the addition of new tenants at our retail malls that recently completed redevelopment projects. The increase was
partially offset by the sale of four malls and the transfer of six malls to the GPT Joint Venture (see Note 7 - Investment in Partially Owned Entities and other Arrangements in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
Tenant recoveries for the year ended December 31, 2005 increased $5.4 million or 21.2% as compared with the year ended December 31, 2004. The increase was primarily the result of our 2005 and 2004 acquisitions.
Other property related revenue for the year ended December 31, 2005 increased $10.6 million or 79.9% as compared with the year ended December 31, 2004. Of the increase, $8.6 million is attributable to the Cornerstone acquisition and the remaining increase is attributable to properties acquired and developed in 2005 and 2004.
Other non-property related revenue for the year ended December 31, 2005 increased $2.8 million or 53.8% as compared with the year ended December 31, 2004. The increase is primarily due to an increase in property management fees as a result of an increase in third party management agreements.
Property operating expenses of our operating properties for the year ended December 31, 2005 increased $42.0 million or 81.0% as compared to the year ended December 31, 2004. The increase is due primarily to increased salaries and benefits of $13.6 million as well as increased general operating expenses of $11.1 million related to the Cornerstone merger and properties acquired during 2006 and 2005. Additionally, repairs and maintenance expenses increased $12.6 million as a result of the Cornerstone merger, property acquisitions and increased repairs on our multifamily and retail assets in 2005 as compared to 2004.
Taxes, licenses and insurance for our operating properties for the year ended December 31, 2005 increased $20.8 million or 91.5% as compared to the year ended December 31, 2004. Of the increase, $12.4 million is related to the Cornerstone assets and $8.7 million is related to the other properties acquired and developed in 2005 and 2004.
Property management expense, which represents regional supervision and accounting costs related to property operations, increased $6.8 million for the year ended December 31, 2005 as compared to the year ended December 31, 2004. This increase was primarily due to salary and benefit expenses related to the addition of regional supervision personnel, as well as the expense associated with the regional offices acquired in the Cornerstone merger.
General and administrative corporate expenses for the year ended December 31, 2005 increased $3.6 million as compared to the year ended December 31, 2004, but decreased as a percentage of total property revenues from 6.3% in 2004 to 4.7% for 2005. The increases in expenses were primarily due to increases in salaries and benefits associated with the Cornerstone merger.
Management fee and other expense, which represents expenses related to property management and other services provided to third parties, increased $0.7 million for the year ended December 31, 2005 as compared to the year ended December 31, 2004. The increase is primarily due to an increase in property management and leasing expenses as a result of additional third party management agreements.
Depreciation and amortization expenses for the year ended December 31, 2005 increased $87.9 million or 122.7% as compared to the year ended December 31, 2004. Of the increase, $65.5 million is related to properties acquired in the Cornerstone merger, including $38.1 million related to the amortization of in-place lease intangible assets. Approximately $17.0 million of the increase is related to properties acquired and developed during 2005 and 2004. The remaining increase is attributable to the amortization of prepaid leasing commissions and tenant improvements on our existing properties as a result of an increase in leasing activity in 2005.
Interest expense for the year ended December 31, 2005 increased $52.6 million, or 73.6%, to $124.1 million as compared to the year ended December 31, 2004. The increase reflects the issuance of $275 million of senior notes on January 31, 2005, the issuance of $325 million of senior notes on September 28, 2005 by CRLP and the assumption of $837.0 million of debt in connection with the Cornerstone merger. In addition, we had increased usage under our unsecured line of credit accompanied by rising interest rates.
Interest income for the year ended December 31, 2005 increased $3.4 million as compared to the year ended December 31, 2004. The increase is a result of a $35.5 million increase in notes receivable in 2005 compared to 2004. We issued notes receivable in connection with the sale of eight multifamily properties and provided mezzanine financing to third parties in 2005.
Income from partially-owned entities for the year ended December 31, 2005 decreased $7.6 million as compared to the year ended December 31, 2004. The decrease is primarily the result of our interest in the net loss of the DRA / Colonial Office JV, which experienced a net loss in the fourth quarter of 2005 as a result of increased amortization and depreciation expense primarily related to in-place lease intangibles.
Gains from sales of property included in continuing operations for the year ended December 31, 2005 increased $101.7 million to $106.5 million as compared to the year ended December 31, 2004. The increase is a result of the transfer of six regional malls to the GPT Joint Venture in which we retained a 10% interest resulting in a gain of $93.2 million and $13.6 million in gains related to condominium sales during 2005.
Other income (expense) for the year ended December 31, 2005 increased $3.1 million as compared to the same period in 2004. The increase is primarily a result of $4.0 million received as a result of forfeited earnest money.
Income from discontinued operations for the year ended December 31, 2005 decreased $7.9 million as compared to the year ended December 31, 2004. At December 31, 2006, we had classified nine multifamily apartment communities containing approximately 2,200 units and 15 retail assets containing approximately 3.4 million square feet as held for sale. The operating property sales that occurred in 2005 and 2004 (with no continuing involvement), which resulted in a gain on disposal of $182.1 million and $14.8 million, respectively, are classified as discontinued operations (see Note 4 - Property Acquisitions and Dispositions in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
Summary of Critical Accounting Policies
We believe our accounting policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. We consider the following accounting policies to be critical to our reported operating results:
Principles of Consolidation-We consolidate entities in which we have a controlling interest or entities where we are determined to be the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities.” Under FIN 46R, variable interest entities (“VIEs”) are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. Additionally, Emerging Issues Task Force (“EITF”) Issue No. 04-5, “Determining Whether a General Partner, or the General Partner as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” provides guidance in determining whether a general partner controls and therefore should consolidate a limited partnership. The application of FIN 46R and EITF No. 04-5, requires us to make significant estimates and judgments about our and our other partners’ rights, obligations and economic interests in such entities. For entities in which we have less than a controlling financial interest or entities where we are not the primary beneficiary under FIN 46R, the entities are accounted for on the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities is included in consolidated net income. A description of our investments accounted for on the equity method of accounting is included in Note 7 Investments in Partially-Owned Entities and Other Arrangements in our Notes to Consolidated Financial Statements contained in item 8 of this Form 10-K. We eliminate all significant intercompany accounts and transactions in consolidation.
We recognize minority interest in our Consolidated Balance Sheets for non-wholly-owned entities that we consolidate. The minority partners’ share of current operations is reflected in minority interest of limited partners in the Consolidated Statements of Income.
Land, Buildings, and Equipment-Land, buildings, and equipment is stated at the lower of cost, less accumulated depreciation, or fair value. We review our long-lived assets and certain intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the asset’s fair value. Assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows:
Repairs and maintenance costs are charged to expense as incurred. Replacements and improvements are capitalized and depreciated over the estimated remaining useful lives of the assets. When items of land, buildings, or equipment are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recorded in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We recognize sales of real estate properties only upon the closing of a transaction. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectibility of the sales price is reasonably assured and we are not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sales of real estate under SFAS No. 66, Accounting for Sales of Real Estate. For properties sold to a joint venture in which we retain an ownership percentage, we limit the profit recognized from the sale to the portion sold to the outside party. Further, the profit is limited by the amount of cash received for which we have no commitment to reinvest pursuant to the partial sale provisions found in paragraph 30 of Statement of Position (“SOP”) 78-9. As of December 31, 2006, in accordance with SFAS No. 66, all sales of real estate properties have been recorded as sales transactions, as the risk and rewards of ownership have been transferred to the purchaser.
For condominium conversion projects, sales and the associated gains for individual condominium units are recognized upon the closing of the sale transactions, as all conditions for full profit recognition have been met. Estimated future warranty costs are charged to cost of sales in the period when the revenues from condominium closings are recognized. Such estimated warranty costs generally are approximately 0.5% of total revenue. As necessary, additional warranty costs are charged to costs of sales based on management’s estimate of the costs to remediate existing clairns.
Acquisition of Real Estate Assets- We account for our acquisitions of investments in real estate in accordance with SFAS No. 141, Business Combinations, which requires the fair value of the real estate acquired to be allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of other tenant relationships, based in each case on their fair values. We consider acquisitions of operating real estate assets to be “businesses” as that term is contemplated in Emerging Issues Task Force Issue No. 98-3, Determining Whether a Non-monetary Transaction Involves Receipt of Productive Assets or of a Business.
We allocate purchase price to the fair value of the tangible assets of an acquired property (which includes the land and building) determined by valuing the property as if it were vacant. The “as-if-vacant” value is allocated to land and buildings based on management’s determination of the relative fair values of these assets. We also allocate value to tenant improvements based on the estimated costs of similar tenants with similar terms.
Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases.
The aggregate value of other intangible assets acquired are measured based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management may engage independent third-party appraisers to perform these valuations and those appraisals use commonly employed valuation techniques, such as discounted cash flow analyses. Factors considered in these analyses include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods depending on specific local market conditions and depending on the type of property acquired. Management also estimates costs to execute similar leases including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to in-place leases, which includes other tenant relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with
the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement or management’s expectation for renewal), among other factors.
We are actively pursuing acquisition opportunities and will not be successful in all cases. Costs incurred related to these acquisition opportunities are expensed when it is no longer probable that we will be successful in the acquisition.
Undeveloped Land and Construction in Progress-Undeveloped land and construction in progress is stated at the lower of cost or fair value.
Costs incurred during predevelopment are capitalized after we have identified a development site, determined that a project is feasible, and concluded that it is probable that the project will proceed. While we believe we will recover this capital through the successful development of such projects, it is possible that a write-off of unrecoverable amounts could occur. Once it is no longer probable that a development will be successful, the predevelopment costs that have been previously capitalized are expensed.
The capitalization of costs during the development of assets (including interest, property taxes and other direct costs) begins when an active development commences and ends when the asset, or a portion of an asset, is delivered and is ready for its intended use. Cost capitalization during redevelopment of assets (including interest and other direct costs) begins when the asset is taken out of service for redevelopment and ends when the asset redevelopment is completed and the asset is placed in-service.
Valuation of Receivables-We are subject to tenant defaults and bankruptcies at our office and retail properties that could affect the collection of outstanding receivables. In order to mitigate these risks, we perform credit review and analysis on all commercial tenants and significant leases before they are executed. We evaluate the collectibility of outstanding receivables and record allowances as appropriate. Our policy is to record allowances for all outstanding invoices greater than 60 days past due at our office and retail properties. We had $1.7 million and $1.6 million in an allowance for doubtful accounts as of December 31, 2006 and 2005, respectively.
Due to the short-term nature of the leases at our multifamily properties, generally six months to one year, our exposure to tenant defaults and bankruptcies is minimized. Our policy is to record allowances for all outstanding receivables greater than 30 days past due at our multifamily properties.
Notes Receivable- Notes receivable consists primarily of promissory notes issued by third parties. The Company records notes receivable at cost. The Company evaluates the collectibility of both interest and principal for each of its notes to determine whether it is impaired. A note is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a note is considered to be impaired, the amount of the allowance is calculated by comparing the recorded investment to either the value determined by discounting the expected future cash flows at the note’s effective interest rate or to the fair value of the collateral if the note is collateral dependent. The Company had recorded accrued interest related to its outstanding notes receivable of $5.2 million and $2.8 million as of December 31, 2006 and 2005, respectively. As of December 31, 2006, we had recorded a reserve of $0.6 million against our outstanding notes receivable and accrued interest. The weighted average interest rate on the notes receivable outstanding at December 31, 2006 and 2005 was approximately 11.8% and 16.0% respectively. Interest income is recognized on an accrual basis.
Derivative Instruments-All derivative instruments are recognized on the balance sheet and measured at fair value. Derivatives that do not qualify for hedge treatment under SFAS No. 133 (subsequently amended by SFAS Nos. 137 and 138), Accounting for Derivative Instruments and Hedging Activities, must be recorded at fair value with gains or losses recognized in earnings in the period of change. We enter into derivative financial instruments from time to time, but do not use them for trading or speculative purposes. Interest rate cap agreements and interest rate swap agreements are used to reduce the potential impact of increases in interest rates on variable-rate debt.
We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in hedging the exposure to the hedged transaction’s variability in cash flows attributable to the hedged risk will be assessed. Both at the inception of the hedge and on an ongoing basis, we assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. We discontinue hedge accounting if a derivative is not determined to be highly effective as a hedge or has ceased to be a highly effective hedge.
Share-Based Compensation-The Trust currently sponsors share option plans and restricted share award plans (Refer to Note 13 - Share-based Compensation in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K). In December 2004, the FASB issued SFAS No. 123 (Revised), Share Based Payment, which replaced SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 (R) requires compensation costs related to share-based payment transactions to be recognized in financial statements. The Trust adopted SFAS No. 123 (R) effective January 1, 2006 using the modified prospective method. The Trust previously adopted SFAS No. 123 on January 1, 2003 using the prospective method. Under this method, the fair value of compensation expense was recorded for all share-based awards granted or modified after January 1, 2003. Accordingly, the adoption of SFAS No. 123 (R) did not have a material impact on our consolidated financial statements.
Revenue Recognition-We, as lessor, retain substantially all the risks and benefits of property ownership and account for our leases as operating leases. Rental income attributable to leases is recognized on a straight-line basis over the terms of the leases. Certain leases contain provisions for additional rent based on a percentage of tenant sales. Percentage rents are recognized in the period in which sales thresholds are met. Recoveries from tenants for taxes, insurance, and other property operating expenses are recognized in the period the applicable costs are incurred in accordance with the terms of the related lease.
Revenue from construction contracts is recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Adjustments to estimated profits on contracts are recognized in the period in which such adjustment become known.
Other income received from long-term contracts signed in the normal course of business, including property management and development fee income, is recognized when earned for services provided to third parties.
Segment Reporting-We have adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 defines an operating segment as a component of an enterprise that engages in business activities that generate revenues and incur expenses, which operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance, and for which discrete financial information is available. We are organized into and manage our business based on the performance of three separate and distinct operating divisions: multifamily, office and retail.
Recent Accounting Pronouncements
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. We will adopt this Interpretation in the first quarter of 2007. The cumulative effects, if any, of applying this Interpretation will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The adoption of FIN 48 did not have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. Among other requirements, SFAS No. 157 defines fair value and establishes a framework for measuring fair value and also expands disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 is effective beginning the first fiscal year that begins after November 15, 2007. We are currently evaluating the impact of SFAS No. 157 on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires, among other things, that we (i) recognize a net liability or asset to report the funded status of our defined benefit pensions and other postretirement plans on our balance sheet and (ii) measure benefit plan assets and benefit obligations as of our balance sheet date. We adopted the recognition and disclosure provisions of SFAS No. 158 as of December 31, 2006. The adoption of the recognition provisions of SFAS No. 158 had the following impact to our consolidated balance sheets: an increase in other liabilities and a corresponding decrease in shareholders’ equity of approximately $2.4 million (see Note 14 - Employee Benefits in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).
In November 2006, the FASB ratified EITF Issue No. 06-8, Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums. EITF 06-8 states that the adequacy of the buyer’s continuing investment under SFAS 66 should be assessed in determining whether to recognize profit under the percentage-of-completion method on the sale of individual units in a condominium project. EITF 06-8 is effective for fiscal years beginning after March 15, 2007. We do not expect the effect of the adoption of EITF 06-8 to have a material impact on our consolidated financial statements.
Liquidity and Capital Resources
Our net cash provided by operating activities increased from $154.2 million for the 12 months ended December 31, 2005 to $171.8 million for the 12 months ended December 31, 2006. This increase is due primarily to an additional three months of operations for properties acquired in the Cornerstone merger during 2006.
