ITEM 1. BUSINESS
The principal business of Century Realty Trust, an Indiana business trust, is the ownership of income-producing real properties, which consist of thirteen apartment complexes, one restaurant property, three commercial properties, and various parcels of undeveloped land which are situated adjacent to rental properties owned by the Trust. The Trust's investment options, in addition to direct equity ownership, include the exclusive control of real estate through the use of operating partnerships. Five of the Trust's thirteen apartment properties are owned by operating partnerships. The Trust's rental income is derived from short-term leases of units in its various buildings. The residential properties and two of the three commercial properties are managed under agreements with independent property management firms. The Trust and its operating partnerships reimburse the management firms for compensation of approximately 52 persons employed at the apartment properties.
In March 2006, the Trust and its subsidiaries entered into an agreement to sell its real estate and associated personal property, except for its restaurant property in Florida, to Buckingham Properties, Inc., for $60 million consisting of approximately $48.45 million of cash and assumed debt of approximately $11.55 million. Buckingham Management, LLC, an affiliate of the purchaser, has managed the Trust's residential properties since 2003. The Trust will use a portion of the cash proceeds to retire the remaining mortgage debt. Management expects the sale, which is subject to approval by shareholders holding a majority of the Trust's outstanding shares, to be completed in late June or July 2006.
The Trust has elected to be treated as a real estate investment trust under the Internal Revenue Code and to distribute substantially all of its real estate investment trust taxable income. A real estate investment trust is an investment vehicle which permits individuals, by purchasing shares, to invest in real estate equities and/or mortgage loans, and share in the profits therefrom without having profits subjected to federal income taxes at the trust level.
ITEM 1A.
ITEM 1A. RISK FACTORS
The folowing factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by our management from time to time. These factors, among others, may have a material adverse effect on our business, financial condition, operating results and cash flows, and you should carefully consider them. It is not possible to predict or identify all such factors. You should not consider this list to be a complete statement of all potential risks or uncertainties. The principal risks for the Trust and its shareholders at this time relate to the asset purchase agreement signed March 17, 2006, pursuant to which the Trust agreed to sell substantially all of its assets to Buckingham Properties, Inc., for $60 million.
RISKS RELATED TO THE PENDING SALE OF ASSETS
Failure to complete the pending sale of assets could adversely affect share values.
The pending sale of assets to Buckingham Properties, Inc., offers the Trust's shareholders an opportunity to realize, in the aggregate, the approximate fair market value of those assets. As operating assets of the Trust, their productivity is burdened by general and administrative expenses. Due, in part, to the relatively small portfolio of investment properties, the Trust's shares have historically sold on the market at a discount to net asset value. The potential costs to comply with provisions of the Sarbanes-Oxley Act of 2002 were perceived to further burden market value. Following a shareholder proposal in 2003 recommending liquidation of the Trust that received strong support, the Board of Trustees investigated strategic alternatives and concluded that the sale of the Trust's assets to Buckingham Properties, Inc., represented the best alternative available for the shareholders to realize full net asset value.
Factors that could result in failure to complete the sale of assets include:
1) The buyer may, at its option, withdraw from the agreement without penalty during the due diligence period;
2) The buyer may, following due diligence procedures, demand changes in contract terms, which the Trust may deem unacceptable;
3) The buyer may not be approved to assume certain mortgage loans which are not currently eligible to be repaid or refinanced;
4) The sale would not occur unless approved by holders of a majority of the Trust's outstanding shares of beneficial interest;
5) The buyer may fail to secure equity and/or debt financing to complete the purchase.
Failure to complete the pending sale could necessitate a change in independent property management agents.
Buckingham Properties, Inc., is affiliated with Buckingham Management, LLC. Buckingham Management, LLC, has, since 2003, managed all of the Trust's apartment properties. The Trust reimburses Buckingham Management for the cost of providing leasing and maintenance employees at the apartment locations. If the proposed sale fails to occur, it may not be possible to continue the present management arrangements. A new management firm and new on-site employees could result in lower occupancy and temporarily, at least, higher operating expenses.
Uncertainties regarding sale of Florida restaurant property.
The only real estate owned by the Trust that is not included in the Asset Purchase Agreement with Buckingham Properties, Inc., is a property near Orlando, Florida, that is currently leased through July 31, 2006, to the operator of a Miami Subs restaurant. The Trust was notified in February 2006 that the State of Florida intends, pursuant to its eminent domain authority, to purchase the property. The State intends to use the Trust's property, along with several other nearby properties, to build a cloverleaf intersection. The State has not yet provided any information as to the amount it will pay or when it will take possession.
The lessee agreed in 2005 to purchase the property from the Trust, but did not complete the purchase. The Trust considers the purchase agreement as no longer valid. A dispute is pending with the lessee over the status of this agreement and the proper disposition of the earnest money he paid. The dispute could lead to litigation.
Departure of headquarters employees could leave the Trust severely short-handed.
The Trust operates with a five person headquarters staff that, in the aggregate, has more than 130 years of service with the Trust. The employees expect that the pending sale of assets by the Trust will be followed by its liquidation. In the absence of any incentives to prevent early departures, staff losses are expected. With personnel needs unpredictable at this time, management expects that it will increasingly rely on temporary help to provide necessary office services. Inefficiencies are expected from the replacement of experienced employees with temporary help.
GENERAL RISKS RELATED TO INVESTMENTS IN REAL ESTATE
Economic and regulatory changes that impact the real estate market generally may cause our operating results to suffer and decrease the value of our real estate properties.
Our operating results will be subject to risks generally incident to the ownership of real estate, including:
1) Changes in general or local economic conditions;
2) Changes in supply of or demand for similar or competing properties in an area;
3) Changes in interest rates and availability of permanent mortgage funds, which may render the sale of a property difficult or unattractive;
4) Changes in tax, real estate, environmental and zoning laws; and
5) Periods of high interest rates and tight money supply.
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
Properties that have significant vacancies could be difficult to sell, which could diminish our return on those properties.
A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash available to distribute to shareholders. In addition, because properties' market values depend principally upon the value of the properties' leases, the resale value of properties with high or prolonged vacancies could suffer, which could further reduce the return to our shareholders.
We depend on tenants for our revenue. Accordingly, lease defaults or terminations could reduce our net income and limit our ability to make distributions to our shareholders.
The success of our non-apartment investments materially depends on the financial stability of our tenants. A default or termination by a significant tenant on its lease payments to us would cause us to lose the revenue associated with such lease and require us to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure if the property is subject to a mortgage. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting our property. If a tenant defaults on or terminates a significant lease, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss. These events could cause us to reduce the amount of distributions to shareholders.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage could reduce our net income.
There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution, or environmental matters, that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase coverage against terrorism as a condition of providing mortgage loans. Such insurance policies may not be available at a reasonable cost, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate coverage for such losses. If any of our properties incur a casualty loss that is not fully insured, the value of that asset will be reduced by such uninsured loss. In addition, other than any working capital reserve or other reserves that we may establish, we do not have sources specifically designated for funding repairs or reconstruction of any uninsured damaged property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to shareholders.
Costs of complying with governmental laws and regulations may reduce our net income and the cash available for distributions to our shareholders.
All real property and the operations conducted on real property are subject to federal, state, and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on tenants, owners, or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may hinder our ability to sell, rent, or pledge such property as collateral for future borrowings. Compliance with new laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances, or regulations may impose material environmental liability. Additionally, our tenants' operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state, and federal fire, health, life-safety and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our cash flow and ability to make distributions.
Discovery of previously undetected environmentally hazardous conditions may decrease our revenues and limit our ability to make distributions.
Under various federal, state and local environmental laws, ordinances, and regulations, a current or previous real property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on, under, or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could reduce the amounts available for distribution to our shareholders.
FEDERAL INCOME TAX RISKS
Failure to qualify as a REIT would reduce our net income and cash available for distributions.
Our qualification as a REIT depends upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets, and other tests imposed by the Internal Revenue Code. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates and/or penalties. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to shareholders because of the additional tax liability. In addition, distributions to shareholders would no longer qualify for the dividends-paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to our shareholders.
Even if we remain qualified as a REIT for federal income tax purposes, we may be subject to some federal, state and local taxes on our income or property. For example:
1) In order to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income to our shareholders (which is determined without regard to the dividends-paid deduction or net capital gain). To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on the undistributed income.
2) We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
3) If we sell a property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% "prohibited transaction" tax.
To maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions to make distributions to our shareholders, which could increase our operating costs and decrease the value of an investment in us.
To qualify as a REIT, we must distribute to our shareholders each year 90% of our REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gain). At times, we may not have sufficient funds to satisfy these distribution requirements and may need to borrow funds to maintain our REIT status and avoid the payment of income and excise taxes. These borrowing needs could result from (i) differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes; (ii) the effect of non-deductible capital expenditures; (iii) the creation of reserves; or (iv) required debt or amortization payments. We may need to borrow funds at times when market conditions are unfavorable. Such borrowings could increase our costs and reduce the value of our common stock.
To maintain our REIT status, we may be forced to forego otherwise attractive opportunities, which could delay or hinder our ability to meet our investment objectives and lower the return to our shareholders.
To qualify as a REIT, we must satisfy tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets and the amounts we distribute to our shareholders. We may be required to make distributions to shareholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
The following investment properties were owned by the registrant at December 31, 2005:
Year No. of 2005 Net Apartments Location Acquired Units Occupancy Investment - ---------- -------- -------- ------ --------- ---------- Fontenelle Kokomo, IN 1973 176 84% $ 542,135 Park Forest Marion, IN 1973 64 95 205,032 Chester Heights Richmond, IN 1973 110 86 198,701 Driftwood Park Indianapolis, IN 1989 48 96 760,699 Regency Royale Mishawaka, IN 1993 132 95 2,793,256 Creek Bay Indianapolis, IN 1993 208 91 5,506,260 Eagle Creek Indianapolis, IN 1994 188 97 4,731,864 Charter Oaks Evansville, IN 1997 192 95 4,300,119 Barcelona* Kokomo, IN 1997 64 84 1,220,772 Beech Grove* Jeffersonville, IN 1997 182 90 3,652,486 Hampton Court* Indianapolis, IN 1997 92 88 1,483,500 Sheffield Square* New Albany, IN 1997 152 98 3,669,474 West Wind Terrace* Indianapolis, IN 1997 96 72 1,693,064 ----- ----------- Total Apartments 1,704 91 $30,757,362
* Property is owned by a partnership controlled by the Trust.