Net cash flows from investing activities increased from net cash used in investing activities of $0.3 million for the 12 months ended December 31, 2005 to net cash provided by investing activities of $135.4 million for the 12 months ended December 31, 2006. This increase is primarily due to the decrease in property acquisitions and increased distributions from unconsolidated partially-owned entities. These increases were partially offset by an increase in development expenditures for the 12 months ended December 31, 2006. In addition, we incurred direct costs associated with the Cornerstone merger of $35.0 million during the 12 months ended December 31, 2005.
Net cash flows from financing activities decreased from net cash used in financing activities of $134.0 million for the 12 months ended December 31, 2005 to net cash used in financing activities of $250.2 million for the 12 months ended December 31, 2006. The decrease was primarily due to the net proceeds received from the Trust’s equity offering during the 12 months ended December 31, 2005 and the redemption and repurchase of preferred shares and preferred units during the 12 months ended December 31, 2006. In addition, distributions increased approximately $20.3 million in 2006.
Strategic Change
As previously disclosed, our current strategy is to change our asset mix to generate approximately 80% of our net operating income from multifamily properties. To implement this strategy, over the next six to 12 months, the Trust plans to sell the majority of our wholly-owned office assets and retail assets into a series of joint ventures. In addition, other retail assets are expected to be sold outright. Capital proceeds from these transactions are expected to be used to reduce mortgage debt and pay a special dividend to the Trust’s common shareholders. Common unitholders in CRLP are expected to receive a special distribution in connection with these transactions. These transactions are not expected to materially impact our debt to equity ratios. We also anticipate maintaining our investment grade rating, and as such, do not expect capital availability to be materially impacted as a result of the transactions. However, the terms of any joint venture arrangements and asset sale transactions have not yet been negotiated, and no assurances can be given as to the structure or terms of such transactions (including the terms or nature of any distributions to unitholders) or the impacts of such transactions on our financial condition or results of operations.
Short-Term Liquidity Needs
Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses directly associated with our portfolio of properties (including regular maintenance items), capital expenditures incurred to lease our space (e.g., tenant improvements and leasing commissions), scheduled principal payments and interest expense on our outstanding debt, and quarterly dividends and distributions paid to our common and preferred unitholders. In the past, we have primarily satisfied these requirements through cash generated from operations. We believe that cash generated from operations and borrowings under our unsecured line of credit will be sufficient to meet our short-term liquidity requirements. However, factors described below and elsewhere herein, including under Item 1A - “Risk Factors,” may have a material adverse effect on our cash flow.
The majority of our revenue is derived from tenants under existing leases at our properties. Therefore, our operating cash flow is dependent upon the rents that we are able to charge to our tenants and the ability of these tenants to make their rental payments.
The Trust has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ending December 31, 1993. If the Trust qualifies for taxation as a REIT, it generally will not be subject to Federal income tax to the extent it distributes at least 90% of its REIT taxable income to its shareholders. Our partnership agreement requires us to distribute at least quarterly 100% of our available cash (as defined in the partnership agreement) to holders of our partnership units. Consistent with our partnership agreement, we intend to continue to distribute quarterly an amount of our available cash sufficient to enable the Trust to pay quarterly dividends to its shareholders in an amount necessary to satisfy the requirements applicable to REITs under the Internal Revenue Code and to eliminate federal income and excise tax liability.
Long-Term Liquidity Needs
Our long-term liquidity requirements consist primarily of funds necessary to pay for the principal amount of our long-term debt as it matures, significant non-recurring capital expenditures that need to be made periodically at our properties, development projects that we undertake and costs associated with acquisitions of properties that we pursue. Historically, we have satisfied these requirements principally through the most advantageous source of capital then available, which has included the incurrence of new debt through borrowings (i.e., public offerings of unsecured debt and private incurrence of collateralized and unsecured debt), sales of the Trust’s common and preferred shares, capital raised through the disposition of assets, and joint venture capital transactions. We believe these sources of capital will continue to be available in the future to fund our long-term capital needs. However, factors described below and elsewhere herein may have a material adverse effect on our access to these capital sources in the future.
Our ability to incur additional debt is dependent upon a number of factors, including our credit ratings, the value of our unencumbered assets, our degree of leverage and borrowing restrictions imposed by our current lenders. We currently have investment grade ratings for prospective unsecured debt offerings from three major rating agencies. If we experienced a credit downgrade, we may be limited in our access to capital in the unsecured debt market, which we have historically utilized to fund investment activities, and the interest rate we are paying under our existing credit facility would increase, if at all.
The Trust’s ability to raise funds through sales of common shares and preferred shares is dependent on, among other things, general market conditions for REITs, market perceptions about the Trust and the current trading price of the Trust’s shares. The Trust will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the equity markets may not be consistently available on terms that are attractive.
As part of our on-going strategy, we have maintained our asset recycling program, through which we sell assets that we believe have reached their maximum investment potential and reinvest the proceeds from the sale of these assets into opportunities that we believe have more growth potential. During 2006, we disposed of 16 wholly-owned multifamily apartment communities and our percentage interest in 20 multifamily apartment communities representing 10,593 units, seven wholly-owned office properties, including three that were sold to a joint venture, and our percentage interest in six office properties representing 3.5 million square feet and six retail properties, representing 1.7 million square feet. The multifamily apartment communities, office properties and retail properties were sold for a total sales price of approximately $1.0 billion, which was used to repay a portion of the borrowings under our unsecured line of credit and to fund other investment activities. We also sold 607 condominium units at our five condominium conversion properties during 2006 for a total sales price of $117.7 million. Our ability to generate cash from asset sales is limited by market conditions and certain rules applicable to REITs. Our ability to sell properties may be limited in the future by the condition of the markets in which we operate and by various other regulatory requirements. Additionally, throughout 2006, we sold various parcels of land located adjacent to our existing properties for an aggregate sales price of approximately $7.0 million, which was also used to repay a portion of the borrowings under our unsecured line of credit and to support our investment activities. As of December 31, 2006, we had approximately $69.8 million of cash from the sales of assets, which we used to fund the acquisition of properties during the first quarter of 2007.
As of December 31, 2006, we have unsecured credit facilities providing for total borrowings of up to $600.0 million and a cash management line that provides for borrowings up to $40.0 million. These credit facilities bear interest at LIBOR plus a spread calculated based on our unsecured debt ratings from time to time. Of the $600 million available under the credit facilities, we have fixed $100.0 million at an interest rate of 5.47% with an interest rate swap agreement. Based on our December 31, 2006 debt ratings, the spread is 80 basis points over LIBOR. The credit facilities, excluding the cash management line of credit, mature and are renewable in March 2008 and provide for a one-year extension. The credit facilities include a competitive bid feature that allows us to convert up to $250 million under the credit facilities to a fixed rate, for a fixed term not to exceed 90 days.
The credit facilities, which are primarily used to finance property acquisitions and developments, had an outstanding balance at December 31, 2006 of $185.0 million. There were no amounts outstanding on the cash management line at December 31, 2006. The interest rate of this short-term borrowing facility, including the competitive bid balance, is 5.64% and 5.32% at December 31, 2006 and 2005, respectively.
At December 31, 2006, our total outstanding debt balance was $2.4 billion. The outstanding balance includes fixed-rate debt of $2.3 billion, or 95.6% of the total debt balance, and floating-rate debt of $105.0 million, or 4.4% of the total debt balance. Our total market capitalization as of December 31, 2006 was $5.4 billion and our ratio of debt to market capitalization was 44.5%. We have certain loan agreements that contain restrictive covenants, which among other things require maintenance of various financial ratios. At December 31, 2006, we were in compliance with these covenants.
Investing Activities
During 2006, we acquired ten multifamily apartment communities containing 3,676 units for an aggregate cost of $342.6 million. We also acquired a partnership interest in four multifamily apartment communities containing 1,216 units for an aggregate cost of $19.0 million. We completed the development of one multifamily apartment community located in Austin, Texas for $24.1 million and two retail properties, including one located in Birmingham, Alabama and one in Knoxville, Tennessee where we are a 50% partner, for $72.5 million, which represents our portion of the cost.
We provided first mortgage financing to third parties totaling $9.9 million and $5.5 million in 2006 and 2005, respectively, and received principal payments of $2.9 million on these loans during 2006. We provided subordinated financing to third parties in connection with the sale of properties of $3.9 million and $8.0 million in 2006 and 2005, respectively, and received principal payments of $8.0 million on these loans during 2006. We provided subordinated financing to third parties for the acquisition and conversion of multi-family properties to condominium communities totaling $11.0 million and $18.8 million in 2006 and 2005, respectively. During 2006, we received principal payments of $4.7 million on these loans and reclassified $3.9 million to investment in partially owned entities pursuant to a reorganization of the borrower. During 2006, we provided subordinated financing of $25.4 million to partially owned joint ventures. These loans are collateralized by the equity of the joint ventures. With the exception of one $2.4 million 20 year amortizing loan, the loans have two to three year maturities.
We regularly incur significant expenditures in connection with the re-leasing of our office and retail space, principally in the form of tenant improvements and leasing commissions. The amounts of these expenditures can vary significantly, depending on the particular market and the negotiations with tenants. We also incur expenditures for certain recurring capital expenses. During 2006, we incurred approximately $33.7 million related to tenant improvements and leasing commissions, and approximately $36.5 million of recurring capital expenditures. We expect to pay for future re-leasing and recurring capital expenditures out of cash from operations.
Distribution
The distribution on our common units of partnership interest was $0.680 per unit per quarter or $2.72 per unit annually in 2006. We also pay regular quarterly distributions on our preferred units. The maintenance of these distributions is subject to various factors, including the discretion of the Board of Trustees of the Trust, our ability to pay distributions under Delaware law, the availability of cash to make the necessary distribution payments and the effect of REIT distribution requirements, which require at least 90% of the Trust’s taxable income to be distributed to its shareholders.
Financing Transactions
On July 17, 2006, we repaid our $65.0 million 8.05% unsecured senior notes, which matured on that date. The notes were repaid with borrowings from our unsecured line of credit.
On August 28, 2006, we completed a $275 million senior notes offering of 6.05% unsecured notes due September 1, 2016. Interest on the notes is payable semi-annually on the first day of every September and March, beginning March 1, 2007. The net proceeds of approximately $271.7 million, after discount and issuance costs, were used to reduce a portion of the outstanding balance under the Credit Facilities.
Credit Ratings
Our current credit ratings are as follows:
(1)
Ratings outlook is “stable”.
Our credit ratings are investment grade. If we experience a credit downgrade, we may be limited in our access to capital in the unsecured debt market, which we have historically utilized to fund our investment activities. In addition, as previously discussed, our spread on our $600 million unsecured line of credit would increase.
Market Risk
In the normal course of business, we are exposed to the effect of interest rate changes that could affect our results of operations and financial condition or cash flow. We limit these risks by following established risk management policies and procedures, including the use of derivative instruments to manage or hedge interest rate risk. The table below presents the principal amounts, weighted average interest rates, fair values and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes at December 31, 2006.
The table incorporates only those exposures that exist as of December 31, 2006. It does not consider those exposures or positions, which could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented therein has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, our hedging strategies at that time, and interest rates.
Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements or other identified risks. To accomplish this objective, we primarily use interest rate swaps (including forward starting interest rate swaps) and caps as part of our cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. During 2006, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. As of December 31, 2006, none of our outstanding interest rate swaps hedge the interest rate risk associated with forecasted debt issuances.
At December 31, 2006 and 2005, derivatives with a fair value of $0.7 million and $3.0 million, respectively, were included in other assets. The change in net unrealized gains/(losses) of $3.0 million in 2006, $1.6 million in 2005 and ($0.2) million in 2004 for derivatives designated as cash flow hedges is separately disclosed in the statements of changes in shareholders’ equity and comprehensive income. The change in fair value of derivatives not designated as hedges of $2.7 million, ($0.1) million and $0.4 million is included in other income (expense) in 2006, 2005 and 2004, respectively. Hedge ineffectiveness of ($0.1) million and $1.1 million on cash flow hedges due to index mismatches was recognized in other income during 2006 and 2005, respectively. As of December 31, 2006, all of our hedges are designated as cash flow hedges under SFAS No. 133.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our hedged debt. The change in net unrealized gains on cash flow hedges reflects a reclassification of $0.5 million, $0.5 million and $1.4 million of net unrealized gains from accumulated other comprehensive income to interest expense during 2006, 2005 and 2004, respectively. We estimate no impact to interest expense for amounts that will be reclassified from other comprehensive income during 2007.
During February 2006, we settled a $200.0 million forward starting interest rate swap and received a payment of approximately $4.3 million. This forward starting interest rate swap was in place to convert the floating rate payments on certain expected future debt obligations to a fixed rate. This derivative originally qualified for hedge accounting under SFAS No. 133. However, in December of 2005 as a result of a modification to the forecasted transaction, this derivative no longer qualified for hedge accounting. As a result, we began treating this derivative as an economic hedge during 2005. Changes in the fair value of this derivative were recognized in earnings in other income (expense) and totaled approximately $2.7 million for the period of time the derivative was active during 2006. The fair value of this derivative at the time it no longer qualified for hedge accounting was approximately $1.5 million, which will remain in accumulated other comprehensive income and be reclassified to interest expense over the applicable period of the associated debt, which is approximately 10 years at December 31, 2006.
During June 2006, we entered into a forward starting interest rate swap agreement to hedge the interest rate risk associated with a forecasted debt issuance that occurred on August 28, 2006. This interest rate swap agreement had a notional amount of $200 million, a fixed interest rate of 5.689%, and a maturity date of November 15, 2016. This interest rate swap agreement was settled concurrent with our issuance of $275 million of debt in the senior notes offering completed August 28, 2006 (see Note 9 - Notes and Mortgages Payable in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K). The settlement resulted in a settlement payment of approximately $5.2 million by us. This amount will remain in other comprehensive income and be reclassified to interest expense over the remaining term of the associated debt, which is approximately 10 years at December 31, 2006. On August 15, 2006, we also entered into a $75 million treasury lock agreement to hedge the interest rate risk associated with the remaining $75 million of senior notes issued on August 28, 2006. This treasury lock agreement was settled on August 28, 2006 for a settlement payment of approximately $0.1 million which will also remain in other comprehensive income and be reclassified to interest expense over the remaining life of the associated debt.
During November 2006, we settled a $175.0 million forward starting interest rate swap that was entered into in July of 2005 and received a payment of approximately $2.9 million. This forward starting interest rate swap was in place to convert the floating rate payments on certain expected future debt obligations to a fixed rate. In November 2006, we settled this forward starting swap agreement as a result of our determination that the forecasted debt issuance was no longer probable due to our strategic shift (see Note 1 - Organization and Basis of Presentation in our Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K). In December 2006, we made the determination that it was probable that the forecasted debt issuance would not occur. As a result, we reversed the $2.9 million in other comprehensive income to other income during December of 2006.
Further, we have a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not sustained a material loss from those instruments nor do we anticipate any material adverse effect on our net income or financial position in the future from the use of derivatives.
Contractual Obligations and Other Commercial Commitments
The following tables summarize the material aspects of our future contractual obligations and commercial commitments as of December 31, 2006:
Contractual Obligations
(1)
Represents the Company’s pro rata share of principal maturities (excluding net premiums and discounts) and interest.
Other Commercial Commitments
Guarantees and Other Arrangements
During November 2006, we committed with our joint venture partner to guarantee up to $17.3 million of a $34.6 million construction loan obtained by the Colonial Promenade Smyrna Joint Venture. We along with our joint venture partner committed to provide 50% of the $17.3 million guarantee, as each partner has a 50% ownership interest in the joint venture. As of December 31, 2006, the Colonial Promenade Smyrna Joint Venture had drawn $9.2 million on the construction loan. As of December 31, 2006, no liability was recorded for the guarantee.