Year Square Currently Net Commercial Location Acquired Feet Leased Investment - ---------- -------- -------- ------ --------- ---------- Office/Warehouse 401 Industrial Dr., Carmel, IN 1977 38,000 100% $ 207,030 Office Buildings 1810 E. 62nd St., Indianapolis, IN 1986 17,000 73 366,633 3510-20 E. 96th St., Indianapolis, IN 1997 34,000 63 1,394,183 ------ ----------- Total Commercial 89,000 $ 1,967,846
Year Square Lease Net Restaurant Location Acquired Feet Expires Investment - ----------- -------- -------- ------ -------- ---------- Miami Subs Orlando, FL 1979 3,500 2006 $ 126,225 ----------- All investment properties $32,851,433
----------- -----------
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the trust, and no such proceedings are known to be contemplated.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2005.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Trust's shares of beneficial interest are traded on the NASDAQ SmallCap market. Cash distributions, if any, are paid approximately 45 days after the end of each quarter. The high and low published bid prices and distributions for the last two years were:
Distributions 2005 High Low Declared - ---- ---- ---- ------------- 1st Quarter $17.49 $14.00 $ -- 2nd Quarter 20.54 14.75 -- 3rd Quarter 19.00 12.40 0.22 4th Quarter 19.50 16.57 0.58
- ---- 1st Quarter $12.74 $10.35 $ -- 2nd Quarter 12.95 10.60 -- 3rd Quarter 13.20 11.50 -- 4th Quarter 17.50 12.07 1.05
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
In thousands, except per share data and number of apartments
Years ended December 31, 2005 2004 2003 2002 2001 - ------------------------ ---- ---- ---- ---- ---- Operating Data: Rental and other operating income $10,693 $10,413 $ 9,915 $10,405 $10,505 Income (loss) before minority interest and discontinued operations 521 117 (560) 157 424 Income (loss) from discontinued operations 2,336 2,499 (71) 462 279 Net income (loss) 2,839 2,647 (541) 689 749 Cash distributions declared 1,442 1,877 673 984 1,269 Weighted average number of shares outstanding 1,800 1,787 1,775 1,757 1,740 Basic and diluted earnings (loss) per share: Continuing operations $ 0.28 $ 0.08 $ (0.26) $ 0.13 $ 0.27 Discontinued operations 1.30 1.40 (0.04) 0.26 0.16 Distributions declared 0.80 1.05 0.38 0.56 0.73
Balance Sheet Data: Total real estate investments(a) $48,778 $48,441 $48,346 $48,520 $48,312 Allowances for depreciation (15,927) (14,903) (13,784) (12,880) (11,787) Real estate held for sale, net carrying value - 5,834 6,530 6,789 6,969 Total assets 41,620 45,870 45,549 46,958 47,556 Mortgage and other notes payable 27,806 33,026 33,437 34,102 34,482 Total debt 30,393 36,069 36,509 36,719 36,934 Minority interest in operating partnerships 264 315 396 569 802 Shareholders' equity 10,962 9,485 8,644 9,670 9,819 Number of shares outstanding 1,803 1,789 1,782 1,762 1,749
Other Data:(c) Cash flow data: Cash provided by operating activities $ 2,633 $ 1,327 $ 1,372 $ 2,479 $ 2,382 Cash provided by (used in) investing activities 3,771 2,652 (340) (666) (702) Cash used in financing activities (6,651) (2,492) (1,232) (1,379) (1,114)
Funds from operations - Non-GAAP financial measure: (b)(c) Net income (loss) $ 2,839 $ 2,647 $ (541) $ 689 $ 749 Less gain from sale of property (2,045) (2,690) - - - Add back depreciation of investment property 1,417 1,658 1,741 1,796 1,801 Deduct investment property depreciation attributed to minority interest (48) (60) (69) (88) (109) ------- ------- ------- ------- -------
Funds from operations $ 2,163 $ 1,555 $ 1,131 $ 2,397 $ 2,441 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Apartment units owned(a): Owned at December 31 1,704 1,960 2,136 2,136 2,136 Weighted average number of apartments owned during the year 1,939 2,004 2,136 2,136 2,136
(a) Real estate owned includes apartments owned by operating partnerships created and controlled by the Trust. (b) It is accepted practice in the real estate industry to evaluate the performance of Real Estate Investment Trusts (REITs), in part, by a non-GAAP financial measure called "Funds from Operations" (FFO). We believe that FFO is helpful to investors because it is a widely recognized measure of the performance of REITs and provides a relevant basis for comparison among REITs. We consider FFO in evaluating our own operating performance. We believe that FFO should be considered along with, but not as an alternative to, net income and cash flow determined in accordance with generally accepted accounting principles (GAAP) as a measure of our activities. Funds from operations is defined as net income excluding gains and losses from the sale of real estate, extraordinary items, the cumulative effects of accounting changes and property related depreciation and amortization all determined on a consistent basis in accordance with GAAP. FFO does not represent cash flow from operations, and should not be considered an alternative to net income as a measure of operating performance. (c) Prior periods revised to conform to current year presentation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Contained in this discussion and elsewhere in this annual report are forward-looking statements which management believes to be reasonable and informative. Such statements are based on assumptions which may not prove to be correct for reasons management cannot predict. Consequently, the inclusion of forward-looking statements should not be considered as representations by the Trust or its management that expected results will be achieved or that stated objectives will be attained. Several risk factors that might cause such a difference are identified in Item 1A of this report.
In March 2006, the Trust and its subsidiaries entered into an agreement to sell its real estate and associated personal property, except for its restaurant property in Florida, to Buckingham Properties, Inc., for $60 million consisting of approximately $48.45 million of cash and assumed debt of approximately $11.55 million. Buckingham Management, LLC, an affiliate of the purchaser, has managed the Trust's residential properties since 2003. The Trust will use a portion of the cash proceeds to retire the remaining mortgage debt. Management expects the sale, which is subject to approval by shareholders holding a majority of the Trust's outstanding shares, to be completed in late June or July 2006.
During all of 2005 and 2004 the Trust owned or controlled, as continuing operations, thirteen apartment communities containing 1,704 apartment units, three multi-tenant commercial properties containing 89,000 rentable square feet, and one restaurant property leased to an operator under a net lease that will expire July 31, 2006. Comparative information related to income and expenses contained in this discussion applies to continuing operations only, unless otherwise indicated.
In April 2004, the Trust sold the 176-unit Park Plaza apartments, in July 2005 it sold a former restaurant property in Indianapolis and in December 2005, it sold the 256-unit Fox Run apartments. In accordance with the provisions of FASB Statement No. 144, the net investments in those three properties are presented in the consolidated balance sheets as real estate held for sale. The gain realized from the sales and the results of their operations for years ended December 31, 2005, 2004 and 2003, are summarized and shown in the consolidated statements of operations as income or loss from discontinued operations. The three sale transactions are described in Note 4 to the consolidated financial statements.
Five apartment properties containing 586 units are owned by five separate partnerships that are controlled by the Trust through a wholly-owned subsidiary, CR Management, Inc. Holders of operating partnership units have the option to exchange them, one for one, for shares of beneficial interest in the Trust at any time until November 2007. As of December 31, 2005 and 2004, holders of 88.1% and 84.6%, respectively of the outstanding units, had exercised their exchange options. (See Note 3 to the financial statements). Management anticipates that the increase in outstanding shares and corresponding decrease in the minority interest will not have a material impact on net income per share during the next year.
At December 31, 2005, the Trust's net investment in real estate consisted of apartment properties (93.6%), commercial properties (6%) and a net-leased restaurant property (.4%). The 1,704 apartment units in the portfolio throughout 2005 and 2004 contributed 94.2% and 93.9%, respectively, of the total revenue from continuing real estate operations, and 97.2% and 98.1%, respectively, of continuing real estate operating expenses.
CRITICAL ACCOUNTING POLICIES
Amortization of Management Contracts. In 1997 the Trust paid $650,350 for the general partner interest and absolute management control over five partnerships. The Trust elected to amortize, on a straight line method, its cost to acquire its position over the ten-year period during which the holders of limited partnership units could elect to, or not elect to, exchange those units for shares of beneficial interest of the Trust; consequently, depreciation expense each year includes $65,030 for amortization of the acquisition costs.
Carpet Replacement Policy. From its inception in 1973, the Trust has consistently followed the practice of charging the cost to replace carpets in its apartment units to expense as incurred. Real estate operating expenses include costs to replace carpets of $307,727, $272,576 and $244,727 for 2005, 2004 and 2003 respectively. An acceptable alternative method of accounting would be the capitalization of costs as incurred, followed by charges for depreciation over the estimated useful life of the carpet. Management believes that, due to the relatively short useful life of apartment carpets, the annual expense for replacements is not materially greater than would be the annual charges for depreciation had the carpets been capitalized when purchased.
Impairment of Long-Lived Assets. When an event or change in circumstance indicates that future undiscounted cash flows and net realizable value is insufficient to recover the carrying value of a long-lived asset, the asset value is reduced to fair market value and an impairment loss is recognized. No impairment losses were recognized in 2005, 2004 or 2003.
RESULTS OF OPERATIONS -- 2005
Compared with 2004, rental and related income from the Trust's continuing apartment operations increased by 2.7% while apartment operating expenses, exclusive of depreciation, decreased by .5%.
The increase in gross income from apartment properties resulted from the net effect of .2% higher average rental rates and a 2.3% increase in overall occupancy rates. Apartment economic occupancy rates increased from an average of 88.7% in 2004 to 91.0% in 2005. In December 2005 the aggregate physical occupancy rate for the Trust's apartment properties was 94.2% up from 92.1% in December 2004. The increasing trend in occupancy rates that commenced in the fourth quarter of 2003 is due primarily to intensive marketing efforts and the use of rental incentives and discounts. Relatively low mortgage loan interest rates continue to make home ownership a viable alternative for residents of higher-rent apartments.
Real estate operating expenses, including real estate taxes (excluding interest and depreciation) for the apartment properties decreased by .5% in 2005. Operating expenses amounted to 53.6% of gross possible income for 2005, down from 54.0% in 2004. Maintenance and repairs, casualty insurance premiums and real estate taxes were lower, while on-site personnel costs and decorating costs, including carpet replacement, increased in 2005. Real estate taxes estimated to be payable in 2006 that were accrued in 2005, decreased by 2.8% from amounts that were accrued in 2004 for payment in 2005.
Real estate tax accruals for amounts estimated to be payable in 2005 decreased by $32,000 from comparable accruals in 2004 due to successful appeals for reduction of assessed values that resulted from an Indiana statewide reassessment of real property as of March 1, 2002. Further reductions are possible from appeals that are still pending for two properties. In addition to the reduction in the amounts accrued for payment in 2006, additional benefits were realized from refunds of taxes accrued for payments in 2003 and 2004. Those prior year overpayments credited against real estate tax expense in 2005 amounted to $79,000.
Mortgage interest expense for 2005 decreased by $110,000, or 5.2%, from the amount reported for 2004. Approximately $61,100 of that decrease is attributable to lower interest rates on three mortgage loans that were refinanced in 2004. The balance of the decrease is attributed primarily to a 2.3% reduction in mortgage loan balances that resulted from scheduled monthly debt service.
General and administrative expenses in 2005 increased by $38,800 from the previous year primarily due to an increase in amounts incurred for professional fees. General and administrative expenses amounted to 7.2% of income from continuing real estate operations in 2005, compared with 7% in 2004. Officer and employee compensation costs, including payroll taxes and benefits that are included in administrative expenses, amounted to $291,372 in 2005, compared with $287,600 in 2004.
The changes in income and expenses attributable to discontinued operations are described in Note 4 to the consolidated financial statements. In addition to the gains realized on the sales of rental properties in 2005 and 2004, the Trust derived income of $290,432 in 2005 and incurred losses aggregating $190,669 in 2004, from the following three properties:
2005 2004 _________ _________ Park Plaza apartments $ 21,549 $ (14,433) Fox Run apartments 280,099 (193,121) Indianapolis restaurant property (11,216) 16,885 _________ _________ Total income (loss) $ 290,432 $(190,669)
For the portion of 2005 that the Trust owned Fox Run, its occupancy rate was 76.7% and operating expenses were 55.9%, compared with occupancy of 78.2% and operating expenses of 60.7% for all of 2004. Upon appeal, the Trust was granted a 35% reduction in assessed value for real estate taxes paid in 2003, 2004 and 2005 and for taxes payable in 2006. Refunds of overpaid taxes in 2005 and prior years received in 2005 amounted to $198,000. The Trust recorded no depreciation expense for Fox Run in 2005, consistent with proper accounting for discontinued operations. In 2004, prior to designating Fox Run as held for sale, the Trust recorded $214,824 of depreciation expense related to Fox Run.
A 25-year lease of the Indianapolis restaurant property that began in 1979 expired in November 2004. The lessee elected not to renew the lease, and vacated the property. In addition to the loss of revenue from the property, the Trust accrued $6,000 and $9,300 in 2005 and 2004, respectively, for estimated real estate taxes payable in the following year. Under the prior lease, the lessee was responsible for real estate taxes.
RESULTS OF OPERATIONS -- 2004
Compared with 2003, rental and related income from the Trust's continuing apartment operations increased by 5.4% while apartment operating expenses, exclusive of depreciation, increased by .2%.
The increase in gross income from apartment properties resulted from the net effect of 1% higher average rental rates and a 4.2% increase in overall occupancy rates. Apartment economic occupancy rates increased from an average of 84.8% in 2003 to 88.7% in 2004. In December 2004 the aggregate physical occupancy rate for the Trust's apartment properties was 92.1% up from 90.3% in December 2003. The increasing trend in occupancy rates that commenced in the fourth quarter of 2003 is due primarily to intensive marketing efforts and the use of rental incentives and discounts. The lack of employment opportunities in several Indiana communities, and relatively low mortgage loan interest rates continue to make home ownership a viable alternative for residents of higher-rent apartments.
Real estate operating expenses, including real estate taxes (excluding interest and depreciation) for the apartment properties increased .2% in 2004. Operating expenses amounted to 54.0% of gross possible income for 2004, down from 54.6% in 2003. Maintenance and repairs and building services expenses were lower in 2004, however, those decreases were more than offset by higher site personnel costs. Real estate taxes estimated to be payable in 2005 that were accrued in 2004, decreased by 6.8% from amounts that were accrued in 2003.
Real estate tax accruals for amounts estimated to be payable in 2005 decreased by $84,000 from comparable accruals in 2003 due to successful appeals for reduction of assessed values that resulted from an Indiana statewide reassessment of real property as of March 1, 2002. Some further reductions are possible from appeals that are still pending for four properties. In addition to the reduction in the amounts accrued for payment in 2005, additional benefits were realized from refunds of taxes accrued for payments in 2003 and 2004. Those prior year overpayments credited against real estate tax expense in 2004 amounted to $191,000.
Mortgage interest expense for 2004 decreased by $77,000 from the amount reported for 2003. Approximately $25,700 of that decrease is attributable to lower interest rates on three mortgage loans that were refinanced in 2004. The balance of the decrease is attributed primarily to a reduction in mortgage loan balances that resulted from scheduled monthly debt service.
General and administrative expenses in 2004 increased by $97,000 from the previous year primarily due to an increase in amounts incurred for professional fees. In 2004 the Trust incurred approximately $12,000 of legal fees and $28,000 for a strategic analysis related to a shareholder proposal that received a favorable vote of approximately 50% at the annual meeting of shareholders in May 2004. Approximately $15,200 of legal fees were incurred to comply with certain corporate governance mandates by the Sarbanes-Oxley Act of 2002. The Trust paid $16,000 more in Trustee fees in 2004 than it paid in 2003 because of two more trustee meetings, one more audit committee meeting, and the addition of one trustee in November 2003. General and administrative expenses amounted to 7% of income from real estate operations in 2004, compared with 6.4% in 2003. Officer and employee compensation costs, including payroll taxes and benefits that are included in administrative expenses, amounted to $287,600 in 2004, compared with $288,100 in 2003.
The changes in income and expenses attributable to discontinued operations are described in Note 4 to the consolidated financial statements. In addition to the gain realized on the sale of the Park Plaza apartments in April 2004, the Trust incurred operating losses aggregating $190,669 and $70,508 in 2004 and 2003, respectively, from the following three properties:
2004 2003 _________ _________ Park Plaza apartments $ (14,433) $ 46,559
Fox Run apartments (193,121) (152,520) Fortune House restaurant 16,885 35,453 _________ _________ Total income (loss) $(190,669) $ (70,508)
For the portion of 2004 that the Trust owned Park Plaza, its occupancy rate was 78.1% and operating expenses were 79.9%, compared with occupancy of 75.6% and operating expenses of 62.4% for all of 2003.
During 2004 Fox Run had occupancy of 77.8% and operating expenses of 61% of gross possible income, compared with occupancy of 75.2% and operating expenses of 59.9% for 2003. In addition to a $51,300 increase in current real estate taxes that resulted from reassessment for taxes payable in 2003 and subsequent years, an additional $73,300 was charged for under-estimated real estate taxes for the prior year. An appeal for a reduction of the new assessed values has been filed by the Trust.
A 25-year lease that began in 1979 expired in November 2004. The lessee elected not to renew the lease, and vacated the property. In addition to the loss of revenue from the property, the Trust accrued $9,300 in 2004 for estimated real estate taxes payable in 2005. Under the prior lease, the lessee was responsible for real estate taxes.
CONTRACTUAL OBLIGATIONS
The following schedule represents the Trust's obligations as of December 31, 2005, to make future payments under contracts, such as mortgage debt, lease agreements, and other long-term obligations (amounts in thousands):
Payments Due by Period __________________________________________ Within 1 2 to 3 4 to 5 After 5 Obligations Total Year Years Years Years ______________ _______ _______ _______ _______ _______ Mortgage notes $27,805 $6,035 $6,834 $1,124 $13,813 Operating leases (1) - - - - - Purchase obligations - - - - - Other: Tenants' Deposits (2) 374 - - - 374 _______ _______ _______ _______ _______ Totals $28,180 $6,035 $6,834 $1,124 $14,187
(1) The Trust is a lessee of certain office equipment, such as copying machines and postage equipment, which represent insignificant obligations.
(2) The Trust holds security deposits by tenants of its rental properties. Individual deposits that are refunded, in whole or in part when a tenant vacates, are replaced by similar deposits received from incoming tenants. Changes in the aggregate amount of deposits held during any given period are not material.
LIQUIDITY AND SOURCES OF CAPITAL At December 31, 2005, the Trust and its controlled partnerships had approximately $2,790,800 in cash, including $565,800 in controlled partnership accounts, which management believes is sufficient to meet anticipated working capital requirements. Net proceeds from the sale of Fox Run apartments in December 2005, in the amount of approximately $3,234,000, was deposited with a qualified intermediary to be held for tax-free reinvestment in replacement property. The net proceeds includes approximately $1,444,000 of realized gain on the sale.
A mortgage loan payable on the Charter Oaks apartments in Evansville, IN, will mature on April 1, 2006, with a balance due of approximately $3,314,000. The Trust had planned to refinance the loan balance with a new first mortgage loan.
On March 17, 2006, the Trust entered into a definitive Asset Purchase Agreement to sell su1bstantially all of its assets to Buckingham Properties, Inc. (See Note 10 to the financial statements contained elsewhere in this report). Both the intent to reinvest the Fox Run sale proceeds and the plan to re-finance the mortgage loan on the Charter Oaks apartments were incompatible with the proposed sale transaction. Management altered its plans and now intends to use the Fox Run sale proceeds to pay off the Charter Oaks mortgage loan at maturity. The decision not to reinvest the Fox Run sale proceeds will cause the recognition, for tax purposes, of the previously deferred gain and lead to its subsequent distribution to shareholders. If for some reason the assets of the Trust are not sold pursuant to the agreement with Buckingham Properties, Inc., the Trust intends to continue to operate as a real estate investment trust while the Board of Trustees re-evaluates its strategic options.
On May 15, 2006, a mortgage loan on one of the commercial properties will mature with a balance due of approximately $542,000. The Trust expects to repay that loan with unrestricted cash. Management expects that cash flow through April 2006, and the receipt of approximately $390,000 of unused replacement reserve funds held by the Charter Oaks mortgage holder, will provide sufficient cash to pay off the mortgage balance that matures in May.