During February 2006, we committed to guarantee up to $4.0 million of a $27.4 million construction loan obtained by the Colonial Grand at Canyon Creek Joint Venture. As of December 31, 2006, the joint venture had drawn $21.9 million on the construction loan. As of December 31, 2006, no liability was recorded for the guarantee.
During July 2005, in connection with our investment into a joint venture with Carter and Associates, we committed to provide a construction loan to the joint venture of up to approximately $40 million at a rate of 8.25% per annum. As of December 31, 2006, $15.4 million had been drawn on the construction loan by the joint venture, and $24.6 million was available to be drawn.
During December 2002, we sold 90% of our interest in Colonial Promenade Hoover for a total sales price of $20.5 million to a newly formed joint venture, Highway 150 LLC, in which we maintain a 10% ownership interest and manage the property. In connection with the formation of Highway 150 LLC, we executed a guarantee, pursuant to which we would serve as a guarantor of $1.0 million of the debt related to the joint venture, which is collateralized by the Colonial Promenade Hoover retail property. Our maximum guarantee of $1.0 million may be requested by the lender only after all of the rights and remedies available under the associated note and security agreements have been exercised and exhausted. At December 31, 2006, the total amount of debt of the joint venture was approximately $16.9 million and matures in December 2012. As of December 31, 2006, no liability was recorded for the guarantee.
In connection with the contribution of certain assets to CRLP, certain partners of CRLP have guaranteed indebtedness of the CRLP totaling $26.5 million at December 31, 2006. The guarantees are held in order for the contributing partners to maintain their tax deferred status on the contributed assets. These individuals have not been indemnified by CRLP.
In connection with the acquisition of CRT with DRA, CRLP guaranteed approximately $50.0 million of third-party financing obtained by the DRA / Colonial Office JV with respect to ten of the CRT properties. During 2006, seven of the ten properties were sold. The DRA / Colonial Office JV is obligated to reimburse CRLP for any payments made under the guaranty before making distributions of cash flows or capital proceeds to the DRA / Colonial Office Joint Venture partners. As of December 31, 2006, no liability was recorded for the guarantee. As of February 2007, this guarantee had been reduced to $19.6 million as a result of the pay down of the associated secured debt from the sales of assets.
Off-Balance Sheet Arrangements
As listed above, at December 31, 2006, our share of mortgage debt of unconsolidated joint ventures is $367.2 million. We do not have any other off-balance sheet arrangements with any unconsolidated investments or joint ventures that we believe have or are reasonably likely to have a material effect on our financial condition, results of operations, liquidity or capital resources. The execution of our current strategy to change our mix of assets may result in a significant increase in unconsolidated third party mortgage indebtedness, which could also negatively impact our results of operations, liquidity or capital resources. See “Risk Factors - Risks Associated with our Current Strategy to Change our Asset Mix” included in Item 1A of this Form 10-K.
Outlook
Management intends to continue pursuing acquisitions and developments that meet our criteria for property quality, market strength, and investment return. Management will continue to use our unsecured line of credit to provide short-term financing for acquisition, development, and re-development activities and plans to continue to replace significant borrowings under the bank line of credit with funds generated from the sale of properties and the sale of additional debt and equity securities and permanent financing, as market conditions permit. Management believes that these potential sources of funds, along with the possibility of issuing limited partnership units of CRLP in exchange for properties, will provide us with the means to finance additional acquisitions, developments, and expansions.
In addition to the issuance of equity and debt, management is investigating alternate financing methods and sources to raise future capital. Private placements, joint ventures, and non-traditional equity and debt offerings are some of the alternatives we are contemplating.
Management anticipates that our net cash provided by operations and our existing cash balances will provide the necessary funds on a short- and long- term basis to cover our operating expenses, interest expense on outstanding indebtedness, recurring capital expenditures, and dividends to Trust shareholders in accordance with Internal Revenue Code requirements applicable to REITs.
Inflation
Leases at the multifamily properties generally provide for an initial term of six months to one year and allow for rent adjustments at the time of renewal. Leases at the office properties typically provide for rent adjustments and the pass-through of certain operating expenses during the term of the lease. Substantially all of the leases at the retail properties provide for the pass-through to tenants of certain operating costs, including real estate taxes, common area maintenance expenses, and insurance. All of these provisions permit us to increase rental rates or other charges to tenants in response to rising prices and, therefore, serve to minimize our exposure to the adverse effects of inflation.
An increase in general price levels may immediately precede, or accompany, an increase in interest rates. At December 31, 2006, our exposure to rising interest rates was mitigated by the existing consolidated debt level of 44.5% of our total market capitalization, the high percentage of consolidated fixed rate debt (94.6%) and the use of interest rate swaps to effectively fix the interest rate on approximately $100.0 million through March 2008. As it relates to the short-term, an increase in interest expense resulting from increasing inflation is anticipated to be less than future increases in income before interest.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is incorporated by reference from “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risk”.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following are filed as a part of this report:
Financial Statements:
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2006, 2005, and 2004
Consolidated Statements of Partners’ Equity for the years ended December 31, 2006, 2005, and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005, and 2004
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
COLONIAL REALTY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
COLONIAL REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share and per unit data)
The accompanying notes are an integral part of these consolidated financial statements.
COLONIAL REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY
(amounts in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
COLONIAL REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
COLONIAL REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
1. Organization and Basis of Presentation
Organization- Colonial Realty Limited Partnership (“CRLP”), a Delaware limited partnership, is the operating partnership of Colonial Properties Trust (the “Trust”), an Alabama real estate investment trust (“REIT”) whose shares are listed on the New York Stock Exchange (“NYSE”). CRLP is engaged in the acquisition, development, ownership, management, and leasing of commercial real estate property. CRLP also owns certain parcels of land.
Strategic Plan-CRLP has undertaken a new strategy to change its asset mix to generate approximately 80% of its net operating income from multifamily apartment communities and is accelerating its plan of focusing on the multifamily business. Accordingly, over the next six to twelve months, CRLP plans to sell the majority of its wholly-owned office assets and retail assets into a series of joint ventures, in which CRLP would retain a minority interest and which CRLP expects to retain management and leasing responsibilities. In addition, other retail assets are expected to be sold outright.
Federal Income Tax Status- CRLP is a partnership for federal income tax purposes. As a partnership CRLP is not subject to federal income tax on its income. Instead, each of CRLP’s partners, including the Trust, is required to pay tax on such partner’s allocable share of income. The Trust, which is considered a corporation for federal income tax purposes, qualifies as a REIT for federal income tax purposes and generally will not be subject to federal income tax to the extent it distributes its REIT taxable income to its shareholders. REITs are subject to a number of organizational and operational requirements. If the Trust fails to qualify as a REIT in any taxable year, the Trust will be subject to federal income tax on its taxable income at regular corporate rates. The Trust may be subject to certain state and local taxes on its income and property.
In addition, CRLP’s financial statements include the operations of a taxable REIT subsidiary, Colonial Properties Services, Inc. (“CPSI”), that is not entitled to a dividends paid deduction and is subject to federal, state and local income taxes. CPSI provides property development, leasing and management services for third-party owned properties and administrative services to CRLP. CRLP generally reimburses CPSI for payroll and other costs incurred in providing services to CRLP. CPSI uses the liability method of accounting for income taxes. Deferred income tax assets and liabilities result from temporary differences. Temporary differences are differences between tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future periods. See Note 15 for additional disclosures regarding CRLP’s income taxes.
Principles Of Consolidation- The consolidated financial statements include CRLP, CPSI, Colonial Properties Services Limited Partnership (in which CRLP holds 100% general and limited partner interests) and certain partially owned entities required to be consolidated. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.
CRLP consolidates entities in which it has a controlling interest or entities where it is determined to be the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities.” Under FIN 46R, variable interest entities (“VIEs”) are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. Additionally, Emerging Issues Task Force (“EITF”) Issue No. 04-5, “Determining Whether a General Partner, or the General Partner as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” provides guidance in determining whether a general partner controls and therefore should consolidate a limited partnership. The application of FIN 46R and EITF No. 04-5, requires management to make significant estimates and judgments about CRLP’s and its other partners’ rights, obligations and economic interests in such entities. For entities in which CRLP has less than a controlling financial interest or entities where it is not the primary beneficiary under FIN 46R, the entities are accounted for on the equity method of accounting. Accordingly, CRLP’s share of the net earnings or losses of these entities is included in consolidated net income. A description of CRLP’s investments accounted for on the equity method of accounting is included in Note 7. All significant intercompany accounts and transactions have been eliminated in consolidation.
CRLP recognizes minority interest in its Consolidated Balance Sheets for non-wholly-owned entities that CRLP consolidates. The minority partners’ share of current operations is reflected in minority interest of limited partners in the Consolidated Statements of Income.
2. Summary of Significant Accounting Policies
Land, Buildings, and Equipment-Land, buildings, and equipment is stated at the lower of cost, less accumulated depreciation, or fair value. CRLP reviews its long-lived assets and certain intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the asset’s fair value. Assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows:
Repairs and maintenance are charged to expense as incurred. Replacements and improvements are capitalized and depreciated over the estimated remaining useful lives of the assets. When items of land, buildings, or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recorded in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. CRLP recognizes sales of real estate properties only upon the closing of a transaction. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectibility of the sales price is reasonably assured and CRLP is not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sales of real estate under SFAS No. 66, Accounting for Sales of Real Estate. For properties sold to a joint venture in which CRLP retains an ownership percentage, CRLP limits the profit recognized from the sale to the portion sold to the outside party. Further, the profit is limited by the amount of cash received for which CRLP has no commitment to reinvest pursuant to the partial sale provisions found in paragraph 30 of Statement of Position (“SOP”) 78-9.
For condominium conversion projects, sales and the associated gains for individual condominium units are recognized upon the closing of the sale transactions, as all conditions for full profit recognition have been met. Estimated future warranty costs are charged to cost of sales in the period when the revenues from condominium closings are recognized. Such estimated warranty costs generally are approximately 0.5% of total revenue. As necessary, additional warranty costs are charged to costs of sales based on management’s estimate of the costs to remediate existing claims.
Acquisition of Real Estate Assets- CRLP accounts for its acquisitions of investments in real estate in accordance with SFAS No. 141, Business Combinations, which requires the fair value of the real estate acquired to be allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of other tenant relationships, based in each case on their fair values. CRLP considers acquisitions of operating real estate assets to be “businesses” as that term is contemplated in Emerging Issues Task Force Issue No. 98-3, Determining Whether a Non-monetary Transaction Involves Receipt of Productive Assets or of a Business.
CRLP allocates purchase price to the fair value of the tangible assets of an acquired property (which includes the land and building) determined by valuing the property as if it were vacant. The “as-if-vacant” value is allocated to land and buildings based on management’s determination of the relative fair values of these assets. CRLP also allocates value to tenant improvements based on the estimated costs of similar tenants with similar terms.
Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases.
The aggregate value of other intangible assets acquired are measured based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management may engage independent third-party appraisers to perform these valuations and those appraisals use commonly employed valuation techniques, such as discounted cash flow analyses. Factors considered in these analyses include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. CRLP also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management
also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods depending on specific local market conditions and depending on the type of property acquired. Management also estimates costs to execute similar leases including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to in-place leases, which includes other tenant relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and CRLP’s overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of CRLP’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement or management’s expectation for renewal), among other factors.
The value of in-place leases and tenant relationships are amortized as a leasing cost expense over the initial term of the respective leases and any renewal periods. These intangible assets generally have a composite life of three to nine months for multifamily properties. In no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles would be charged to expense.
As of December 31, 2006 and 2005, CRLP had $98.4 million and $113.2 million, respectively, of gross in-place lease intangible assets. Accumulated amortization for these in-place lease intangible assets was $66.2 million and $53.9 million as of December 31, 2006 and 2005, respectively. The aggregate amortization expense for these in-place lease intangible assets was $14.6 million for 2006 and $50.5 million for 2005, and is expected to be $3.9 million, $3.9 million, $3.7 million, $3.4 million and $3.1 million for each of the next five years, respectively. These in-place lease intangible assets have a weighted average composite life of 7.8 years for office properties and 13.2 years for retail properties.
Additionally, as of December 31, 2006 and 2005, CRLP had $4.7 million and $6.9 million, respectively, of net above (below) market lease intangibles related to its office and retail property acquisitions. The above (below) market lease intangibles are amortized as a decrease or increase of rental revenue over the terms of the related leases. The aggregate amortization of these intangibles was $1.6 million for 2006 and $0.2 million for 2005, and is expected to be $1.3 million, $1.3 million, $0.8 million, $0.9 million and $1.0 million for each of the next five years, respectively. These above (below) market lease intangibles have a current weighted-average composite life of 3.7 years for office properties and 7.7 years for retail properties.
CRLP is actively pursuing acquisition opportunities and will not be successful in all cases. Costs incurred related to these acquisition opportunities are expensed when it is no longer probable that CRLP will be successful in the acquisition.
Undeveloped Land and Construction in Progress-Undeveloped land and construction in progress is stated at the lower of cost or fair value.
Costs incurred during predevelopment are capitalized after CRLP has identified a development site, determined that a project is feasible, and concluded that it is probable that the project will proceed. While CRLP believes it will recover this capital through the successful development of such projects, it is possible that a write-off of unrecoverable amounts could occur. Once it is no longer probable that a development will be successful, the predevelopment costs that have been previously capitalized are expensed.
The capitalization of costs during the development of assets (including interest, property taxes and other direct costs) begins when an active development commences and ends when the asset, or a portion of an asset, is delivered and is ready for its intended use. Cost capitalization during redevelopment of assets (including interest and other direct costs) begins when the asset is taken out-of-service for redevelopment and ends when the asset redevelopment is completed and the asset is transferred back into service.
Cash and Equivalents-CRLP includes highly liquid marketable securities and debt instruments purchased with a maturity of three months or less in cash equivalents. The majority of CRLP’s cash and equivalents are held at major commercial banks.
CRLP has included in accounts payable book overdrafts representing outstanding checks in excess of funds on deposit of $24.8 million and $24.2 million as of December 31, 2006 and 2005, respectively.
Restricted Cash-Restricted cash is comprised of cash balances which are legally restricted as to use and consists primarily of tenant deposits, deposits on for-sale residential lots and units, and cash in escrow for self insurance retention.
Valuation of Receivables-CRLP is subject to tenant defaults and bankruptcies at its office and retail properties that could affect the collection of outstanding receivables. In order to mitigate these risks, CRLP performs credit review and analysis on all commercial tenants and significant leases before they are executed. CRLP evaluates the collectibility of outstanding receivables and records allowances as appropriate. CRLP’s policy is to record allowances for all outstanding invoices greater than 60 days past due at its office and retail properties. CRLP had an allowance for doubtful accounts of $1.7 million and $1.6 million as of December 31, 2006 and 2005, respectively.
Due to the short-term nature of the leases at its multifamily properties, generally six months to one year, CRLP’s exposure to tenant defaults and bankruptcies is minimized. CRLP’s policy is to record allowances for all outstanding receivables greater than 30 days past due at its multifamily properties.
Notes Receivable- Notes receivable consists primarily of promissory notes issued by third parties. CRLP records notes receivable at cost. CRLP evaluates the collectibility of both interest and principal for each of its notes to determine whether it is impaired. A note is considered to be impaired when, based on current information and events, it is probable that CRLP will be unable to collect all amounts due according to the existing contractual terms. When a note is considered to be impaired, the amount of the allowance is calculated by comparing the recorded investment to either the value determined by discounting the expected future cash flows at the note’s effective interest rate or to the fair value of the collateral if the note is collateral dependent. CRLP had recorded accrued interest related to its outstanding notes receivable of $5.2 million and $2.8 million as of December 31, 2006 and 2005, respectively. As of December 31, 2006, CRLP had recorded a reserve of $0.6 million against its outstanding notes receivable and accrued interest. The weighted average interest rate on the notes receivable outstanding at December 31, 2006 and 2005 was approximately 11.8% and 16.0% respectively. Interest income is recognized on an accrual basis.
CRLP provided first mortgage financing to third parties totaling $9.9 million and $5.5 million in 2006 and 2005, respectively, and received principal payments of $2.9 million on these loans during 2006. CRLP provided subordinated financing to third parties in connection with the sale of properties of $3.9 million and $8.0 million in 2006 and 2005, respectively, and received principal payments of $8.0 million on these loans during 2006. CRLP provided subordinated financing to third parties for the acquisition and conversion of multi-family properties to condominium communities totaling $11.0 million and $18.8 million in 2006 and 2005, respectively. During 2006, CRLP received principal payments of $4.7 million on these loans and reclassified $3.9 million to investment in partially owned entities pursuant to a reorganization of the borrower. During 2006, CRLP provided subordinated financing of $25.4 million to partially owned joint ventures. These loans are collateralized by the equity of the joint ventures. With the exception of one $2.4 million twenty year amortizing loan, the loans have two to three year maturities.
Deferred Debt and Lease Costs-Deferred debt costs consist of loan fees and related expenses which are amortized on a straight-line basis, which approximates the effective interest method, over the terms of the related debt. Deferred lease costs include leasing charges, direct salaries and other costs incurred by CRLP to originate a lease, which are amortized on a straight-line basis over the terms of the related leases.
Derivative Instruments-All derivative instruments are recognized on the balance sheet and measured at fair value. Derivatives that do not qualify for hedge treatment under SFAS No. 133 (subsequently amended by SFAS Nos. 137 and 138), Accounting for Derivative Instruments and Hedging Activities, must be recorded at fair value with gains or losses recognized in earnings in the period of change. CRLP enters into derivative financial instruments from time to time, but does not use them for trading or speculative purposes. Interest rate cap agreements and interest rate swap agreements are used to reduce the potential impact of increases in interest rates on variable-rate debt.
CRLP formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge (see Note 10). This process includes specific identification of the hedging instrument and the hedge transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in hedging the exposure to the hedged transaction’s variability in cash flows attributable to the hedged risk will be assessed. Both at the inception of the hedge and on an ongoing basis, CRLP assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. CRLP discontinues hedge accounting if a derivative is not determined to be highly effective as a hedge or has ceased to be a highly effective hedge.
Share-Based Compensation-The Trust currently sponsors share option plans and restricted share award plans (Refer to Note 13). In December 2004, the FASB issued SFAS No. 123 (Revised), Share Based Payment, which replaced SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in financial statements. The Trust adopted SFAS No. 123(R) effective January 1, 2006 using the modified prospective method. The Trust had previously adopted SFAS No. 123 on January 1, 2003 using the prospective method. Under this method, the fair value of compensation expense was recorded for all share-based awards granted or modified after January 1, 2003. Accordingly, the adoption of SFAS No. 123(R) did not have a material impact on the Trust’s consolidated financial statements.
Revenue Recognition-CRLP, as lessor, has retained substantially all the risks and benefits of property ownership and accounts for its leases as operating leases. Rental income attributable to leases is recognized on a straight-line basis over the terms of the leases. Certain leases contain provisions for additional rent based on a percentage of tenant sales. Percentage rents are recognized in the period in which sales thresholds are met. Recoveries from tenants for taxes, insurance, and other property operating expenses are recognized in the period the applicable costs are incurred in accordance with the terms of the related lease.
Revenue from construction contracts is recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Adjustments to estimated profits on contracts are recognized in the period in which such adjustments become known.
Other income received from long-term contracts signed in the normal course of business, including property management and development fee income, is recognized when earned for services provided to third parties.
Net Income Per Unit-Basic net income per unit is computed by dividing the net income available to common unitholders by the weighted average number of common units outstanding during the period. Diluted net income per unit is computed by dividing the net income available to common unitholders by the weighted average number of common units outstanding during the period, the dilutive effect of restricted shares issued, and the assumed conversion of all potentially dilutive outstanding share options.
Self Insurance Accruals- CRLP is self insured up to certain limits for general liability claims, workers’ compensation claims, property claims and health insurance claims. Amounts are accrued currently for the estimated cost of claims incurred, both reported and unreported.
Use of Estimates-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 amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Segment Reporting-CRLP has adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 defines an operating segment as a component of an enterprise that engages in business activities that generate revenues and incur expenses, which operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance, and for which discrete financial information is available. CRLP is organized into, and manages its business based on the performance of three separate and distinct operating divisions: multifamily, office and retail.
Recent Accounting Pronouncements
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. CRLP will adopt this Interpretation in the first quarter of 2007. The cumulative effect, if any, of applying this Interpretation will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The adoption of FIN 48 did not have a material impact on CRLP’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. Among other requirements, SFAS No. 157 defines fair value and establishes a framework for measuring fair value and also expands disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 is effective beginning the first fiscal year that begins after November 15, 2007. CRLP is currently evaluating the impact of SFAS No. 157 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires, among other things, that CRLP (1) recognize a net liability or asset to report the funded status of its defined benefit pensions and other postretirement plans on its balance sheet and (2) measure benefit plan assets and benefit obligations as of CRLP’s balance sheet date. CRLP adopted the recognition and disclosure provisions of SFAS No. 158 as of December 31, 2006. The adoption of the recognition provisions of SFAS No. 158 had the following impact to the Consolidated Balance Sheets: an increase in other liabilities and a corresponding decrease in partners’ equity of approximately $2.6 million (see Note 14).
In November 2006, the FASB ratified EITF Issue No. 06-8, Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums. EITF 06-8 states that the adequacy of the buyer’s continuing investment under SFAS 66 should be assessed in determining whether to recognize profit under the percentage-of-completion method on the sale of individual units in a condominium project. EITF 06-8 is effective for fiscal years beginning after March 15, 2007. CRLP does not expect the effect of the adoption of EITF 06-8 to have a material impact on its consolidated financial statements.
3. Merger with Cornerstone Realty Income Trust
On April 1, 2005, the Trust completed the merger with Cornerstone Realty Income Trust, Inc. (“Cornerstone”), a Virginia corporation, pursuant to an Agreement and Plan of Merger, dated as of October 25, 2004, as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated January 24, 2005 (the “Merger Agreement”). As a result of the merger, the Trust succeeded by operation of law to all of the assets and liabilities of Cornerstone prior to the merger, which consisted of 86 apartment communities with 22,981 apartment homes, a third party property management business, apartment land under development and ownership in four real estate joint ventures.
Under the terms of the Merger Agreement, Cornerstone shareholders had the right to elect to receive either:
for each outstanding common share of Cornerstone, subject to the restriction that the Colonial Series E preferred depositary shares issued would not exceed approximately 25% of the total merger consideration. The final conversion ratios of the common and preferred depositary shares were determined based on the average market price of the Trust’s common shares over a five day trading period preceding the effective time of the merger and fractional shares were paid in cash. Cornerstone shareholders who made no effective election received Trust common shares. In connection with the merger, the Trust issued 11,277,358 common shares, 5,326,349 Series E preferred depositary shares and 578,358 CRLP common units to former shareholders of Cornerstone. The shares of the Trust issued to the Cornerstone shareholders were registered with the Securities and Exchange Commission on a Registration Statement on Form S-4 (File No. 333-121675).
The aggregate consideration paid for the merger was as follows:
CRLP allocated the purchase price between net tangible and intangible assets utilizing the assistance of a third party valuation firm. When allocating the purchase price to acquired properties, the costs were allocated to the estimated intangible value of in place leases, customer relationships and above or below market leases, and to the estimated fair value of furniture and fixtures, land and buildings on a value determined by assuming the property is vacant by applying methods similar to those used by independent appraisers of income-producing property. Depreciation and amortization is computed on a straight-line basis over the remaining useful lives of the related assets. Buildings and furniture and fixtures have an average estimated useful life of 33 years and 3 years, respectively. The value of in place leases and above or below market leases was amortized over the estimated average remaining life of leases in place at the time of the merger. In place lease terms generally range from 3 to 7 months. The value of customer relationships was amortized over 9 months. CRLP used an estimated remaining average lease life of 5 months to amortize the value of in place leases recorded in conjunction with the merger. In connection with the merger, CRLP incurred $16.1 million of termination, severance and settlement of share-based compensation costs.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed on April 1, 2005:
The merger resulted in the following non-cash changes to CRLP’s Consolidated Balance Sheet during the year ended December 31, 2005:
The following unaudited pro forma financial information for the twelve months ended December 31, 2005 and 2004, gives affect to the merger with Cornerstone as if it had occurred at the beginning of the periods presented. The pro forma information for the twelve months ended December 31, 2005 includes three months of pro forma results and nine months of actual results. The pro forma results are based on historical data and are not intended to be indicative of the results of future operations.
4. Property Acquisitions and Dispositions
Property Acquisitions
CRLP acquired ten multifamily properties containing 3,676 units and an additional 50,000 square feet of condominium interest in an office asset for an aggregate cost of approximately $350.3 million in 2006. During 2006, CRLP also acquired a partnership interest in four multifamily properties containing 1,216 units for an aggregate cost of approximately $19.0 million. In 2005, in addition to the Cornerstone acquisition, CRLP acquired six multifamily properties, eight office properties and one retail property for an aggregate cost of $537.7 million. During 2005, CRLP also acquired a partnership interest in four multifamily properties containing 1,374 units, and a partnership interest in 26 office properties containing 11.7 million square feet for an aggregate cost of approximately $400 million. During 2004, CRLP acquired 11 multifamily properties, two office properties and six retail properties, including a 90% interest in one retail property that is consolidated for an aggregate cost of $508.0 million. CRLP funded these acquisitions with cash proceeds from its dispositions of assets, public offerings of debt and equity (see Notes 9 and 12), advances on bank lines of credit, and cash from operations.
The consolidated operating properties acquired during 2006, 2005 and 2004 are listed below:
Results of operations of these properties, subsequent to their respective acquisition dates, are included in the consolidated financial statements of CRLP. The cash paid to acquire these properties is included in the consolidated statements of cash flows. CRLP has accounted for its acquisitions in 2006, 2005 and 2004 accordance with SFAS 141. The value of the acquired tenant improvements and leasing commissions for the office and retail assets acquired are amortized over the remaining terms of the in-place leases (see Note 2). The acquisitions during 2006, 2005 and 2004 are comprised of the following:
In addition to the acquisition of the operating properties mentioned above, CRLP acquired certain parcels of land to be utilized for future development opportunities.
The following unaudited pro forma financial information for the twelve months ended December 31, 2006 and 2005, give affect to the above operating property acquisitions (excluding the Cornerstone acquisition, see Note 3) as if they had occurred at the beginning of the periods presented. The pro forma information for the twelve months ended December 31, 2006 includes pro forma results for the months during the year prior to the acquisition date and actual results from the date of acquisition through the end of the year. The pro forma results are not intended to be indicative of the results of future operations.
Property Dispositions - Continuing Operations
During 2006, 2005 and 2004, CRLP sold various parcels of land located adjacent to its existing properties for an aggregate sales price of $7.0 million, $25.1 million and $16.7 million, respectively, which were used to repay a portion of the borrowings under CRLP’s unsecured line of credit and to support its investment activities.
During 2006, CRLP sold 85% of its interest in an office complex representing approximately 0.9 million square feet to a joint venture formed by CRLP and unrelated parties for approximately $140.6 million. CRLP continues to manage the properties and accounts for its 15% interest in this joint venture as an equity investment. The gain on the sale of CRLP’s 85% interest is included in Gains from Sales of Property in CRLP’s Consolidated Statements of Income. CRLP also sold a wholly owned office property containing 76,000 square feet for a total sales price of $13.7 million and two wholly owned retail properties representing approximately 1.0 million square feet for a total sales price of approximately $90.0 million. Because CRLP retained management and leasing responsibilities for these three properties, the gains on the sales are included in continuing operations (see Note 7).
Also during 2006, CRLP sold its interests in 20 multifamily apartment communities representing approximately 4,985 units, including 16 that were part of the DRA Southwest Joint Venture, and its interests in six office assets representing 2.1 million square feet, all of which were part of the Colonial/DRA Office Joint Venture. CRLP’s interests in these properties were sold for approximately $155.1 million. The gains from the sales of these interests are included in Income (Loss) from Partially Owned Entities in CRLP’s Consolidated Statements of Income (see Note 7).
Also during 2006, CRLP sold 90% of its interest in four retail properties representing approximately 0.7 million square feet to a joint venture formed by CRLP and unrelated parties for approximately $114.6 million. CRLP continues to manage the properties and accounted for its 10% interest in this joint venture as an equity investment. The remaining 10% interest was sold in December for approximately $7.3 million. The gain on the sale of CRLP’s 90% interest is included in
Gains from Sales of Property in CRLP’s Consolidated Statements of Income and the gain from the sale of the remaining 10% interest is included in Income (Loss) from Partially Owned Entities in CRLP’s Consolidated Statements of Income (see Note 7).
During 2005, CRLP sold 90% of its interest in six retail properties representing approximately 3.7 million square feet to a joint venture formed by CRLP and unrelated parties for approximately $325.8 million. CRLP continues to manage the properties and accounts for its 10% interest in this joint venture as an equity investment. The gain on the sale of CRLP’s 90% interest is included in Gains from Sales of Property in CRLP’s Consolidated Statements of Income (see Note 7).
Also during 2005, CRLP disposed of its 15% interests in two multifamily apartment communities representing 901 units and its 10% interest in a third multifamily apartment community representing 326 units for a total sales price of $12.1 million. The gains from the sales of these interests are included in Income (Loss) from Partially Owned Entities in CRLP’s Consolidated Statements of Income (see Note 7).
During 2004, CRLP sold its 15% interest in a multifamily apartment community representing 240 units and its 50% interest in a retail property representing 1.1 million square feet for approximately $64.0 million. The gains from the sales of these interests are included in Income (Loss) from Partially Owned Entities in CRLP’s Consolidated Statements of Income (see Note 7).
For-Sale Projects
During 2006 and 2005, CRLP, through CPSI, sold 607 and 328 condominium units, respectively, at its condominium conversion properties. During 2006, CRLP, through CPSI, also sold five residential lots and 49 condominium units at its for-sale residential development properties. During 2006 and 2005, Gains from sales of property on the Consolidated Statements of Income and Comprehensive Income included $33.9 million ($24.1 million net of income taxes) and $13.3 million ($9.7 million net income taxes), respectively, from these condominium conversion and for-sale residential sales. There were no condominium conversion or for-sale residential sales during 2004. A summary of revenues and costs of condominium conversion and for-sale residential sales for 2006 and 2005 are as follows:
The net gains on condominium conversion unit sales are classified in discontinued operations if the related condominium property was previously operated by CRLP as an apartment community. For the twelve months ended December 31, 2006, net gains on condominium conversion unit sales of $19.1 million were included in discontinued operations. All gains on condominium conversion unit sales were included in continuing operations for the twelve months ended December 31, 2005. Results of operations for condominium conversion properties that were previously operated by CRLP are classified in discontinued operations for all years presented in the Consolidated Statements of Income. The condominium conversion properties are reflected in the accompanying Consolidated Balance Sheets as part of real estate assets held for sale, net, and totaled $106.2 million and $66.7 million as of December 31, 2006 and 2005, respectively. The net gains on for-sale residential sales are classified in continuing operations.
During December 2006, CRLP, through CPSI, sold an option to purchase land for a total sales price of $3.2 million. CRLP recognized a gain, net of income taxes, of $1.5 million on the sale, which is included in Gains from sales of property in CRLP’s Consolidated Statements of Income.