A mortgage loan on the Regency Royale apartments is scheduled to mature on October 6, 2006, with a balance due at maturity of approximately $1,583,000. If the asset sale to Buckingham Properties, Inc., occurs, that loan will be paid off with proceeds from the sale. If the asset sale does not occur, management is confident that the balance due at maturity can be refinanced.
Other than the above transactions and cash that may be required for property improvements and replacements which amounts are not expected to exceed funds generated by operations, management is not aware of any significant transactions or events which will require material expenditures in 2006. The Trust has not made any commitments, which would require expenditures in excess of funds expected to be provided by operations during 2006.
Management expects to operate as a qualified real estate investment trust until the proposed sale of assets occurs, and to distribute to shareholders all of its otherwise taxable income. The Trust distributed $1,441,973 to its shareholers in 2005, of which $868,902 was designated as capital gain from the sale of property. All of the $1,876,772 that was distributed to shareholders in 2004 was designated as capital gain. The aggregate surplus cash distributed to the minority interest partners by the controlled partnerships totaled $20,745 during 2005. There were no distributions by the controlled partnerships in 2004.
Due primarily to differences in depreciation expense, the net income, excluding the deferred gain on the sale of Fox Run, reported for 2005 was 11.8% more than taxable income. The reported net income for 2004 was 4.5% more than the income for tax purposes; and, for 2003, the reported net loss was 15% more than loss for tax purposes.
IMPACT OF INFLATION Inflation, except for increases in real estate taxes payable in 2003 that resulted from the Indiana state-wide reassessment of real estate, has not had a significant impact on the Trust during 2005, 2004 and 2003.
ITEM 7a.
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust does not believe it is subject to material market risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, which are included in the annual shareholders report for the year ended December 31, 2005, are included as exhibits under Item 15.
Unaudited summarized consolidated quarterly financial data for the year ended December 31, 2005, is as follows:
Three Months Ended ______________________________________________
March 31 June 30 September 30 December 31 _______________________________________________________________________________
Rental and other operating income $2,664,694 $2,673,669 $2,650,920 $2,703,259
Income before minority interest and discontinued operations 120,864 145,971 43,022 210,648
Income from discontinued operations 56,189 93,975 652,363 1,533,328
Net income 176,474 231,246 694,649 1,736,677
Earnings per share - basic and diluted: Income before discontinued operations $ 0.07 $ 0.08 $ 0.02 $ 0.11 Income from discontinued operations $ 0.03 $ 0.05 $ 0.37 $ 0.85
Net income $ 0.10 $ 0.13 $ 0.39 $ 0.96
Unaudited summarized consolidated quarterly financial data for the year ended December 31, 2004, is as follows:
Three Months Ended ______________________________________________
March 31 June 30 September 30 December 31 _______________________________________________________________________________
Rental and other operating income $2,591,252 $2,587,929 $2,617,428 $2,616,613
Income (loss) before minority interest and discontinued operations (61,414) (126,989) 38,311 267,018
Income (loss) from discontinued operations (10,500) 2,660,816 (30,865) (120,521)
Net income (loss) (59,306) 2,555,526 16,050 134,797
Earnings (loss) per share - basic and diluted: Income (loss) before discontinued operations $ (0.03) $ (0.06) $ 0.03 $ 0.14 Income (loss) from discontinued operations $ 0.00 $ 1.49 $ (0.02) $ (0.07)
Net income (loss) $ (0.03) $ 1.03 $ 0.01 $ 0.07
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No change of accountants or reported disagreements have occurred which are to be disclosed hereunder.
ITEM 9a.
ITEM 9a. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Chief Executive Officer serves as the principal operating officer and in such capacity supervises, directly or indirectly, the daily operation of the Trust and investment properties. The Chief Financial Officer serves as the principal accounting officer and in such capacity supervises, directly or indirectly, the accounting and financial operations of the Trust and its subsidiaries. The centralized and compact management structure of the registrant provides adequate and effective disclosure control.
(b) Changes in internal controls. There have been no changes in internal controls or in other factors that could significantly affect internal controls within the past ninety days. Management has discovered no material weaknesses in internal controls that would warrant corrective actions.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Following is information relative to executive officers and members of the Board of Trustees. The Trust has no executive officers other than those individuals presently serving as Trustees.
Period During Shares of Which He Has the Trust Served As A Beneficially Principal Occupation Trustee Owned as of Name and Address Age For Past Five Years (term expires) March 13, 2006 _______________________________________________________________________________
John W. Adams(1) 57 Principal 1996 to date 2,100 (0.12%) Indianapolis, IN JWA Sports, LLC (2006) Private investments (Since January 2004)
Vice President Browning Investments, Inc. Real estate development (January 1990 to November 2004) Other Directorships: None
John I. Bradshaw, Jr.(2) 75 President and CEO 1982 to date 94,123 (5.19%) Indianapolis, IN Century Realty Trust (2006) Other Directorships: None
Marvin L. Hackman(1) 72 Partner, Hackman 2000 to date 1,200 (0.07%) Indianapolis, IN Hulett & Cracraft LLP (2006) Attorneys at Law Other Directorships: None
Francis M. Hapak(3) 80 Real estate investor 1987 to date 76,605 (4.22%) Indianapolis, IN Self employed (2007) Other Directorships: None
John J. Dillon(4) 46 Chief Deputy Mayor/ 2000 to date 23,128 (1.28%) Indianapolis, IN Chief of Staff (2007) City of Indianapolis (since January 2006)
Businessman Self employed (March 2003 to February 2006) (August 2000 to January 2002
Chief Operating Officer Standard Management Corp. Financial services holding company (January 2002 to March 2003) Other Directorships: Indianapolis Bond Bank
Murray R. Wise(5) 57 Chairman and CEO 2000 to date 113,966 (6.28%) Westchester Group, Inc. (2007) Agricultural investments Other Directorships: None
Larry S. Boulet(1) 59 President 2003 to date 5,100 ( .28%) Boulet Consulting LLC (2008) Business consulting (since July 2002)
Senior Audit Partner PricewaterhouseCoopers LLP Public accounting (1998 to July 2002) Other Directorships: None
Michael W. Malafronte(6) 31 Vice President 2005 to date 5,000 ( .28%) Arnhold and S. (2008) Bleichroeder Advisors,LLC Asset Management (since July 2005)
Principal Oppenheimer + Close Financial investments Other Directorships: Bresler & Reiner, Inc.
Neil C. McKinnon(7) 47 President & CEO 2005 to date 278,021(15.33%) Prana Holding Co., LLC (2008) Real estate investments Other Directorships: None
Trustees and Officers as a Group (9 persons) 599,243(33.05%)
(1) Shares are held with sole voting and investment power.
(2) John I. Bradshaw, Jr., is sole owner of 91,664 shares and shares voting and investment power with respect to 459 shares owned by his spouse and 2,000 shares owned by a trust for his sister.
(3) Francis M. Hapak is the sole owner of 38,392 shares and shares voting and investment power with respect to 38,213 shares owned by Charlotte H. Hapak, his wife.
(4) John J. Dillon is sole owner of 3,688 shares and shares voting and investment power with respect to 19,440 shares owned by Dillon Family Limited Partnership in which he is a limited partner.
(5) Murray R. Wise is sole owner of 103,883 shares and shares voting and investment power with respect to 1,000 shares owned by his spouse, 7,083 shares owned by the Westchester Profit Sharing Trust, 1,000 shares owned by the Westchester Foundation and 1,000 shares owned by Travinap Partnership.
(6) Michael W. Malafronte is the holder of an exercisable, but unexercised, option to purchase 5,000 shares, which shares are construed herein to be beneficially owned by him.
(7) Neil C. McKinnon is the holder of an exercisable, but unexercised, option to purchase 5,000 shares, which shares are construed herein to be beneficially owned by him. Mr. McKinnon disclaims beneficial ownership of 273,021 shares beneficially owned by Prana Securities Adviser, LLC, except to the extent of his pecuniary interest therein. See also Note 5 to Item 12, Security Ownership by Certain Beneficial Owners and Management.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
	Section 16(a) of the Securities Exchange Act of 1934 requires that certain Trustees, Officers and share owners file with the SEC and the Trust an initial statement of beneficial ownership and certain statements of changes in beneficial ownership of shares of the Trust. Based solely on its review of such forms received by the Trust and written representation from those individuals that no other reports were required, the Trust is unaware of any instances of failure timely file required reports, except that trustee Michael W. Malafronte filed late a Form 4 reporting an option to purchase 5,000 shares of beneficial interest that was granted to him by the Trust upon his election to the Board of Trustees in May 2005.
COMPENSATION OF TRUSTEES
	Each trustee, except the individual named in the "Summary Compensation Table", is paid $750 per quarter plus $300 for each meeting of the trustees attended by him. Members of the audit committee are each paid $300 for attendance at each meeting of the committee. In addition, Trustees are paid amounts, not in excess of $300 each day, for property inspections and special assignments. No additional compensation is paid to those trustees, other than John I. Bradshaw, Jr., who are also officers of the Trust. In 2005, under these arrangements, the Trust paid a total of $57,200 in trustee compensation to all trustees who, individually, were paid amounts ranging from $5,300 to $8,100.
No long term or deferred compensation arrangements have been awarded to any trustee, officer or employee of the Trust.
	Except as set forth in the following schedules, no options, warrants, or rights of any kind were granted or exercised during 2005.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information relative to management remuneration and transactions is included in the following table. John I. Bradshaw, Jr. is the sole executive officer of the Trust. He has held the position of President and Chief Executive Officer since 1982.
SUMMARY COMPENSATION TABLE
Annual Compensation _________________________________ Long-Term Name and Other Compensation Principal Compen- Awards Position Year Salary($) Bonus($) sation($) Options(#) _______________________________________________________________________________
John I. Bradshaw, Jr. 2005 99,000 - 898* - President 2004 99,000 - 1,619* - Chief Exec. 2003 99,000 - 2,686* - Officer
*Compensation equivalent of club dues paid on behalf of named individual.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Individual Grants Annual Rates of Stock % of Total Exercise Price Appreciation for Options Options Granted Price per Expiration Option Term Name Granted (#) In Fiscal Year Share Date 5% 10% _______________________________________________________________________________
Michael W. Malafronte 5,000 50% $18.95 May 3, 2008 $15,050 $26,400
Neil C. McKinnon 5,000 50% $18.95 May 3, 2008 $15,050 $26,400
The Options are exercisable at any time until the expiration date. Upon exercise, shares in treasury, to the extent available, will be issued. Potential realizable value is computed based upon a market value of $19.80 per share on March 15, 2006.