For cash flow statement purposes, CRLP classifies capital expenditures for newly developed for-sale residential communities and for other condominium conversion communities in investing activities. Likewise, the proceeds from the sales of condominium conversion units and for-sale residential sales are also included in investing activities.
Recently, there has been a softening in the condominium and single family housing markets due to increasing mortgage financing rates, increasing supplies of such assets, increasing insurance costs, uncertainties related to the cost of energy and a perceived slow down in overall economic activity in the U.S, resulting in lower sales prices and reduced sales velocity. As a result, CRLP recognized a $1.6 million impairment on one of its condominium conversion properties during the fourth quarter of 2006. Management’s determination of this impairment was based on a probability-weighted future cash flow analysis for the property. There can be no assurances of the amount or pace of future for-sale residential sales and closings. Additional softening in the for-sale residential market could result in lower margins on sales and additional impairment of assets.
Property Dispositions - Discontinued Operations
During 2006, CRLP disposed of 16 multifamily apartment communities representing 5,608 units and two office assets representing 0.5 million square feet. The multifamily and office properties were sold for a total sales price of $445.4 million, which was used to repay a portion of the borrowings under CRLP’s unsecured line of credit and fund future investments.
During 2005, CRLP disposed of 23 multifamily apartment communities representing 6,865 units and four retail properties representing 2.9 million square feet. The multifamily and retail properties were sold for a total sales price of $636.7 million, which was used to repay a portion of the borrowings under CRLP’s unsecured line of credit and fund future investments.
During 2004, CRLP disposed of one multifamily apartment community representing 178 units, one office property representing 25,500 square feet, and three retail properties representing 0.3 million square feet. The multifamily, office and retail properties were sold for a total sales price of $41.1 million, which was used to repay a portion of the borrowings under CRLP’s unsecured line of credit and fund future investments.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS No. 144”) net income (loss) and gain (loss) on disposition of operating properties sold through December 31, 2006, in which CRLP does not maintain continuing involvement, are reflected in its consolidated statements of income on a comparative basis as discontinued operations for the years ended December 31, 2006, 2005 and 2004. Following is a listing of the properties CRLP disposed of in 2006, 2005 and 2004 that are classified as discontinued operations:
(1)
Square footage includes anchor-owned square footage.
Additionally, CRLP classifies real estate assets as held for sale, only after CRLP has received approval by its internal investment committee, has commenced an active program to sell the assets, and in the opinion of CRLP’s management it is probable the asset will sell within the next 12 months. At December 31, 2006, CRLP had classified nine multifamily assets containing 2,203 units, five condo conversion properties and 15 retail assets, containing 3.4 million square feet, as held for sale. At December 31, 2005, CRLP had classified 18 multifamily assets containing 4,635 units, two condo conversion properties and one retail asset, a strip center, containing 73,500 square feet, as held for sale. These real estate assets are reflected in the accompanying consolidated balance sheets at $381.4 million and $367.4 million at December 31, 2006 and 2005, respectively, which represents the lower of depreciated cost or fair value less costs to sell. Depreciation expense not recorded for the twelve months ended December 31, 2006 related to assets classified as held for sale at December 31, 2006 was $0.9 million. There was no amortization expense suspended for the twelve months ended December 31, 2006. Depreciation and amortization expense not recorded for the twelve months ended December 31, 2005 related to assets classified as held for sale at December 31, 2005, was $5.0 million and $1.9 million, respectively. There was no depreciation or amortization expense suspended for the twelve months ended December 31, 2004.
In some cases, CRLP uses disposition proceeds to fund investment activities through tax-deferred exchanges under Section 1031 of the Internal Revenue Code. Certain of the proceeds described above were received into temporary cash accounts pending the fulfillment of Section 1031 exchange requirements. Subsequently, the funds were utilized to repay a portion of the borrowings under CRLP’s unsecured line of credit or for financing of other investment activities.
In accordance with SFAS No. 144, the operating results of properties (excluding condominium conversion properties not previously operated) designated as held for sale, are included in discontinued operations in the Consolidated Statements of Income for all periods presented. Also under the provisions of SFAS No. 144, the reserves, if any, to write down the carrying value of the real estate assets designated and classified as held for sale are also included in discontinued operations (excluding condominium conversion properties not previously operated). Additionally, under SFAS No. 144, any impairment losses on assets held for continuing use are included in continuing operations.
Below is a summary of the operations of the properties sold during 2006, 2005 and 2004 and properties classified as held for sale as of December 31, 2006, that are classified as discontinued operations:
5. Land, Buildings and Equipment
Land, buildings, and equipment consist of the following at December 31, 2006 and 2005:
6. Undeveloped Land and Construction in Progress
During 2006, CRLP completed the construction of a multifamily development, adding 238 apartment homes to the portfolio. This development, located in Austin, Texas, had a total cost of $24.1 million. Additionally, CRLP completed the construction of Colonial Pinnacle Tutwiler Farm, located in Birmingham, Alabama, and Colonial Pinnacle Turkey Creek, in which CRLP owns a 50% interest, located in Knoxville, Tennessee. These assets had a total cost of $72.5 million. Colonial Pinnacle Tutwiler Farm was sold during the fourth quarter.
During 2005, CRLP completed the construction of three multifamily community developments, adding 950 apartment homes to the portfolio. These developments, located in Austin, Texas, Orlando, Florida and Charlotte, North Carolina, had a total cost of $75.7 million. Additionally, CRLP completed the redevelopment of Colonial Shoppes Colonnade, adding a 30,000 square foot Gold’s Gym and three restaurants including Cracker Barrel, Fox & Hound and Logan Farms Deli, the redevelopment of Colonial Mall Myrtle Beach and the redevelopment of Colonial University Village. CRLP also completed the development of Colonial Promenade Alabaster, a 607,000 square foot power center anchored by Lowes, Wal-Mart, Ross Dress for Less, Pier-1 Imports, Belk, Books-A-Million, Old Navy, Beth Bath & Beyond and an Amstar Theater. These retail projects are located in Birmingham, Alabama; Myrtle Beach, South Carolina and Auburn, Alabama, had a total cost of $69.5 million.
CRLP currently has 29 active development projects and various parcels of land available for expansion and construction. Undeveloped land and construction in progress is comprised of the following at December 31, 2006:
(1)
Square footage includes anchor-owned square footage.
(2)
This project is part of a mixed-use development.
Interest capitalized on construction in progress during 2006, 2005 and 2004 was $17.1 million, $9.6 million and $6.9 million, respectively.
7. Investment in Partially Owned Entities and Other Arrangements
Investments in Consolidated Partially Owned Entities
During March 2006, CRLP disposed of its majority interest in Colonnade Properties, LLC for approximately $2.5 million. There was no gain or loss recognized on the disposition. At December 31, 2006, CRLP has a $3.1 million outstanding note receivable from Colonnade Properties, LLC which bears interest at 9% per annum and reaches maturity in 2008.
During May 2005, CRLP entered into a partnership with Montecito Property Company to convert apartment properties into condominium communities. CRLP is a 98% partner in this partnership and Montecito Property Company is a 2% partner. On May 24, 2005, the partnership acquired Portofino at Jensen Beach (formerly St. Andrews), a 384-unit multifamily property located in Jensen Beach, Florida, which required an investment of $61.8 million by CRLP and was funded through borrowings under CRLP’s unsecured line of credit. During July 2005, CRLP made an additional investment of $54.5 million into its partnership with Montecito Property Company, to fund 98% of the purchase price of Murano at Delray Beach (formerly Mizner / Delray Beach), a 273-unit multifamily property located in Delray Beach, Florida. This investment was funded through borrowings under a collateralized bridge loan (see Note 9). Under the partnership agreement, CRLP will receive a 10% preferred return on its equity investment, and 48% and 50% of any remaining available cash for Portofino and Murano, respectively. The 2% third-party equity partner will receive 52% and 50% of the remaining available cash for Portofino and Murano, respectively. Both properties have been converted to condominium communities, and condominium units at both properties are currently being sold.
Investments in Unconsolidated Partially Owned Entities
Investments in unconsolidated partially owned entities at December 31, 2006 and 2005 consisted of the following:
(1)
The CMS/Colonial Joint Venture II holds one property in which CRLP has a 15% partnership interest and one in which
CRLP has a 5% partnership interest.
(2)
During 2006, Heritage at Deerwood reorganized such that CRLP’s lending relationship changed to an equity investment.
(3)
CRLP’s interest in Douglas HCI was sold in connection with the disposal of CRLP’s interest in Colonnade Properties, LLC.
(4)
Amount includes the value of CRLP’s investment of approximately $6.7 million, offset by CRLP’s basis difference on
the transaction of approximately $9.8 million, which is being amortized over the life of the properties.
During January 2006, CRLP acquired a 20% partnership interest in Colonial Grand at Huntcliff, a 358-unit multifamily apartment community located in Atlanta, Georgia. CRLP’s 20% investment in the partnership was $8.0 million, which consisted of $5.2 million of newly issued mortgage debt and $2.8 million of cash. The cash portion of this investment was funded from borrowings under CRLP’s unsecured line of credit.
During March 2006, CRLP acquired a 25% partnership interest in Colonial Village at Matthews, a 370-unit multifamily apartment community located in Charlotte, North Carolina. CRLP’s 25% investment in the partnership was $4.9 million, which consisted of the assumption of $3.7 million of newly issued mortgage debt and $1.2 million of cash. The cash portion of this investment was funded from borrowings under CRLP’s unsecured line of credit.
During March 2006, CRLP entered into a joint venture agreement with a 75% partner for the completion of the Canyon Creek multifamily development project, including the ultimate sale of this property to a third party. CRLP, in its role as general contractor for this project, is earning development / general contractor fees which are being recognized on a percentage of completion basis. CRLP’s initial investment in this joint venture was $1.5 million in cash and CRLP has guaranteed up to $4.0 million of the construction loan that the joint venture will use to complete the project. In addition, CRLP will receive distributions of 50% of the gains upon the sale of the property.
During March 2006, CRLP completed the sale of a 90% interest in four shopping centers valued in the transaction at approximately $127.3 million to a joint venture partner. CRLP maintained a 10% interest in the properties, and the responsibility of leasing and managing the assets in the joint venture which represent 0.7 million square feet of retail shopping space. The shopping centers include Colonial Promenade Boulevard Square in Pembroke Pines, Florida; Colonial Shoppes Pines Plaza in Pembroke Pines, Florida; Colonial Shoppes College Parkway in Fort Myers, Florida; and Colonial Promenade Deerfield in Deerfield Beach, Florida. As a part of the sale, CRLP’s joint venture partner assumed 90% of the outstanding collateralized debt of $74.7 million. The proceeds from the sale were used to repay a portion of the borrowings under CRLP’s unsecured line of credit.
During March 2006, CRLP sold its 15% interest in four multifamily assets including Colonial Grand at Barrington, a 176-unit apartment community located in Macon, Georgia; Colonial Grand at Inverness Lakes, a 312-unit apartment community located in Mobile, Alabama; Colonial Village at Hillwood, a 160-unit apartment community located in Montgomery, Alabama; and Colonial Village at Stockbridge, a 240-unit apartment community located in Atlanta, Georgia. CRLP’s interest in these assets was sold for a total sales price of $6.0 million and the proceeds were used to repay a portion of the borrowings under CRLP’s unsecured line of credit.
During April, 2006, the DRA / Colonial Office Joint Venture sold two office properties, including Paragon Place, a 145,000 square foot building located in Richmond, Virginia and Cigna Plaza, a 127,000 square foot building located in Dallas, Texas. On June 1, 2006, the DRA / Colonial Office Joint Venture sold one office property, Gwinnett Center, a 263,000 square foot building located in Atlanta, Georgia. CRLP’s interest in these three assets was sold for a total sales price of approximately $11.2 million. The proceeds were used to repay associated collateralized loans of the joint venture.
During May 2006, CRLP sold its 20% interest in Rancho Viejo, a 266-unit multifamily apartment community located in Phoenix, Arizona which was a property in the DRA Southwest Partnership. CRLP’s interest in this asset was sold for a total sales price of $3.5 million and the proceeds were used to repay an associated collateralized loan and the remaining proceeds were distributed to CRLP and were used to repay a portion of the borrowings under CRLP’s unsecured line of credit.
During June 2006, CRLP completed a combination joint venture, sale and long-term management and leasing assignment with UBS Wealth Management (UBS) for Colonial Center at Mansell Overlook located in Atlanta, Georgia. Colonial Center at Mansell Overlook consists of four 6-story, Class-A office buildings, five low-rise buildings and two street-front boutique retail shops. The suburban office park is 98% leased and totals approximately 877,000 square feet with three sites available for future office and retail development. CRLP will retain a 15% interest in the joint venture arrangement with UBS for the four 6-story, Class-A office buildings, two retail centers and three development parcels. UBS will assume 100% ownership of the five low-rise buildings. CRLP will maintain operational management and leasing of the office assets through a long-term management and leasing contract. Net proceeds to CRLP totaled approximately $140.6 million, of which $16.5
million was used to pay off a collateralized loan, $74.7 million was reinvested in additional property acquisitions and the remaining $51.2 million was used to reduce CRLP’s outstanding unsecured line of credit.
During July 2006, the DRA / Colonial Office Joint Venture sold Charlotte Vanguard, a 527,500 square foot office asset located in Charlotte, North Carolina. During September 2006, the DRA / Colonial Office Joint Venture sold Tallahassee Center, an 836,400 square foot office asset located in Tallahassee, Florida. CRLP’s interest in these two assets was sold for a total sales price of approximately $23.6 million. The proceeds were used to repay associated collateralized loans of the joint venture.
During September 2006, CRLP purchased a 10% interest in Belterra, a 288-unit multifamily apartment community located in Fort Worth, Texas. CRLP’s 10% investment in the partnership was $2.7 million, which consisted of $2.0 million of newly issued mortgage debt and $0.7 million of cash. The cash portion of this investment was funded from borrowings under CRLP’s unsecured line of credit.
During November 2006, CRLP purchased a 10% interest in Park Crossing, a 200-unit multifamily apartment community located in Fairfield, California. CRLP’s investment in the partnership was approximately $3.4 million, which consisted of $2.6 million of newly issued mortgage debt and $0.8 million of cash. The cash portion of this investment was funded from borrowings under CRLP’s unsecured line of credit.
During December 2006, CRLP sold 15 multifamily assets in which it had an approximate 23% interest through DRA Southwest Partnership. The total sales price was approximately $468.0 million and Colonial Properties’ portion of the sales price was approximately $108.0 million. Proceeds from the sale were used to pay off CRLP’s portion of the existing mortgage debt of $53.6 million associated with these properties and the remaining proceeds of $54.4 million were used to reduce CRLP’s unsecured line of credit.
During December 2006, the DRA / Colonial Office Joint Venture sold Tollway Crossing, a 152,200 square foot office asset located in Dallas, Texas. CRLP’s interest in this asset was sold for a total sales price of approximately $2.9 million. The proceeds were used to repay associated collateralized loans of the joint venture.
During December 2006, CRLP sold its remaining 10% interest in the Cornfeld/South Florida Joint Venture for a total sales price of $7.4 million. The proceeds from the sale will be used to fund future investment activities. The properties sold in the transaction include Colonial Promenade Boulevard Square in Pembroke Pines, Florida; Colonial Shoppes Pines Plaza in Pembroke Pines, Florida; Colonial Shoppes College Parkway in Fort Myers, Florida; and Colonial Promenade Deerfield in Deerfield Beach, Florida, which represent 0.7 million square feet of retail shopping space.