The exercise price per share represents the closing share price on the date of grant.
OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
Value of Unexercised Unexercised In-The-Money Options at Fiscal Options at Fiscal Shares Acquired Value Year End(#) Year End** Name On Exercise(#) Realized* (All Exercisable) (All Exercisable) _______________________________________________________________________________
Larry S. Boulet 3,000 $17,970 --- ---
Michael W. Malafronte --- --- 5,000 $1,500
Neil C. McKinnon --- --- 5,000 $1,500
* Value realized based on the closing share price on the date exercised. ** Value based on $19.25 per share, the closing price on December 31, 2005.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person is known to the Trust to own of record or beneficially more than 5% of the Trust's outstanding shares except as set forth in the following table. The information below is as of March 15, 2006.
Title of Name of Amount and Nature of Percent Class Beneficial Owner Beneficial Ownership of Class ____________________________________________________________________________
Shares of John I. Bradshaw, Jr. 94,123(1) 5.2% Beneficial 320 N. Meridian Street Interest Indianapolis, IN
Shares of Murray R. Wise 113,966(2) 6.3% Beneficial 4309 Crayton Road Interest Naples, FL 34103
Shares of David C. Eades 114,600(3) 6.4% Beneficial 1701 Broadmoor Drive Interest Champaign, IL 61821
Shares of Mercury Real Estate Beneficial Advisors, LLC 158,805(4) 8.8% Interest 100 Field Point Road Greenwich, CT 06830
Shares of Prana Securities Adviser, LLC 273,021(5) 15.3% Beneficial 333 West 52nd St., Suite 600 Interest New York, NY 10019
(1) John I. Bradshaw, Jr., is sole owner of 91,664 shares and shares voting and investment power with respect to 459 shares owned by his spouse and 2,000 shares owned by a trust for his sister.
(2) Murray R. Wise is sole owner of 103,883 shares and shares voting and investment power with respect to 1,000 shares owned by his spouse, 15,767 shares owned by the Westchester Profit Sharing Trust, 1,000 shares owned by the Westchester Foundation and 1,000 shares owned by Travinap Partnership.
(3) David C. Eades is sole owner of 83,300 shares and shares voting and investment power with respect to 6,000 shares owned by his spouse, 4,000 shares owned by the mother of his spouse, 16,300 shares owned by the Eades Foundation and 5,000 shares owned by the Helen Virginia Eades Trust.
(4) Mercury Real Estate Advisors, LLC, as sole owner, has exclusive voting and investment power with respect to 158,805 shares.
(5) The following persons and entities share voting and investment power with respect to the indicated shares: Prana Securities Adviser, LLC, a New York limited liability company (the "Investment Manager"), is the investment adviser to Prana Securities Fund I, L.P., a Delaware limited partnership (the "Fund"), the record holder of the indicated shares. The general partner of the Fund is Prana Securities Manager, LLC, a Delaware limited liability company (the "General Partner"). Prana Real Estate Securities, LLC, a California limited liability company, is the sole member of the General Partner and the Investment Manager, and a manager of the General Partner. Prana Holding Company, LLC, is the sole member and a manager of Prana Real Estate Securities, LLC. Kurt C. McCracken is Chairman and a Manager of Prana Holding Company, LLC. Neil C. McKinnon is a Manager of Prana Real Estate Securities, LLC, and President and a Manager of Prana Holding Company, LLC. Mr. McCracken and Mr. McKinnon disclaim beneficial ownership with respect to the indicated shares except to the extent of their respective pecuniary interests therein.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no relationships or transactions, as defined under this item, nor are any contemplated, to be disclosed hereunder.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Board of Trustees appointed the firm of Ernst & Young LLP, as auditors for the Trust for the year ended December 31, 2005. This firm has previously audited the Trust's financial statements each year beginning with 1973. The Audit Committee approved the audit and non-audit services before they were performed following specific consideration as to the possible effects of such services on the independence of the auditors. Following is a schedule of fees billed to the Trust and its subsidiaries by Ernst & Young during 2005 and 2004:
2005 2004 ____ ____ Audit fees (1) $98,000 $80,500 Audit-Related Fees (2) 4,000 None Tax Fees (3) 32,500 31,000 All Other Fees (4) None None
(1) Audit Fees - Fees for professional services performed by Ernst & Young for the audit of the Trust's annual financial statements and review of financial statements included in the Trust's 10-Q filings.
(2) Audit-Related Fees - Audit related services in 2005 consisted of consultations regarding financial accounting and reporting matters.
(3) Tax Fees - Fees for services with respect to tax compliance, tax advice and tax planning. This includes review of federal and state tax returns for the Trust and its consolidated subsidiaries, and preparation of federal and state tax returns for Partnerships controlled, but not wholly-owned, by the Trust.
(4) All Other Fees - Fees, of which there were none in 2005 and 2004, for permissible work performed by Ernst & Young that does not meet the above category descriptions.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion of Item 15 is submitted as a separate section of this report.
(b) Reports on Form 8-K
A Form 8-K was filed December 7, 2005, that reported, under Item 2.01, completion of the sale of the 256-unit Fox Run apartments. That transaction is explained in Note 4 to the consolidated financial statements for the year ended December 31, 2005, included herein.
A Form 8-K was filed March 23, 2006, that reported, under Item 1.01, the execution of an Asset Purchase Agreement on March 17, 2006, pursuant to which the Century Realty Trust and its subsidiaries agreed to sell substantially all of their assets to Buckingham Properties, Inc. That agreement (Exhibit 10.5) was furnished as an exhibit to that Form 8-K.
(c) Exhibits
(1) Code of Ethics for Senior Financial Officers executed by the President, Treasurer and CEO (Exhibit 14.1) and by the Controller and CFO (Exhibit 14.2) were filed with Form 10-K for the year ended December 31, 2003, and are incorporated herein by reference.
(2) The Trust Instrument of Century Realty Trust (Exhibit 3(i)); the Code of By-laws of Century Realty Trust (Exhibit 3(ii); Purchase Agreement executed December 7, 2004, for the sale of Fox Run Apartments (Exhibit 10.1); and, Trustee's Option to Purchase Shares granted May 5, 2004, to Larry S. Boulet were filed with Form 10-K for the year ended December 31, 2004, and are incorporated herein by reference.
(3) Rule 13a-14(a)/15d-14(a) Certifications: 31.1 - Certification by Principal Exective Officer 31.2 - Certification by Principal financial and accounting officer
(4) Sec. 906, Sarbanes-Oxley Act, Certifications: 32.1 - Certification of Chief Executive Officer 32.2 - Certification of Chief finanacial officer and principal accounting officer
(5) Other exhibits: 10.3 - Trustee's Option to Purchase Shares granted May 4, 2005, to Michael W. Malafronte 10.4 - Trustee's Option to Purchase Shares granted May 4, 2005, to Neil C. McKinnon
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report be signed on its behalf by the undersigned, thereunto duly authorized.
CENTURY REALTY TRUST
Date: 3/27/06 By: S/ JOHN I. BRADSHAW, JR. President and Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: 3/27/06 S/ DAVID F. WHITE Controller
Date: 3/30/06 S/ MURRAY R. WISE Trustee, Chairman of the Board
Date: 3/30/06 S/ FRANCIS M. HAPAK Trustee
Date: 3/30/06 S/ JOHN W. ADAMS Trustee
Date: 3/30/06 S/ JOHN J. DILLON Trustee
Date: 3/30/06 S/ MARVIN L. HACKMAN Trustee
Date: 3/30/06 S/ LARRY S. BOULET Trustee
Date: 3/30/06 S/ MICHAEL W. MALAFRONTE Trustee
Date: 3/30/06 S/ NEIL C. McKINNON Trustee
ITEM 15(a)(1) AND (2). LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Century Realty Trust and subsidiaries are included herein and in the annual report of the Registrant to its shareholders for the year ended December 31, 2005:
Consolidated balance sheets - December 31, 2005 and 2004
Consolidated statements of operations - Years ended December 31, 2005, 2004 and 2003
Consolidated statements of shareholders' equity - Years ended December 31, 2005, 2004 and 2003
Consolidated statements of cash flows - Years ended December 31, 2005, 2004 and 2003
Notes to consolidated financial statements
The following financial statement schedule of Century Realty Trust and Subsidiaries is included in Item 15(a):
Schedule III - Real estate and accumulated depreciation
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
ITEM 15(c) EXHIBITS
EXHIBIT 31.1
CERTIFICATION
I, John I. Bradshaw, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Century Realty Trust;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of trustees (or other persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: 3/28/06 /S/ John I. Bradshaw, Jr. Chief Executive Officer President and Treasurer
EXHIBIT 31.2
CERTIFICATION
I, David F. White, certify that:
1. I have reviewed this annual report on Form 10-K of Century Realty Trust;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of trustees (or other persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identifiedfor the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: 3/28/06 S/ David F. White Controller (chief financial officer and principal accounting officer)
EXHIBIT 32.1
CERTIFICATION
In connection with the accompanying Annual Report of the Trust on Form 10-K for the period ending December 31, 2005, I, John I. Bradshaw, Jr., Chief Executive Officer, President and Treasurer of the Trust, certify, pursuant to 18 U.S.C Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
	1) The Report fully complies with the requirements of section 13(a)of the Securities Exchange Act of 1934; and
	2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust.
S/ John I. Bradshaw, Jr. Chief Executive Officer, President and Treasurer
EXHIBIT 32.2
CERTIFICATION
In connection with the accompanying Annual Report of the Trust on Form 10-K for the period ending December 31, 2005, I, David F. White, Controller of the Trust, certify, pursuant to 18 U.S.C Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust.
S/ David F. White Controller (chief financial officer and principal accounting officer)
ITEM 15(a)1--Audited Financial Statements
Century Realty Trust and Subsidiaries Consolidated Balance Sheets December 31 2005 2004 ___________ ___________ Assets Real estate investments: Land $3,140,029 $3,140,029 Buildings 44,865,692 44,531,489 Equipment 772,275 769,765 Allowances for depreciation (15,926,563) (14,903,389) ___________ ___________ 32,851,433 33,537,894 ___________ ___________ Real estate held for sale, net of $1,861,117 allowances for depreciation - 5,834,086 Cash and cash equivalents 2,790,787 3,037,234 Restricted cash 1,580,045 1,885,865 Funds held in escrow for possible completion of 1031 exchange 3,234,065 - Accounts and accrued interest receivable 525,365 426,478 Unamortized management contracts 124,651 189,686 Unamortized mortgage costs 239,644 275,478 Undeveloped land 99,675 99,675 Other assets 173,882 185,075 Real estate held for sale, other assets - 398,114 ___________ ___________ $41,619,547 $45,869,585 ___________ ___________ ___________ ___________ Liabilities and shareholders' equity Liabilities: Mortgage notes payable $27,805,711 $33,026,470 Accounts payable and accrued liabilities 646,019 580,338 Accrued interest 161,574 150,236 Accrued property taxes 1,254,768 1,386,978 Tenants' security deposits and unearned income 525,061 520,118 Real estate held for sale, other liabilities - 405,074 ___________ ___________ 30,393,133 36,069,214
Minority interest in operating partnerships 264,112 315,004
Shareholders' equity: Shares of Beneficial Interest, no par value - authorized 5,000,000 shares, issued - 1,806,349 shares including 3,507 in treasury in 2005, and 1,795,909 shares including 6,507 shares in treasury in 2004 9,648,572 9,599,697 Overdistributed income other than from gain on the sale of real estate (1,955,471) (2,176,023) Undistributed net realized gain from sale of real estate 3,305,426 2,128,905 Cost of treasury shares (36,225) (67,212) ___________ ___________ 10,962,302 9,485,367 ___________ ___________ $41,619,547 $45,869,585 ___________ ___________ ___________ ___________ See accompanying notes.
Century Realty Trust and Subsidiaries Consolidated Statements of Operations Year ended December 31 2005 2004 2003 _________ __________ __________ Income: Real estate operations: Rental Income $10,478,582 $10,233,114 $9,745,507 Other income 213,960 180,108 169,108 ___________ ___________ __________ 10,692,542 10,413,222 9,914,615 Less: Real estate operating expenses 4,956,079 4,921,806 4,820,743 Depreciation 1,423,884 1,418,720 1,456,135 Real estate taxes 1,096,361 1,018,211 1,375,129 ___________ ___________ __________ 7,476,324 7,358,737 7,652,007 ___________ ___________ __________ 3,216,218 3,054,485 2,262,608 Interest income 92,373 38,780 16,615 ___________ ___________ __________ 3,308,591 3,093,265 2,279,223 Expenses: Interest 2,018,375 2,128,408 2,205,435 Mortgage loan extinguishment costs - 117,044 - General and administrative expenses 769,711 730,887 633,873 ___________ ___________ __________ 2,788,086 2,976,339 2,839,308 ___________ ___________ __________ Income (loss) before minority interest and discontinued operations 520,505 116,926 (560,085)
Minority interest in operating partnerships (17,314) 31,211 89,935 ___________ ___________ __________ Income (loss) before discontinued operations 503,191 148,137 (470,150)
Income (loss) from discontinued operations, including gain on sale of rental properties of $2,045,423 in 2005 and $2,689,599 in 2004 2,335,855 2,498,930 (70,508) ___________ ___________ __________ Net income (loss) $2,839,046 $2,647,067 ($540,658) ___________ ___________ __________ ___________ ___________ __________
Earnings (loss) per share - basic and diluted: Income (loss) before discontinued operations $0.28 $0.08 ($0.26) Income (loss) from discontinued operations $1.30 $1.40 ($0.04) ___________ ___________ __________ Net income (loss) $1.58 $1.48 $0.30 ___________ ___________ __________ ___________ ___________ __________ See accompanying notes.
Century Realty Trust and Subsidiaries Consolidated Statements of Cash Flows Year ended December 31 2005 2004 2003 __________ __________ __________ Operating Activities Net income (loss) $2,839,046 $2,647,067 ($540,658) Adjustments to reconcile net income (loss)to net cash provided by operating activities: Less gain on sale of apartment property (2,045,423) (2,689,599) - Depreciation and amortization 1,477,662 1,711,885 1,796,467 Write off unamortized costs of mortgage loans extinguished - 56,572 - Minority interest 17,314 (31,211) (89,935) Changes in operating assets and liabilities: Restricted cash 736,720 (358,265) (150,018) Accounts and accrued income receivable (77,083) (69,237) (74,501) Other assets (11,258) (76,106) (23,167) Accounts payable and accrued liabilities (226,406) 102,598 404,556 Tenants' security deposits and unearned rent (77,371) 33,108 48,991 __________ __________ __________ Net cash provided by operations 2,633,201 1,326,812 1,371,735
Investing Activities: Net proceeds from sales of property 7,700,909 2,989,586 - Sale proceeds escrowed for possible completion of 1031 exchange (3,234,065) - - Purchase of property and improvements (695,415) (389,546) (389,675) Lease principal payments received - 51,731 49,548
Net cash provided by (used in) __________ __________ __________ investing activities 3,771,429 2,651,771 (340,127)
Financing Activities: Mortgage loan repaid with sale proceeds (3,966,400) - - Net proceeds from mortgage notes payable - 4,484,115 - Mortgage loan balances refinanced - (4,410,439) - Principal payments on mortgage notes payable (1,254,359) (710,312) (664,591) Sale of treasury shares 32,400 21,600 109,675 Distributions to minority interest (20,745) - (6,101) Dividends paid to shareholders (1,441,973) (1,876,772) (671,183) __________ __________ __________ Net cash used in financing activities (6,651,079) (2,491,808) (1,232,200) __________ __________ __________ Net increase (decrease) in cash and cash equivalents (246,447) 1,486,775 (200,592) Cash and cash equivalents at beginning of year 3,037,234 1,550,459 1,751,051 __________ __________ __________ Cash and cash equivalents at end of year $2,790,787 $3,037,234 $1,550,459 __________ __________ __________ __________ __________ __________ Supplemental Data: Selected noncash activities related to investing and financing activities were as follows: Issued 10,440, 5,612 and 9,389 shares of beneficial interest in 2005, 2004 and 2003, respectively, in exchange for operating partnership units (See Note 3) $47,462 $49,920 $76,850
See accompanying notes.
Century Realty Trust and Subsidiaries Notes to Consolidated Financial Statements December 31, 2005
1. Significant Accounting Policies
Organization and Management Agreements:
Century Realty Trust (the Trust) commenced operations under a Plan of Reorganization as of January 1, 1973, as the successor in interest to American National Trust and Republic National Trust. CRT Investments, Inc. was formed as a wholly owned subsidiary in 2001. Century Realty Properties, L.P., an Indiana limited partnership, was formed in 2001, with Century Realty Trust as its manager and sole general partner and CRT Investments, Inc. as its sole limited partner. During 2001, the Trust conveyed substantially all of its investment properties to Century Realty Properties, L.P. Charter Oaks Associates, LLC and CR Management, Inc. were formed as wholly owned subsidiaries in 1997. CR Management, Inc. is the manager and sole general partner of five partnerships (Porter Portfolio), each of which owns one apartment property as its principal asset. As the sole general partner and pursuant to each partnership agreement, the Trust, through its wholly owned subsidiary, has full, exclusive and complete responsibility and discretion in the management and control of each of these five partnerships. Control is demonstrated by the ability of the general partner to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent of the limited partners and the inability of the limited partners to replace the general partner. Interests held by limited partners other than the Trust in the five real estate partnerships are reflected as minority interests in operating partnerships. Charter Oaks Associates, LLC holds title to the Charter Oaks apartments in Evansville, Indiana, which the Trust purchased in 1997.
The Trust owns and operates 13 residential rental properties and three commercial properties throughout Indiana. The Trust also owns one restaurant property in Florida. The Trust aggregates its properties into a single investment property segment because the residential rental properties have similar economic characteristics, facilities and services, and the restaurant and commercial properties are not material to the consolidated financial statements to warrant separate disclosure. All segment disclosures are included in or can be derived from the Trust's consolidated financial statements.
The residential rental properties owned and controlled by the Trust are managed under agreements with Buckingham Management, LLC, an independent property management firm. The agreements provide for management fees based generally on gross rental collections (See Note 10).
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Trust, and its wholly owned and controlled subsidiaries, including the five operating partnerships controlled by CR Management, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition:
The revenue of the Trust primarily consists of rental income associated with short-term leases from apartments with terms generally of one year or less. Rental income is recognized when earned.
Cash and Cash Equivalents:
Cash and cash equivalents include cash and short-term investments with original maturities of less than 30 days.
Restricted Cash:
Restricted cash includes security deposit savings accounts, property completion and replacement reserves, and real estate tax and insurance escrow accounts held by lenders.
Unamortized Management Contracts:
Unamortized management contracts represent the allocation of the purchase price related to the Porter Portfolio acquisition identifiable with obtaining management of those properties (See Note 3). Amortization is computed by the straight-line method for a 10 year period which is the number of years the limited partners in the five controlled partnerships have to exchange their operating partnership units (O.P. units) into shares of beneficial interest of the Trust. The cumulative amortization was $525,699 and $460,664 at December 31, 2005 and 2004, respectively.
Unamortized Mortgage Costs:
Unamortized mortgage costs represent costs incurred to acquire long-term financing. Amortization is computed by the straight-line method based on the terms of the loans which approximates the effective interest method. The cumulative amortization was $191,895 and $197,987 at December 31, 2005 and 2004, respectively.
Real Estate Investments:
Real estate investments are stated on the basis of cost. Depreciation is computed by the straight-line method based on estimated economic lives ranging from 29 to 40 years for buildings and 3 to 15 years for equipment.
When an event or change in circumstance indicates that future undiscounted cash flows and net realizable value is insufficient to recover the carrying value of a long-lived asset, the asset value is reduced to fair market value, and an impairment loss is recognized.
Real estate investments classified as held for sale are generally under contract to be sold with a high probability of being consummated within one year. Real estate held for sale is carried at the lower of cost, net of accumulated depreciation, or fair market value less cost to dispose. Income net of expenses related to real estate held for sale is classified on the Statement of Operations as income or loss from discontinued operations.
Treasury Shares:
Treasury shares are carried at cost and shares reissued are removed based on average cost. The difference between proceeds received on reissuance and the average cost is credited or charged to shares of beneficial interest.