During February 2005, CRLP disposed of its 15% interest in Colonial Village at Cahaba Heights, a 125-unit multifamily apartment community located in Birmingham, Alabama, and its 15% interest in Colonial Grand at River Hills, a 776-unit multifamily apartment community located in Tampa, Florida, both of which were multifamily apartment communities in the CMS / Colonial Joint Venture I. CRLP’s interests in the assets were sold for $1.2 million and $6.9 million, respectively, and the proceeds were used to repay a portion of the borrowings under its unsecured line of credit.
During April 2005, CRLP completed the acquisition of Cornerstone. The assets of Cornerstone included ownership in four real estate joint ventures which consists of a 10% ownership interest in Arbors at Windsor Lake, a 10% interest in Cypress Cove at Suntree, a 35% ownership interest in Merritt at Godley Station and a 10% ownership interest in Stone Ridge (see Note 3 - Merger with Cornerstone Realty Income Trust).
During July 2005, CRLP entered into a 20% joint venture to acquire Colonial Grand at Research Park (formerly Alta Trace), a 370-unit multifamily property, located in Durham, North Carolina. CRLP’s 20% investment in the partnership was $6.4 million, which consisted of $4.8 million of newly issued mortgage debt and $1.6 million of cash. The cash portion of this investment was funded from borrowings under CRLP’s unsecured line of credit.
During July 2005 and August 2005, CRLP made investments of $1.0 million and $2.0 million, respectively, into a partnership with Carter Regents Park, to fund 40% of the purchase price of Regents Park in Atlanta, Georgia. The joint venture will develop and sell town homes and condominiums on the property. During 2006, CRLP made an additional investment of $3.0 million into the partnership. The investments were funded through CRLP’s unsecured line of credit. Additionally, CRLP committed to provide a construction loan to the joint venture of up to approximately $40.0 million at a rate of 8.25% per annum (see Note 17).
During September 2005, CRLP entered into a partnership agreement with DRA Advisors LLC in which it acquired a 20% interest and the management of a 345-unit multifamily property, The Grove at Riverchase, located in Birmingham, Alabama. CRLP’s investment in the partnership was $5.6 million, which consisted of $3.9 million of newly issued mortgage debt and $1.7 million of cash. The cash portion of this investment was funded from borrowings under CRLP’s unsecured line of credit.
During September 2005, CRLP acquired a 15% partnership interest in the CRT Properties, Inc. (“CRT”) portfolio through a joint venture (the “DRA / Colonial Office Joint Venture”) with DRA Advisors LLC (“DRA”). The DRA / Colonial Office Joint Venture owns a portfolio of 137 office buildings on 26 properties located primarily in the southeastern United States. CRLP’s 15% investment in the DRA / Colonial Office Joint Venture required an equity contribution of $49.0 million, which is included in Investments in Partially-Owned Entities in the December 31, 2005 consolidated balance sheet. The equity contribution was funded through CRLP’s existing credit facilities, the outstanding balances of which were reduced with the proceeds from CRLP’s September 21, 2005 equity offering (see Note 12). The DRA / Colonial Office Joint Venture’s total transaction cost of $1.8 billion includes the assumption of $370.0 million of mortgage debt and the placement of an additional $1.1 billion of collateralized debt financing. CRLP also guaranteed approximately $50.0 million of third-party financing obtained by the DRA / Colonial Office Joint Venture with respect to 10 of the CRT properties. During 2006, seven of the ten properties were sold. The DRA / Colonial Office Joint Venture is obligated to reimburse CRLP for any payments made under the guaranty before making distributions of cash flows or capital proceeds to the DRA / Colonial Office Joint Venture partners. As of February 2007, this guarantee had been reduced to $19.6 million as a result of the pay down of the associated secured debt from the sales of assets. With the consummation of the acquisition of CRT, CRLP assumed management of substantially all of the office properties included in the CRT portfolio, adding 11.7 million square feet of managed office space to CRLP’s office portfolio.
During November 2005, CRLP entered into agreements to transfer six regional malls valued in the transaction at approximately $362.0 million to a joint venture with The GPT Group and Babcock & Brown, an Australian partner, in which CRLP retained a 10% interest. CRLP maintained the responsibility of leasing and managing the assets in the joint venture which represent 3.75 million square feet of retail shopping space and include Colonial Mall Myrtle Beach, in Myrtle Beach, South Carolina; Colonial Mall Greenville, in Greenville, North Carolina; Colonial Mall Bel Air, in Mobile, Alabama; Colonial Mall Valdosta, in Valdosta, Georgia; Colonial Mall Glynn Place, in Brunswick, Georgia; and Colonial University Village in Auburn, Alabama.
During December 2005, CRLP disposed of its 10% interest in Cypress Cove at Suntree, a 326-unit multifamily apartment community located in Melbourne, Florida. CRLP’s interest in the asset was sold for $4.0 million and the proceeds were used to repay a portion of the borrowings under its unsecured line of credit.
Combined financial information for CRLP’s investments in unconsolidated partially owned entities since the date of acquisition is as follows:
8. Segment Information
CRLP is organized into, and manages its business based on the performance of three separate and distinct operating segments: multifamily, office, and retail. Each segment has a separate management team that is responsible for acquiring, developing, managing, and leasing properties within such segment. The applicable accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies.” The pro rata portion of the revenues, net operating income (“NOI”), and assets of the partially-owned entities and joint ventures that CRLP has entered into are included in the applicable segment information. Additionally, the revenues and NOI of properties sold that are classified as discontinued operations are also included in the applicable segment information. In reconciling the segment information presented below to total revenues, income from continuing operations, and total assets, investments in partially-owned entities and joint ventures are eliminated as equity investments and their related activity are reflected in the consolidated financial statements as investments accounted for under the equity method and discontinued operations are reported separately. Management evaluates the performance of its segments and allocates resources to them based on segment NOI. Segment NOI is defined as total property revenues, including unconsolidated partnerships and joint ventures, less total property operating expenses (such items as repairs and maintenance, payroll, utilities, property taxes, insurance and advertising). All of CRLP’s condominium conversion properties and related sales are being managed by the multifamily segment. Segment information and the reconciliation of total segment revenues to total revenues, total segment NOI to income from continuing operations and minority interest, and total segment assets to total assets, for the years ended December 31, 2006, 2005 and 2004, is presented below:
9. Notes and Mortgages Payable
Notes and mortgages payable at December 31, 2006 and 2005 consist of the following:
As of December 31, 2006, CRLP, with the Trust as guarantor, has a $500.0 million unsecured revolving credit facility and a $100.0 million unsecured term loan facility (“the Credit Facilities”) with Wachovia Bank, National Association (“Wachovia”), as Agent for the lenders, Bank of America, N.A. as Syndication Agent, Wells Fargo Bank, National Association, Citicorp North America, Inc. and Regions Bank, as Co-Documentation Agents, and U.S. Bank National Association and PNC Bank, National Association (“PNC Bank”), as Co-Senior Managing Agents and other lenders named therein. In addition, CRLP has a $40.0 million cash management line provided by Wachovia. Any amounts outstanding under the cash management line mature on March 22, 2008.
Base rate loans and revolving loans are available under the Credit Facilities. The Credit Facilities also include a competitive bid feature that allows CRLP to convert up to $250.0 million under the Credit Facilities to a fixed rate and for a fixed term not to exceed 90 days. Generally, base rate loans bear interest at Wachovia’s designated base rate, plus a base rate margin ranging up to 0.25% based on CRLP’s unsecured debt ratings from time to time. Revolving loans bear interest at LIBOR plus a margin ranging from 0.50% to 1.15% based on CRLP’s unsecured debt ratings from time to time. Competitive bid loans bear interest at LIBOR plus a margin, as specified by the participating lenders. Term loans are available under the term loan facility and bear interest at LIBOR plus a margin ranging from 0.55% to 1.35% based on CRLP’s unsecured debt ratings from time to time. The Credit Facilities are primarily used by CRLP to finance property acquisitions and developments and had an outstanding balance at December 31, 2006 of $185.0 million. The Credit Facilities, excluding the cash management line of credit, mature and are renewable in March 2008, and provide for a one-year extension. The interest rate of the Credit Facilities, including the competitive bid balance, is 5.64% and 5.32% at December 31, 2006 and 2005, respectively.
On August 28, 2006, CRLP completed a $275 million senior notes offering of 6.05% unsecured notes due September 1, 2016. Interest on the notes is payable semi-annually on the first day of every September and March, beginning March 1, 2007. The net proceeds of approximately $271.7 million, after discount and issuance costs, were used to reduce a portion of the outstanding balance under the Credit Facilities.
On July 17, 2006, CRLP repaid its $65.0 million 8.05% unsecured senior notes, which matured on that date. The notes were repaid with borrowings from CRLP’s unsecured line of credit.
On January 31, 2005, CRLP completed a $275 million senior notes offering of 4.75% unsecured notes due February 1, 2010. Interest on the notes is payable semi-annually on the first day of every February and August beginning August 1, 2005. The net proceeds of approximately $273.3 million were used to pay down CRLP’s bridge credit facility and a portion of CRLP’s unsecured line of credit.
On July 7, 2005, CRLP, and the Trust as guarantor, entered into a $54.5 million bridge loan which was secured by CRLP’s ownership in Murano at Delray Beach. The bridge loan was priced at LIBOR plus 90 basis points. The balance outstanding under the bridge loan was paid off on September 21, 2005 from proceeds received from the equity offering (see Note 12).
On August 2, 2005, CRLP, and the Trust as guarantor, entered into a $91.0 million bridge loan which was secured by CRLP’s ownership in Research Park Plaza. The bridge loan was priced at LIBOR plus 90 basis points. The balance outstanding under the bridge loan was paid off on September 21, 2005 from proceeds received from the equity offering (see Note 12).
On September 28, 2005, CRLP completed a $325 million senior notes offering of 5.50% unsecured notes due October 1, 2015. Interest on the notes is payable semi-annually on the first day of every April and October beginning April 1, 2006. The net proceeds of $320.7 million, after discount and issuance costs, were used to reduce outstanding borrowings under CRLP’s unsecured line of credit.
At December 31, 2006, CRLP had $1.9 billion in unsecured indebtedness including balances outstanding on its bank line of credit and certain other notes payable. The remainder of CRLP’s notes and mortgages payable are collateralized by the assignment of rents and leases of certain properties and assets with an aggregate net book value of approximately $0.8 billion at December 31, 2006.
The aggregate maturities of notes and mortgages payable, including CRLP’s line of credit at December 31, 2006, are as follows:
Based on borrowing rates available to CRLP for notes and mortgages payable with similar terms, the estimated fair value of its notes and mortgages payable at December 31, 2006 and 2005 was approximately $2.4 billion.
The Credit Facilities and certain other loan documents contain various covenants and events of default which could trigger early repayment obligations, including, but not limited to the following: nonpayment, violation or breach of certain covenants; failure to perform certain covenants beyond a cure period; certain financial ratios; and generally not paying CRLP’s debts as they become due. At December 31, 2006, CRLP is in compliance with these covenants.
10. Derivative Instruments
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, CRLP records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. CRLP assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.
CRLP’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, CRLP primarily uses interest rate swaps (including forward starting interest rate swaps) and caps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. During 2006, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. As of December 31, 2006, none of CRLP’s outstanding interest rate swaps hedge the interest rate risk associated with forecasted debt issuances.
At December 31, 2006 and 2005, derivatives with a fair value of $0.7 million and $3.0 million, respectively, were included in other assets. The change in net unrealized gains/(losses) of $3.0 million in 2006, $1.6 million in 2005 and ($0.2) million in 2004 for derivatives designated as cash flow hedges is separately disclosed in the statement of changes in partners’ equity and comprehensive income. The change in fair value of derivatives not designated as hedges of $2.7 million, ($0.1) million and $0.4 million is included in other income (expense) in 2006, 2005 and 2004, respectively. Hedge ineffectiveness of ($0.1) million and $1.1 million on cash flow hedges due to index mismatches was recognized in other income during 2006 and 2005, respectively. There was no hedge ineffectiveness recognized during 2004. As of December 31, 2006, all of CRLP’s hedges are designated as cash flow hedges under SFAS No. 133.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on CRLP’s hedged debt. The change in net unrealized gains on cash flow hedges reflects a reclassification of $0.5 million, $0.5 million and $1.4 million of net unrealized gains from accumulated other comprehensive income to interest expense during 2006, 2005 and 2004, respectively. CRLP estimates no net impact to interest expense for amounts that will be reclassified from other comprehensive income in 2007.
During February 2006, CRLP settled a $200.0 million forward starting interest rate swap and received a payment of approximately $4.3 million. This forward starting interest rate swap was in place to convert the floating rate payments on certain expected future debt obligations to a fixed rate. This derivative originally qualified for hedge accounting under SFAS No. 133. However, in December of 2005 as a result of a modification to the forecasted transaction, this derivative no longer qualified for hedge accounting. As a result, CRLP began treating this derivative as an economic hedge during 2005. Changes in the fair value of this derivative were recognized in earnings in other income (expense) and totaled approximately $2.7 million for the period of time the derivative was active during 2006. The fair value of this derivative at the time it no longer qualified for hedge accounting was approximately $1.5 million, which will remain in accumulated other comprehensive income and be reclassified to interest expense over the applicable period of the associated debt, which is approximately 10 years at December 31, 2006.
During June 2006, CRLP entered into a forward starting interest rate swap agreement to hedge the interest rate risk associated with a forecasted debt issuance that occurred on August 28, 2006. This interest rate swap agreement had a notional amount of $200 million, a fixed interest rate of 5.689%, and a maturity date of November 15, 2016. This interest rate swap agreement was settled concurrent with CRLP’s issuance of $275 million of debt in the senior notes offering completed August 28, 2006 (see Note 9). The settlement resulted in a settlement payment of approximately $5.2 million by CRLP. This amount will remain in other comprehensive income and be reclassified to interest expense over the remaining term of the associated debt, which is approximately 10 years at December 31, 2006. On August 15, 2006, CRLP also entered into a $75 million treasury lock agreement to hedge the interest rate risk associated with the remaining $75 million of senior notes issued on August 28, 2006. This treasury lock agreement was settled on August 28, 2006 for a settlement payment of approximately $0.1 million which will also remain in other comprehensive income and be reclassified to interest expense over the remaining life of the associated debt.
During November 2006, CRLP settled a $175.0 million forward starting interest rate swap and received a payment of approximately $2.9 million. This forward starting interest rate swap was in place to convert the floating rate payments on certain expected future debt obligations to a fixed rate. In November of 2006, CRLP settled this forward starting swap agreement as a result of its determination that the forecasted debt issuance was no longer probable due to CRLP’s strategic shift (see Note 1). In December 2006, CRLP made the determination that it was probable that the forecasted debt issuance would not occur. As a result, CRLP reversed the $2.9 million in other comprehensive income to other income during December of 2006.
Further, CRLP has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, CRLP has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives.
11. Capital Structure
At December 31, 2006 the Trust controlled CRLP as the sole general partner and as the holder of 81.4% of the common units of CRLP. The limited partners of CRLP who hold redeemable or common units, are those persons (including certain officers and trustees) who, at the time of the initial public offering, elected to hold all or a portion of their interest in the form of units rather than receiving common shares of the Trust, or individuals from whom CRLP acquired certain properties, who elected to receive units in exchange for the properties. Redeemable units represent the number of outstanding limited partnership units as of the date of the applicable balance sheet, valued at the closing market value of the Trust’s common
shares. Each redeemable unit may be redeemed by the holder thereof for either one common share or cash equal to the fair market value thereof at the time of such redemption, at the option of the Trust.