Income Taxes:
The Trust intends to continue to qualify as a real estate investment trust as defined in the Internal Revenue Code and will distribute the majority of its taxable income. Realized gains on the sale of investments are distributed to shareholders if and when recognized for income tax purposes. Assuming compliance with other requirements of the Code, income so distributed will not be taxable to the Trust. Accordingly, no provision for federal income taxes is made in the consolidated financial statements.
For income tax purposes, distributions paid to shareholders consist of ordinary income, capital gains, return of capital or a combination thereof. Earnings and profits, which determine the taxability of dividends to shareholders, differ from reported net income due to differences for tax purposes in the estimated useful lives used to compute depreciation and the carrying values of the depreciable properties.
No provision has been made for income taxes or related credits of the operating partnerships, as the results of operations are includable in the tax returns of the partners.
Net Income (loss) per Share:
Net income (loss) per share is computed in accordance with Statement of Financial Accounting Standards No.128.
Stock Based Compensation:
As permitted by SFAS No. 123, Accounting for Stock Based Compensation the Trust accounts for its trustee stock options using the intrinsic value method. Accordingly, no compensation expense is recognized for stock options to the extent the option exercise price equals fair value on the date of the grant. If compensation expense for the Company's stock options had been determined based on the fair value method of accounting, net income (loss) and earnings (loss) per share would not have been materially impacted.
Use of Estimates:
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123(R), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, superseded APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statements of Cash Flows. Statement No. 123R requires that all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based upon their fair value. The current pro forma disclosure of the impact on earnings is no longer allowed. The Statement will be effective for the Trust beginning in the first quarter of 2006. Given the nature of the Trust's share based payments, the Trust does not believe SFAS 123(R) will have a material impact on its results of operations.
During 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations," an interpretation of FASB Statement No. 143, Asset Retirement Obligations ("FIN 47"). FIN 47 became effective for the year ended December 31, 2005 and provides clarification of the term "conditional asset retirement obligation" as used in SFAS 143, defined as a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional on a future event that may or may not be within the control of the company. Under this standard, a company must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. The adoption of FIN 47 did not have a material effect on the Trust's consolidated financial statements. Certain of the Trust's properties may contain asbestos. If these properties were demolished, environmental regulations specify the manner in which asbestos must be handled and disposed. Because the Trust's obligation for handling the disposal of any asbestos has an indeterminable settlement date, it is not able to reasonably estimate this asset retirement obligation.
2. Real Estate Investments
Real estate investments consist principally of apartments and commercial properties in Indiana. In connection with these properties, the Trust is principally a lessor using short-term operating leases. The Florida restaurant property is currently operating under a net lease which will expire July 31, 2006.
3. Interest In Operating Partnerships
In 1997 the Trust, through its wholly owned subsidiary, CR Management, Inc., acquired from a single unrelated seller, the general partner interest in five limited partnerships (the Porter Portfolio) each of which owned a single apartment property as its principal asset.
The acquisition resulted in creating five new partnerships that issued, in the aggregate, 286,908 O.P. units to the selling partnerships for their contribution of net assets to the newly formed partnerships. At the date of acquisition, the market value of the Trust's shares of beneficial interest was $11.625 per share.
The acquisition agreement provided that the Trust would use it best efforts to grant to each beneficial owner of O.P. units, commencing two years after closing, the right to exchange those units on a one for one basis for shares of beneficial interest of the Trust.
Such exchange rights were granted in December, 1999, effective January 1, 2000 and on the first day of each quarter thereafter, and will exist until November 27, 2007, at which time the Trust may, at its option, require the exchange of any remaining outstanding O.P. units. Through December 31, 2005, holders of 252,821 O.P. units have elected to exchange their units for shares of beneficial interest. The Trust repurchased 13,793 of those shares, for a total cost of $162,986, from residents of certain states with which the Trust elected not to register its shares. As a result of the exchanges, the Trust owned 88.1% of the limited partnership interests in the Porter Portfolio partnerships at December 31, 2005.
Due to the level of control that the Trust has over the activities and operations of each of these partnerships included in the Porter Portfolio, the financial position and results of operations of those partnerships are included in the consolidated financial statements of the Trust from the date of their acquisition. The equity interest that the Trust does not own is described in the consolidated financial statements as the minority interest in operating partnerships.
4. Discontinued Operations
In April 2004, the Trust sold Park Plaza, a 176-unit apartment community in Indianapolis, and in December 2004, entered into contracts with separate unrelated parties to sell Fox Run, a 256-unit apartment community in Indianapolis, and a restaurant property in Indianapolis. The restaurant property was sold in July 2005, for $850,000 before the payment of any transaction costs, resulting in a gain of approximately $601,000. The Fox Run apartments were sold in December 2005, for $7,273,750 before the payment of any transaction costs, resulting in a gain of approximately $1,444,000. After closing costs and repayment of the mortgage loan on Fox Run, $3,234,065 was placed in escrow with a qualified intermediary to be held for investment in replacement property in accordance with the tax free exchange provisions of the Internal Revenue Code.
In accordance with provisions of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, the above properties were classified in the Trust's balance sheets as Real Estate Held for Sale. The results of operations are separately classified for all periods presented as discontinued operations.
The following is a summary of the income (loss) from operations of Park Plaza, Fox Run and the restaurant property:
Year Ended December 31 2005 2004 2003 ____ ____ ____ Rental income $1,224,537 $1,560,248 $2,016,519 Other income 33,248 58,173 73,906 Income from financing leases - 8,856 16,548 __________________________________ 1,257,785 1,627,277 2,106,973 Less: Rental operating expenses 787,251 1,034,640 1,404,105 Provision for depreciation - 246,969 292,901 Real estate taxes (77,826) 346,843 281,460 Interest expense 257,918 189,494 199,015 __________________________________ 967,353 1,817,946 2,177,481 __________________________________ Income (loss) from discontinued operations, before gain on sale 290,432 (190,669) (70,508)
Gain on sale of rental property 2,045,423 2,689,599 - __________________________________ Income (loss) from discontinued operations $2,335,855 $2,498,930 $ (70,508) __________________________________ __________________________________
5. Mortgage Notes Payable
Mortgage notes are payable in monthly installments, including interest at rates ranging from 4.95% to 9% per annum, and mature from April 1, 2006 to August 1, 2037. At December 31, 2005 and 2004, mortgage notes payable by the Trust amounted to $27,805,711 and $33,026,470, respectively. The aggregate amount of long-term debt maturities for each of the five years after December 31, 2005 is: 2006, $6,035,358; 2007, $527,509; 2008, $6,306,314; 2009, $738,474; 2010, $385,423 and thereafter $13,812,633. The Trust plans to meet its obligations as they become due in 2006 through using current cash on hand (including cash held in escrow at December 31, 2005, as described further in Note 9) or through re-financing the outstanding indebtedness on the respective properties pending the outcome of the proposed sale of substantially all of the assets of the Trust.
At December 31, 2004, the Fox Run apartment complex had an outstanding mortgage note payable of $4,573,800. During 2005, the Trust extended the mortgage note payable due date on the Fox Run apartment complex and simultaneously paid down the mortgage note by $500,000. In connection with the sale of the Fox Run apartments, the Trust repaid in its entirety, the $3,966,400 outstanding balance on the Fox Run mortgage. There was no outstanding mortgage debt related to the Indiana restaurant property that was sold in July 2005.
A mortgage loan on the Chester Heights apartments that provided for monthly payments of $9,986, including 8.125% interest, matured in October 2004 with an unpaid balance of $731,787. That balance was repaid with the proceeds of a new $731,787 mortgage loan from the same lender, repayable in monthly installments, including interest, until it matures in October 2009 with the balance due at maturity. The interest rate and monthly payment amount is adjusted annually. In November 2005, the monthly payment was adjusted to $10,124, including interest at the new rate of 6.83%. Without further adjustments the balance due at maturity would be $303,291.
Two of the mortgage loans from the Porter Portfolio totaling $3,684,450 were repaid during 2004 using the proceeds of two new fixed rate long-term mortgage loans approximately totaling $3,978,400. The new loans allowed the Porter Portfolio to reduce their aggregate average interest rate from approximately 7.6% to 6.4%. In connection with the refinancing, the two respective partnerships wrote-off unamortized costs of $56,572 and incurred loan prepayment premiums of $60,471.
Cash paid for interest was $2,192,026, $2,357,631, and $2,411,133 for the years ended December 31, 2005, 2004, and 2003, respectively.
At December 31, 2005, approximately $31,190,600 of the real estate investments, after allowances for depreciation, represent collateral for the mortgage notes payable.
6. Stock Options
In May 2005, the Board of Trustees granted each of two newly elected Trustees options to purchase 5,000 shares of beneficial interest exercisable on or before May 3, 2008, at $18.95 per share, the fair market value at the date of grant. None of the options were exercised in 2005.
In May 2004, the Board of Trustees granted a newly elected Trustee, an option to purchase 5,000 shares of beneficial interest exercisable on or before May 5, 2007, at $10.80 per share, the fair market value at the date of grant. Options for 2,000 shares were exercised in December 2004 and the remaining options for 3,000 shares were exercised in January 2005.
7. Fair Values of Financial Instruments
The following methods and assumptions were used by the Trust in estimating its fair value disclosures for financial instruments:
Cash, Cash Equivalents and Restricted Cash: The carrying amount reported in the balance sheets for cash and cash equivalents approximates fair value.
Mortgage Notes Payable: The fair values of the Trust's mortgage notes payable are estimated using discounted cash flow analyses, based on the Trust's current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Trust's financial instruments are as follows:
December 31, 2005 _________________________ Carrying Fair Amount Value _________________________ Cash and cash equivalents $ 2,790,787 $ 2,790,000 Restricted cash 1,580,045 1,580,000 Escrow for possible completion of 1031 exchange 3,234,065 3,234,000
Mortgage notes payable 27,805,711 27,775,000
December 31, 2004 _________________________ Carrying Fair Amount Value _________________________ Cash and cash equivalents $ 3,037,234 $ 3,037,000 Restricted cash 1,885,865 1,885,000 Mortgage notes payable 33,026,470 33,437,000
8. Earnings (Loss) Per Share
A reconciliation of the numerator and denominator of the earnings (loss) per share computation is as follows: 2005 2004 2003 ____________________________________ Numerator net income (loss): Numerator for basic and diluted earnings (loss) per share $2,839,046 $2,647,067 $ (540,658) ____________________________________ ____________________________________
Denominator: Denominator for basic earnings (loss) per share-weighted average shares 1,800,456 1,786,602 1,774,987 Effect of dilutive securities: Stock options 120 747 - ____________________________________ Denominator for diluted earnings (loss) per share-adjusted weighted average shares and assumed conversions 1,800,576 1,787,349 1,774,987 ____________________________________ ____________________________________
Basic earnings (loss) per share $ 1.58 $ 1.48 $ (0.30) ____________________________________ ____________________________________
Diluted earnings (loss) per share $ 1.58 $ 1.48 $ (0.30) ____________________________________ ____________________________________
9. Federal Income Taxes
The Trust initially intended to use the proceeds from the sale of the Park Plaza apartments in April, 2004 and the former restaurant property in July 2005 to acquire replacement investment property in qualified tax free exchanges. The Trust was unable to acquire suitable replacements, and subsequently declared and paid special cash distributions of $1.05 per share in 2004 and $.80 per share in 2005, amounts management believed would approximate the otherwise taxable income of the Trust for 2004 and 2005. The Trust initially intended to use the net proceeds from the sale of the Fox Run apartments in December 2005, to acquire replacement property in a qualified tax-free exchange. Because of the subsequent event described in Note 10, the Trust will, instead, use those proceeds to retire a mortgage loan that will mature with a balance due of $3,314,000 on April 1, 2006.
10.Subsequent Event - Proposed Sale of All Apartments and Commercial Real Estate - Unaudited
On March 17, 2006 the Trust and its subsidaries entered into a definitive asset purchase agreement to sell substantially all of its assets to Buckingham Properties, Inc. The purchase price will be $60 million, consisting of approximately $48.45 million of cash and assumed debt of approximately $11.55 million. The Trust will use a portion of the cash proceeds to retire the remaining mortgage debt, estimated to be approximately $12.1 million if the close of the transaction occurs in late June 2006. An affiliate of Buckingham Properties, Inc. has, since 2003, managed all of the Trust's apartment properties (See Note 1).
The Board of Trustees will consider the appropriate use for the proceeds from the sale, including the possible termination and liquidation of the Trust and distribution of the proceeds to its shareholders. Termination of the Trust requires shareholder approval.
The sale is conditioned upon satisfactory completion of due diligence, negotiation of mutually acceptable definitive documentation, certain regulatory approvals and shareholder approval. Management expects that the sale could be completed in the second or third calendar quarter of 2006. Accordingly, there can be no assurance the proposed sale will be completed, or completed on the same terms and conditions as set forth in the asset purchase agreement.
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Trustees Century Realty Trust
We have audited the accompanying consolidated balance sheets of Century Realty Trust and Subsidiaries (the Trust) as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Trust's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Century Realty Trust and Subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young, LLP _________________________________________________________________________
February 24, 2006 Indianapolis, IN ________________
EXHIBIT 10.3
TRUSTEE'S OPTION TO PURCHASE SHARES
CENTURY REALTY TRUST, an Indiana business trust, hereby grants to Michael W. Malafronte of 200 E. 66th St., Apt. C1602, New York, New York 10021 (hereinafter "the grantee"), the option to purchase shares of beneficial interest (hereinafter "the shares") in Century Realty Trust (hereinafter "the grantor") on the following terms and conditions:
1. Shares Subject To Option. This option shall apply to 5,000 shares of treasury stock, to the extent there are a sufficient number of treasury shares to fund this option.
2. Authorization and Consideration. This option is granted pursuant to a resolution of the Board of Trustees of grantor which was adopted on May 4, 2005. No monetary consideration has been paid by grantee for this option. Grantee is as of the date hereof a duly elected, qualifying and acting trustee of grantor.
3. Purchase Price For Shares. The purchase price for any shares purchased pursuant to this option shall be $18.95 per share, that being by stipulation and agreement of the parties hereto the fair market value of the shares as of the option date.
4. Duration Of Option. This option shall be effective on and after May 4, 2005, which date is herein called the "grant date". This option shall expire three years from the grant date, on May 3, 2008, said date of expiration being herein called the "expiry date". The duration of this option shall not be affected by the death of grantee, nor by the termination of grantee's status as a trustee of grantor.
5. Manner of Exercise. Grantee may exercise this option, with or without notice to grantor, at 320 N. Meridian Street, Suite 823, Indianapolis, Indiana, 46204, (or at such other address as grantor may from time to time designate) at any time selected by grantee on or after the grant date and prior to the expiry date. Said notice shall indicate the number of shares grantee wishes to purchase, and be accompanied by payment to grantor for the shares being purchased.
6. Method Of Payment. Payment for any shares purchased by grantee pursuant to this option shall be made in cash, check or money order, or such other form of payment as would constitute "good funds" in normal commercial transactions. The date on which the purchase price is received by grantor shall constitute the purchase date. Upon payment for any shares purchased pursuant to this option, grantor shall cause share certificate(s) for the shares purchased to be issued to grantee, or his nominee, in negotiable form, subject only to proper notation for the restrictions set out in paragraph 7 below.
7. Restrictions On Dividend And Voting Rights. The holder of any shares issued by the grantor pursuant to this option shall not be deemed to be the record owner of such shares, for the purpose of being entitled to dividends or other cash distributions from the Trust, or for voting rights, until ninety (90) days following the purchase date as defined in paragraph 6 above. The date on which the holder of the shares issued pursuant to this option becomes the record owner for dividends, other cash distributions and voting rights shall be known as the "vesting date". Shares issued pursuant to this option shall be assignable prior to the vesting date, but shall carry a notation indicating the restrictions set out in this paragraph.
8. Partial Exercise. Grantee shall not be obligated to purchase all shares subject to this option at one time, but may, at grantee's option, purchase as few as 100 shares at any one time. Any partial exercise of this option may be made at any intervals grantee may select, but not more frequently than once in each calendar quarter. Any shares not purchased following a partial exercise of this option shall remain subject to the terms of this option until the expiry date.
9. Status of Expiry Date. After the expiry date, as noted above, all shares not purchased shall no longer be subject to this option.
10. Successors and Assigns. This option shall be binding on the grantor and its successors and its assigns.
11. Assignability Of Option. This option shall be fully assignable by grantee, at any time after the grant date, but partial assignments shall not be made. This option shall inure to the benefit of grantee's heirs, successors and assigns.
IN WITNESS WHEREOF, the Grantor has executed this option to purchase shares as of the 4th day of May 2005.
CENTURY REALTY TRUST
By: /S/ John I. Bradshaw, Jr. _________________________ President
/S/ John W. Adams _________________________ Secretary
"GRANTOR"
EXHIBIT 10.4
TRUSTEE'S OPTION TO PURCHASE SHARES
CENTURY REALTY TRUST, an Indiana business trust, hereby grants to Neil C. McKinnon of 665 Third Street, Ste. 450, San Francisco, California 94107 (hereinafter "the grantee"), the option to purchase shares of beneficial interest (hereinafter "the shares") in Century Realty Trust (hereinafter "the grantor") on the following terms and conditions:
1. Shares Subject To Option. This option shall apply to 5,000 shares of treasury stock, to the extent there are a sufficient number of treasury shares to fund this option.
2. Authorization and Consideration. This option is granted pursuant to a resolution of the Board of Trustees of grantor which was adopted on May 4, 2005. No monetary consideration has been paid by grantee for this option. Grantee is as of the date hereof a duly elected, qualifying and acting trustee of grantor.
3. Purchase Price For Shares. The purchase price for any shares purchased pursuant to this option shall be $18.95 per share, that being by stipulation and agreement of the parties hereto the fair market value of the shares as of the option date.
4. Duration Of Option. This option shall be effective on and after May 4, 2005, which date is herein called the "grant date". This option shall expire three years from the grant date, on May 3, 2008, said date of expiration being herein called the "expiry date". The duration of this option shall not be affected by the death of grantee, nor by the termination of grantee's status as a trustee of grantor.
5. Manner of Exercise. Grantee may exercise this option, with or without notice to grantor, at 320 N. Meridian Street, Suite 823, Indianapolis, Indiana, 46204, (or at such other address as grantor may from time to time designate) at any time selected by grantee on or after the grant date and prior to the expiry date. Said notice shall indicate the number of shares grantee wishes to purchase and be accompanied by payment to grantor for the shares being purchased.
6. Method Of Payment. Payment for any shares purchased by grantee pursuant to this option shall be made in cash, check or money order, or such other form of payment as would constitute "good funds" in normal commercial transactions. The date on which the purchase price is received by grantor shall constitute the purchase date. Upon payment for any shares purchased pursuant to this option, grantor shall cause share certificate(s) for the shares purchased to be issued to grantee, or his nominee, in negotiable form, subject only to proper notation for the restrictions set out in paragraph 7 below.
7. Restrictions On Dividend And Voting Rights. The holder of any shares issued by the grantor pursuant to this option shall not be deemed to be the record owner of such shares, for the purpose of being entitled to dividends or other cash distributions from the Trust, or for voting rights, until ninety (90) days following the purchase date as defined in paragraph 6 above. The date on which the holder of the shares issued pursuant to this option becomes the record owner for dividends, other cash distributions and voting rights shall be known as the "vesting date". Shares issued pursuant to this option shall be assignable prior to the vesting date, but shall carry a notation indicating the restrictions set out in this paragraph.
8. Partial Exercise. Grantee shall not be obligated to purchase all shares subject to this option at one time, but may, at grantee's option, purchase as few as 100 shares at any one time. Any partial exercise of this option may be made at any intervals grantee may select, but not more frequently than once in each calendar quarter. Any shares not purchased following a partial exercise of this option shall remain subject to the terms of this option until the expiry date.
9. Status of Expiry Date. After the expiry date, as noted above, all shares not purchased shall no longer be subject to this option.
10. Successors and Assigns. This option shall be binding on the grantor and its successors and its assigns.
11. Assignability Of Option. This option shall be fully assignable by grantee, at any time after the grant date, but partial assignments shall not be made. This option shall inure to the benefit of grantee's heirs, successors and assigns.
IN WITNESS WHEREOF, the Grantor has executed this option to purchase shares as of the 4th day of May 2005.
CENTURY REALTY TRUST
By: /S/ John I. Bradshaw, Jr. _________________________ President
/S/ John W. Adams _________________________ Secretary
"GRANTOR"