The rollforward of redeemable units at redemption value for the year ended December 31, 2006 is as follows:
In 1999, CRLP issued $100 million of Series B Cumulative Redeemable Perpetual Preferred Units (“Series B preferred units”) in a private placement, that are exchangeable for Series B preferred shares of the Trust, net of offering costs of $2.6 million. On February 18, 2004, CRLP modified the terms of the $100.0 million 8.875% Preferred Units. Under the modified terms, the Preferred Units bear a distribution rate of 7.25% and are redeemable at the option of CRLP, in whole or in part, after February 24, 2009, at the cost of the original capital contribution plus the cumulative priority return, whether or not declared. The terms of the Preferred Units were further modified on March 14, 2005 to extend the redemption date from February 24, 2009 to August 24, 2009. The Preferred Units are exchangeable for 7.25% Series B Preferred Shares of the Trust, in whole or in part at anytime on or after January 1, 2014, at the option of the holders.
The Board of Trustees of the Trust manages CRLP by directing the affairs of CRLP. The Trust’s interests in CRLP entitle it to share in cash distributions from, and in the profits and losses of, CRLP in proportion to the Trust’s percentage interest therein and entitle the Trust to vote on all matters requiring a vote of the limited partners.
12. Cash Contributions
On September 21, 2005, the Trust issued 4,500,000 of its common shares at $43.75 per share, or an aggregate offering price of approximately $196.9 million, in a public offering in which Merrill Lynch & Co. and Wachovia Securities acted as joint book-running managers. The Trust contributed the proceeds of this offering to CRLP in exchange for 4,500,000 common units of limited partnership interest. Net proceeds to CRLP totaled $187.3 million after payment of underwriting fees and issuance costs. CRLP used approximately $145.5 million of the net proceeds to repay the outstanding balance on its bridge loans (see Note 9), and used the remaining proceeds (which were temporarily used to pay down the outstanding balances under the Credit Facilities), together with additional borrowings under CRLP’s Credit Facilities, to fund its $49.0 million equity investment in its joint venture with DRA (see Note 7).
On April 1, 2005, in connection with the Cornerstone acquisition (see Note 3), the Trust issued 5,326,349 Series E Cumulative Redeemable Preferred Shares of Beneficial Interest. The depositary shares may be called by the Trust at any time and have a liquidation preference of $25.00 per depositary share. Each Series E preferred depositary share will represent 1/100th of a newly created 7.62% Series E Cumulative Redeemable Preferred Share of Beneficial Interest, liquidation preference $2,500 per share, of the Trust. On February 2, 2006, the Trust announced its Board of Trustees’ authorization of the repurchase of up to $65 million of the Trust’s Series E Depositary Shares, each representing 1/100 of a share of its 7.62% Series E Cumulative Redeemable Preferred Shares. In connection with the repurchase of the Series E Preferred Shares, the Board of Trustees of the Trust, as general partner of CRLP, also authorized the repurchase of a corresponding amount of Series E Preferred Units, all of which are held by the Trust, as general partner of CRLP. This repurchase program was effective immediately and extended through January 27, 2007. Under the repurchase program, the Trust was authorized to make purchases in the open market or in privately negotiated transactions from time to time, subject to market conditions, applicable legal requirements and other factors. The repurchase program does not obligate the Trust to repurchase any specific number of shares, and repurchases pursuant to the program may be suspended or resumed at any time or from time to time without further notice or announcement. During the twelve months ended December 31, 2006, the Trust repurchased 1,135,935 million Series E Depositary Shares for a total cost of approximately $28.5 million. CRLP wrote off approximately $0.3 million of issuance costs associated with this redemption, in accordance with the SEC’s clarification of EITF Abstracts, Topic No. D-42 “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock”.
On April 30, 2003, the Trust issued $125.0 million or 5,000,000 depositary shares, each representing 1/10 of a share of 8.125% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest. The depositary shares may be called by the Trust on or after April 30, 2008 and have a liquidation preference of $25.00 per depositary share. The depositary shares have no stated maturity, sinking fund or mandatory redemption and are not convertible into any other securities of the Trust.
During June 2001, the Trust issued 2,000,000 preferred shares of beneficial interest (Series C Preferred Shares). The Series C Preferred Shares pay a quarterly dividend at 9.25% per annum and may be called by the Trust on or after June 19, 2006. The Series C Preferred Shares have no stated maturity, sinking fund or mandatory redemption and are not convertible into any other securities of the Trust. The Series C Preferred Shares have a liquidation preference of $25.00 per share. The net proceeds of the offering were approximately $48.1 million and were used to repay outstanding balances under CRLP’s unsecured line of credit. On April 26, 2006, the Board of Trustees of the Trust authorized the redemption of the Trust’s 9.25% Series C Cumulative Redeemable Preferred Shares. The redemption, of approximately $50.0 million occurred on June 30, 2006. CRLP wrote off approximately $1.9 million of issuance costs associated with this redemption.
13. Share-based Compensation
Effective January 1, 2006, the Trust accounts for share-based compensation using the fair value method prescribed in SFAS No. 123(R) (see Note 2). For share-based compensation granted from January 1, 2003 to December 31, 2005, the Trust accounted for share-based compensation under the fair value method prescribed by SFAS No. 123. Other than the required modification under SFAS No. 123(R) to use an estimated forfeiture rate for award terminations and forfeitures, and the provisions related to retirement eligible employees, the adoption of SFAS No. 123(R) did not have an impact on the Trust’s accounting for share-based compensation. In prior years, the Trust used a policy of recognizing the effect of award forfeitures as they occurred. Under SFAS No. 123(R), such award forfeitures are recognized based on an estimate of the number of awards expected to be forfeited during the estimated service period. The cumulative impact of this modification on awards granted prior to January 1, 2006 was $0.2 million and was reflected as a reduction of compensation expense in the twelve months ended December 31, 2006.
Incentive Share Plans
The Trust has in place a Third Amended and Restated Employee Share Option and Restricted Share Plan (the “Employee Plan”) designed to attract, retain, and motivate executive officers of the Trust and other key employees. The Employee Plan authorizes the issuance of up to approximately 5,700,000 common shares (as increased from time to time to equal 10% of the number of common shares and Operating Partnership units outstanding) pursuant to options or restricted shares granted or issued under this plan, provided that no more than 750,000 restricted shares may be issued. In connection with the grant of options under the Employee Plan, the Executive Compensation Committee of the Board of Trustees of the Trust determines the option exercise period and any vesting requirements. All options granted to date have a term of ten years and may be exercised in equal installments based on a one or five year vesting schedule. The value of outstanding restricted shares is being charged to compensation expense based on a one to five year vesting schedule.
In April 1997, the Trust also adopted a Non-Employee Trustee Share Plan (the “Trustee Plan”). The Trustee Plan permits non-employee trustees of the Trust to elect to receive common shares in lieu of all or a portion of their annual trustee retainers, board meeting fees and committee meeting fees. The Trustee Plan authorizes the issuance of 50,000 common shares under the Plan.
Compensation costs for share options have been valued on the grant date using the Black-Scholes option-pricing method. The weighted average assumptions used in the Black-Scholes option pricing model were as follows:
The expected dividend yield reflects the Trust’s current historical yield, which is expected to approximate the future yield. Expected volatility was based on the historical volatility of the Trust’s common shares. The risk-free interest rate for
the expected life of the options was based on the implied yields on the U.S Treasury yield curve. The weighted average expected option term was based on the Trust’s historical data for prior period share option exercises and forfeiture activity.
During the twelve months ended December 31, 2006, the Trust granted share options to purchase 114,535 shares of the Trust’s common shares to Trust employees and trustees. For the twelve months ended December 31, 2006, 2005 and 2004, the Trust recognized compensation expense related to share options of $0.8 million, $0.4 million and $0.2 million, respectively. Upon the exercise of share options, the Trust issues common shares from authorized but unissued common shares.
The following table presents a summary of share option activity under all plans for the twelve months ended December 31, 2006:
The weighted average grant date fair value of options granted in 2006, 2005 and 2004 was $5.70, $3.71 and $3.17, respectively. The total intrinsic value of options exercised during 2006, 2005 and 2004 was $4.1 million, $1.2 million and $3.7 million, respectively.
As of December 31, 2006, the Trust had approximately 1.6 million share options outstanding with a weighted average exercise price of $34.03, a weighted average remaining contractual life of 5.1 years, and an aggregate intrinsic value of $21.0 million. The total number of exercisable options at December 31, 2006 was approximately 1.2 million. As of December 31, 2006, the weighted average exercise price of exercisable options was $32.58 and the weighted average remaining contractual life was 4.3 years for these exercisable options. The aggregate intrinsic value of these exercisable options at December 31, 2006 was $16.9 million. At December 31, 2006, there was $0.8 million of unrecognized compensation cost related to unvested share options, which is expected to be recognized over a weighted average period of 1.0 year.
The following table presents the change in deferred compensation related to restricted share awards:
The following table presents the change in nonvested restricted share awards:
The weighted average grant date fair value of restricted share awards for 2006, 2005 and 2004 was $46.39, $36.95, and $36.54, respectively. For the twelve months ended December 31, 2006, 2005 and 2004, the Trust recognized compensation expense related to restricted share awards of $3.0 million, $1.9 million and $1.1 million, respectively. For the twelve months ended December 31, 2006 and 2005, the Trust capitalized $0.9 million and $0.7 million, respectively, for restricted share awards granted in connection with certain real estate developments. There were no restricted share awards capitalized during 2004. The total intrinsic value for restricted share awards that vested during 2006, 2005 and 2004 was $3.2 million, $1.3 million and $0.8 million, respectively. At December 31, 2006, the unrecognized compensation cost related to nonvested restricted share awards is $8.5 million, which is expected to be recognized over a weighted average period of 3.0 years.
Adoption of Incentive Program
On April 26, 2006, the Executive Compensation Committee of the Board of Trustees of the Trust adopted a new incentive program in which seven executive officers of the Trust participate. The program provides for the following one-time awards:
A participant’s restricted shares will be forfeited if the participant’s employment is terminated prior to the end of the Vesting Period. The compensation expense and deferred compensation related to these restricted shares is included in the restricted share disclosures above.
A participant’s right to receive a performance payment will be forfeited if the participant’s employment is terminated prior to the end of the Performance Period, unless termination of employment results from the participant’s death or disability, in which case the participant (or the participant’s beneficiary) will earn a pro-rata portion of the applicable award. Performance payments, if earned, will be paid in cash, common shares, or a combination of the two. Each performance award has specified threshold, target and maximum payout amounts. The payout amounts range from $500,000 to $6,000,000 per participant. The performance awards were valued with a binomial model by a third party valuation firm. The performance awards, which had a fair value on the grant date of $5.4 million, were valued as equity awards tied to a market condition. For the twelve months ended December 31, 2006, the Trust recognized $1.3 million of compensation expense attributable to the performance based share awards. The unrecognized expense associated with these grants was $3.7 million as of December 31, 2006.
The Trust’s share-based awards have historically provided for immediate vesting upon retirement, death or disability of the participant. The Trust had previously recognized the compensation expense related to such share-based awards made to retirement eligible individuals using the nominal vesting approach. The nominal vesting approach requires recognition of the compensation expense over the stated vesting period. SFAS No. 123(R) clarified the accounting for share-based awards made to retirement eligible individuals. SFAS No. 123(R) explicitly provides that the vesting period for a grant made to a retirement eligible employee is considered non-substantive if the award provides for immediate vesting upon retirement, and should be ignored when determining the period over which the award should be expensed. Effective January 1, 2006, concurrent with the
adoption of SFAS No. 123(R), the Trust began expensing share-based compensation granted after January 1, 2006 over the period between grant date and retirement eligibility or immediately if the employee is retirement eligible as of the date of grant. Effective July 26, 2006, the Trust amended its share based compensation plans to remove any retirement eligible vesting provisions for future grants.
The Trust recognized $0.4 million of compensation expense, $0.1 million for share option awards and $0.3 million for restricted share awards, for the twelve months ended December 31, 2006 related to grants to retirement eligible employees that would not have been recognized under the nominal vesting approach. If the Trust had historically accounted for share-based awards made to retirement eligible individuals under the requirements of SFAS No. 123(R), the compensation expense recognized would have been increased by $1.2 million and $0.1 million for the twelve months ended December 31, 2005 and 2004, respectively.
Employee Share Purchase Plan
The Trust maintains an Employee Share Purchase Plan (the “Purchase Plan”). The Purchase Plan permits eligible employees of the Trust, through payroll deductions, to purchase common shares at market price. The Purchase Plan has no limit on the number of common shares that may be issued under the plan. The Trust issued 2,652 and 1,324 common shares pursuant to the Purchase Plan during 2006 and 2005, respectively.
14. Employee Benefits
Noncontributory Defined Benefit Pension Plan
Employees of CRLP hired prior to January 1, 2002 participate in a noncontributory defined benefit pension plan designed to cover substantially all employees. Pension expense includes service and interest costs adjusted by actual earnings on plan assets and amortization of prior service cost and the transition amount. The benefits provided by this plan are based on years of service and the employee’s final average compensation. CRLP’s policy is to fund the minimum required contribution under ERISA and the Internal Revenue Code. CRLP uses a December 31 measurement date for its plan.
The table below presents a summary of pension plan status as of December 31, 2006 and 2005, as it relates to the employees of CRLP.
Amounts recognized in the consolidated balance sheet as of December 31, 2006 consist of:
Amounts recognized in the consolidated balance sheets
Amounts recognized in accumulated other comprehensive income
CRLP’s accumulated benefit obligations as of December 31, 2006 and 2005 are as follows:
Components of CRLP’s net periodic benefit cost for 2006 and 2005 are as follows:
Components of Net Periodic Benefit Cost
Amounts recognized in the consolidated balance sheets prior to adoption of SFAS No. 158
The weighted-average assumptions used to determine benefit obligations and net costs are as follows:
CRLP’s pension plan weighted-average asset allocations at December 31, 2006 and 2005, by asset category are as follows:
CRLP’s investment policy targets to achieve a long-term return on plan assets of at least 8.0%. In order to achieve these targets, CRLP primarily utilizes a diversified grouping of growth and value funds with moderate risk exposure. CRLP reviews the pension plan’s investment policy on a periodic basis and may adjust the investment strategy, as needed, in order to achieve the long-term objectives of the plan.
The following table presents the cash flow activity of the pension plan during the years ending December 31, 2006 and 2005:
The following table presents the expected future benefit payments to the pension plan:
401(k) Plan
CRLP maintains a 401(k) plan covering substantially all eligible employees. This plan provides, with certain restrictions, that employees may contribute a portion of their earnings with CRLP matching one-half of such contributions up to 6%, solely at its discretion. Contributions by CRLP were approximately $0.8 million, $0.5 million and $0.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.
15. Income Taxes
CRLP’s consolidated financial statements include the operations of its taxable REIT subsidiary, CPSI, which is subject to federal, state and local income taxes. CPSI provides property development, leasing and management services for third-party owned properties and administrative services to CRLP. In addition, CRLP performs all of its for-sale residential and condominium conversion activities through CPSI. CRLP generally reimburses CPSI for payroll and other costs incurred in providing services to CRLP. All inter-company transactions are eliminated in the accompanying consolidated financial statements. The components of income tax expense, significant deferred tax assets and liabilities and a reconciliation of CPSI’s income tax expense to the statutory federal rate are reflected in the tables below.
For the years ended December 31, 2005 and 2004, the impact of CPSI’s income taxes and their related tax attributes were not material to the accompanying consolidated financial statements.
Income tax expense of CPSI for the year ended December 31, 2006 is comprised of the following:
In 2006, income tax expense resulting from condominium conversion unit sales was allocated to discontinued operations (see Note 4).
The components of CPSI’s deferred income tax assets and liabilities at December 31, 2005 were not material to the accompanying Consolidated Balance Sheet. The components of CPSI’s deferred income tax assets and liabilities at December 31, 2006 were as follows:
A reconciliation of the effective tax rate of CPSI to the federal statutory rate is detailed below. As shown above, a portion of the 2006 income tax expense was allocated to discontinued operations.
16. Leasing Operations
CRLP is in the business of leasing and managing multifamily, office, and retail property. For properties owned by CRLP, minimum rentals due in future periods under noncancelable operating leases extending beyond one year at December 31, 2006, are as follows:
The noncancelable leases are with tenants engaged in retail and office operations in Alabama, Georgia, Florida, North Carolina, South Carolina, Tennessee, Texas, and Virginia. Performance in accordance with the lease terms is in part dependent upon the economic conditions of the respective areas. No additional credit risk exposure relating to the leasing arrangements exists beyond the accounts receivable amounts shown in the December 31, 2006 balance sheet. Leases with tenants in multifamily properties are generally for one year or less and are thus excluded from the above table. Substantially all of CRLP’s land, buildings, and equipment represent property leased under the above and other short-term leasing arrangements.
Rental income from continuing operations for 2006, 2005 and 2004 includes percentage rent of $1.2 million, $3.2 million and $2.4 million, respectively. This rental income was earned when certain retail tenants attained sales volumes specified in their respective lease agreements.
17. Commitments, Contingencies, Guarantees and Other Arrangements
Commitments and Contingencies
CRLP is a party to various legal proceedings incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect the financial position or results of operations or cash flows of CRLP.
Guarantees and Other Arrangements
During November 2006, CRLP committed with its joint venture partner to guarantee up to $17.3 million of a $34.6 million construction loan obtained by the Colonial Promenade Smyrna Joint Venture. CRLP and its joint venture partner each committed to provide 50% of the $17.3 million guarantee, as each partner has a 50% ownership interest in the joint venture. As of December 31, 2006, the Colonial Promenade Smyrna Joint Venture had drawn $9.2 million on the construction loan. At December 31, 2006, no liability was recorded for the guarantee.
During February 2006, CRLP committed to guarantee up to $4.0 million of a $27.4 million construction loan obtained by the Colonial Grand at Canyon Creek Joint Venture. As of December 31, 2006, the joint venture had drawn $22.0 million on the construction loan. At December 31, 2006, no liability was recorded for the guarantee.
During September 2005, in connection with the acquisition of CRT with DRA, CRLP guaranteed approximately $50.0 million of third-party financing obtained by the DRA / Colonial Office Joint Venture with respect to 10 of the CRT properties. During 2006, seven of the ten properties were sold. The DRA / Colonial Office Joint Venture is obligated to reimburse CRLP for any payments made under the guaranty before making distributions of cash flows or capital proceeds to the DRA / Colonial
Office Joint Venture partners. At December 31, 2006, no liability was recorded for the guarantee. As of February 2007, this guarantee had been reduced to $19.6 million as a result of the pay down of the associated secured debt from the sales of assets.
During July 2005, in connection with CRLP’s investment into a joint venture with Carter and Associates, CRLP committed to provide a construction loan to the joint venture of up to approximately $40 million at a rate of 8.25% per annum. As of December 31, 2006, $15.4 million had been drawn on the construction loan by the joint venture, and $24.6 million was available to be drawn.
During December 2002, CRLP sold 90% of its interest in Colonial Promenade Hoover for a total sales price of $20.5 million to a newly formed joint venture, Highway 150 LLC, in which CRLP maintains a 10% ownership interest and manages the property. In connection with the formation of Highway 150 LLC, CRLP executed a guarantee, pursuant to which CRLP would serve as a guarantor of $1.0 million of the debt related to the joint venture, which is collateralized by the Colonial Promenade Hoover retail property. CRLP’s maximum guarantee of $1.0 million may be requested by the lender, only after all of the rights and remedies available under the associated note and security agreements have been exercised and exhausted. At December 31, 2006, the total amount of debt of the joint venture was approximately $16.9 million and matures in December 2012. At December 31, 2006, no liability was recorded for the guarantee.
In connection with the contribution of certain assets to CRLP, certain partners of CRLP have guaranteed indebtedness of CRLP totaling $26.5 million at December 31, 2006. The guarantees are held in order for the contributing partners to maintain their tax deferred status on the contributed assets. These individuals have not been indemnified by CRLP.
18. Related Party Transactions
CRLP has used an affiliated construction company to manage and oversee certain of its development, re-development and expansion projects. The affiliated construction company utilized by CRLP is headquartered in Alabama and has completed numerous projects within the Sunbelt region of the United States. Through the use of market survey data and in-house development expertise, CRLP negotiates the fees and contract prices of each development, re-development or expansion project with the affiliated construction company in compliance with CRLP’s approved “Policy on Hiring Architects, Contractors, Engineers, and Consultants”. The policy was developed to allow the selection of certain preferred vendors who have demonstrated an ability to consistently deliver a quality product at a fair price and in a timely manner. Additionally, the affiliated construction company outsources all significant subcontractor work through a competitive bid process. Upon approval by the Management Committee, the Management Committee presents each project to the independent members of the Executive Committee of the Board of Trustees of the Trust for final approval. In each of the following transactions, the independent members of the Executive Committee approved such transactions unanimously.
CRLP paid $59.2 million, $41.6 million and $20.0 million for property construction costs to Brasfield & Gorrie LLC, a construction company partially-owned by Mr. M. Miller Gorrie (a trustee of the Trust) during the years ended December 31, 2006, 2005 and 2004, respectively. Of these amounts, $53.1 million, $36.6 million and $17.0 million was then paid to unaffiliated subcontractors for the construction of these development projects during 2006, 2005 and 2004, respectively. CRLP had $9.6 million and $8.0 million in outstanding construction invoices or retainage payable to this construction company at December 31, 2006 and 2005, respectively.
CRLP leased space to certain entities in which Mr. Thomas H. Lowder, Mr. James K. Lowder, and Mr. M. Miller Gorrie have an interest and received market rent from these entities of approximately $2.5 million, $2.5 million and $1.6 million during the years ended December 31, 2006, 2005 and 2004, respectively.
Colonial Insurance Agency, an entity owned by Mr. Thomas H. Lowder and Mr. James K. Lowder, has provided insurance risk management, administration and brokerage services for CRLP. The aggregate amount paid by CRLP to Colonial Insurance Agency for these services during the years ended December 31, 2006, 2005 and 2004 were $0.5 million, $0.5 million and $0.4 million, respectively. As a part of this service, CRLP placed insurance coverage with unaffiliated insurance carriers through a competitive bidding process. The premiums paid to these unaffiliated insurance carriers totaled $4.8 million, $8.3 million and $3.6 million during 2006, 2005 and 2004, respectively.
In connection with the closing of CRLP’s acquisition of Cornerstone via merger on April 1, 2005, the Trust appointed Glade Knight, who formally served as the Chairman and Chief Executive Officer of Cornerstone, as a trustee of the Trust. Mr. Knight was subsequently elected to serve as a trustee of the Trust at the 2005 annual meeting of the Trust’s shareholders. On April 1, 2005, following the Cornerstone merger, Mr. Knight elected to cash out the options under a non-statutory share option agreement between Cornerstone and Mr. Knight, which was assumed by the Trust in the Cornerstone merger, and the Trust paid Mr. Knight approximately $3.1 million (plus an applicable tax gross up payment) in connection therewith. In connection with the Cornerstone merger, CRLP also assumed Cornerstone’s obligations under Mr. Knight’s change in control agreement.
Shortly after the Cornerstone merger, CRLP paid to Mr. Knight approximately $5.5 million (which includes an applicable tax gross up payment) in respect of Mr. Knight’s change in control agreement assumed by Colonial and Mr. Knight’s employment agreement with Cornerstone, which terminated in connection with the closing of the Cornerstone merger.
19. Subsequent Events
Property Acquisitions
During January 2007, CRLP acquired two multifamily apartment communities. Colonial Grand at Old Town Scottsdale North (formerly Monte Carlo Apartments) was acquired for $33.8 million and contains 208 units. Colonial Grand at Scottsdale South (formerly Monaco Apartments) was acquired for $42.2 million and contains 264 units. Both properties are located in Scottsdale, Arizona. The acquisition of these assets was funded from proceeds received from asset sales and from borrowings under CRLP’s unsecured line of credit.
During January 2007, CRLP acquired 15.0 acres of land for $12.0 million to be used for the development of Colonial Grand at Pecos, a 380-unit multifamily apartment community located in Las Vegas, Nevada. The acquisition was funded from borrowings under CRLP’s unsecured line of credit.
Property Dispositions
During January 2007, CRLP sold seven multifamily apartment communities. The properties include the following:
CRLP used the proceeds from the sale to repay a portion of the borrowings under CRLP’s unsecured line of credit.
During February 2007, CRLP sold Rivermont Shopping Center, a 73,500 square foot retail asset located in Chattanooga, Tennessee. The asset was sold for a total sales price of $4.2 million and the proceeds were used to repay a portion of the borrowings under CRLP’s unsecured line of credit.
During February 2007, CRLP sold Colonial Grand at Promenade, a 384-unit multifamily apartment community located in Montgomery, Alabama. The asset was sold for a total sales price of $38.0 million and the proceeds were used to repay a portion of the borrowings under CRLP’s unsecured line of credit.
During February 2007, CRLP sold its 20% interest in Colonial Grand at Bayshore, a 376-unit multifamily apartment community located in Sarasota, Florida. The asset was sold for $12.0 million, which represents CRLP’s interest, and the proceeds were used to repay a secured mortgage loan and a portion of the borrowings under its unsecured line of credit.
During February 2007, the DRA / Colonial Office Joint Venture sold St. Petersburg Center, a 675,500 square foot office asset located in Tampa, Florida. The asset was sold for $14.0 million, which represents CRLP’s 15% ownership interest. CRLP used the proceeds from the sale to repay a secured mortgage loan.
Distribution
During January 2007, the Board of Trustees of the Trust declared a cash distribution to partners of CRLP holding common units in the amount of $0.68 per partnership unit, totaling $38.6 million. The distribution was made to partners of record as of February 6, 2007, and was paid on February 13, 2007.
20. Quarterly Financial Information (Unaudited)
The following is a summary of the unaudited quarterly financial information for the years ended December 31, 2006 and 2005. The information provided herein has been reclassified in accordance with SFAS No. 144 for all periods presented.
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Colonial Properties Trust
and Partners of Colonial Realty Limited Partnership:
We have completed integrated audits of Colonial Realty Limited Partnership’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Colonial Realty Limited Partnership at December 31, 2006 and 2005, and the results of its operations and its 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. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that 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 (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s 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 opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting 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. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed 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 company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s 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. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
February 28, 2007
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedure
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer of the Trust, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer of the Trust concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15) that occurred during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Trust is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange act of 1934. CRLP’s internal control over financial reporting is a process designed 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.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of CRLP’s annual financial statements, management has undertaken an assessment of the effectiveness of CRLP’s internal control over financial reporting as of December 31, 2006. The assessment was based upon the framework described in “Integrated Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management’s assessment included an evaluation of the design of internal control over financial reporting and testing of the operational effectiveness of internal control over financial reporting. We have reviewed the results of the assessment with the Audit Committee of the Board of Trustees of the Trust.
Based on our assessment under the criteria set forth in COSO, management has concluded that, as of December 31, 2006, CRLP maintained effective internal control over financial reporting.
Management’s assessment of the effectiveness of CRLP’s internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Trustees and Executive Officers of the Registrant.
We are managed by the Trust, the general partner of CRLP. The information required by this item with respect to trustees, the audit committee and the audit committee expert of the Trust is hereby incorporated by reference from the material appearing in the Trust’s definitive proxy statement for the annual meeting of shareholders held in 2007 (the “Proxy Statement”) under the caption “Election of Trustees - Nominees for Election” and “Information Regarding Trustees and Corporate Governance - Committees of the Board of Trustees - Audit Committee”. Information required by this item with respect to the availability of the Trust’s code of ethics is provided in Item 1 of this report. See “Available Information”.
Item 11.
Item 11. Executive Compensation.
The information required by this item is hereby incorporated by reference from the material appearing in the Trust’s Proxy Statement under the captions “Compensation of Trustees and Executive Officers”, “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report.”
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial ownership of units as of February 6, 2007 for:
(1) each person known by CRLP to be the beneficial owner of more than five percent of the CRLP’s outstanding units,
(2) each trustee of the Trust and each named executive officer and
(3) the trustees and executive officers of the Trust as a group.
Each person named in the table has sole voting and investment power with respect to all units shown as beneficially owned by such person, except as otherwise set forth in the notes to the table. References in the table to “units” are to units of limited partnership interest in CRLP. Unless otherwise provided in the table, the address of each beneficial owner is Colonial Plaza, Suite 750, 2101 Sixth Avenue North, Birmingham, Alabama 35203.
The following table summarizes information, as of December 31, 2006, relating to the Trust’s equity compensation plans pursuant to which options to purchase common shares and restricted common shares may be granted from time to time.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is hereby incorporated by reference from the material appearing in the Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Information Regarding Trustees and Corporate Governance - Committees of the Board of Trustees”.
Item 14.
Item 14. Principal Accountant Fees and Services.
The information required by this item is hereby incorporated by reference from the material appearing in the Proxy Statement under the captions “Ratification of Appointment of Independent Registered Public Accounting Firm - Summary of Audit Fees” and “Ratification of Appointment of Independent Registered Public Accounting Firm - Pre-Approval Policy for Services by Auditor”.
Part IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
15(a)(1) Financial Statements
The following financial statements of CRLP are included in Part II, Item 8 of this report:
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Partners’ Equity for the years ended December 31, 2006, 2005 and
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
15(a)(2) Financial Statement Schedules
Schedule III Real Estate and Accumulated Depreciation
All other schedules have been omitted because the required information of such other schedules is not present in amounts sufficient to require submission of the schedule or because the required information is included in the consolidated financial statements.
15(a)(3) Exhibits

Denotes a management contract or compensatory plan, contract or arrangement.
15(b) Exhibits
The list of Exhibits filed with this report is set forth in response to Item 15(a)(3). The required exhibit index has been filed with the exhibits.
15(c) Financial Statements
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 1, 2007.
COLONIAL REALTY LIMITED PARTNERSHIP
a Delaware limited partnership
By: Colonial Properties Trust, its general partner
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities with Colonial Properties Trust indicated on March 1, 2007.
SCHEDULE III
COLONIAL REALTY LIMITED PARTNERSHIP
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
December 31,
S-1
COLONIAL REALTY LIMITED PARTNERSHIP
S-2
COLONIAL REALTY LIMITED PARTNERSHIP
S-3
COLONIAL REALTY LIMITED PARTNERSHIP
S-4
COLONIAL REALTY LIMITED PARTNERSHIP
S-5
COLONIAL REALTY LIMITED PARTNERSHIP
S-6
COLONIAL REALTY LIMITED PARTNERSHIP
S-7
COLONIAL REALTY LIMITED PARTNERSHIP
S-8
COLONIAL REALTY LIMITED PARTNERSHIP
S-9
COLONIAL REALTY LIMITED PARTNERSHIP
S-10
NOTES TO SCHEDULE III
COLONIAL REALTY LIMITED PARTNERSHIP
December 31,
(1) The aggregate cost for Federal Income Tax purposes was approximately $3.4 billion at December 31, 2006.
(2) See description of mortgage notes payable in Note 9 of Notes to Consolidated Financial Statements.
(3) The following is a reconciliation of real estate to balances reported at the beginning of the year:
(4) Amounts include real estate assets classified as held for sale at December 31, 2006.
Reconciliation of Real Estate
Reconciliation of Accumulated Depreciation
S-11