Camden Property Trust 10-Q 2006
For the transition period from to
Commission file number: 1-12110
CAMDEN PROPERTY TRUST
3 Greenway Plaza, Suite 1300, Houston, Texas 77046
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
As of August 1, 2006, there were 56,384,619 shares of Common Shares of Beneficial Interest, $0.01 par value, outstanding.
CAMDEN PROPERTY TRUST
See Notes to Consolidated Financial Statements.
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
See Notes to Consolidated Financial Statements.
CAMDEN PROPERTY TRUST
CAMDEN PROPERTY TRUST
See Notes to Consolidated Financial Statements.
CAMDEN PROPERTY TRUST
The accompanying interim unaudited financial information has been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) have been condensed or omitted according to such rules and regulations. Management believes the disclosures included are adequate for ensuring the information presented is not misleading. In the opinion of management, all adjustments and eliminations, necessary to fairly present the financial position of Camden Property Trust as of June 30, 2006, the results of operations for the three and six months ended June 30, 2006 and 2005, and the cash flows for the six months ended June 30, 2006 and 2005 have been included. The results of operations for such interim periods are not necessarily indicative of future results.
Camden Property Trust is a self-administered and self-managed Texas real estate investment trust (REIT) organized on May 25, 1993. We, with our subsidiaries, report as a single business segment with activities related to the ownership, development, construction and management of multifamily apartment communities. Our use of the term communities, multifamily communities, properties, or multifamily properties in the following discussion refers to our multifamily apartment communities. As of June 30, 2006, we owned interests in, operated or were developing 199 multifamily properties containing 68,199 apartment homes located in thirteen states. We had 5,071 apartment homes under development at fifteen of our multifamily properties, including 561 apartment homes at two multifamily properties owned through joint ventures. We had three properties containing 1,260 apartment homes which were designated as held for sale. Additionally, we had several sites that we intend to develop into multifamily apartment communities.
As of June 30, 2006, we had operating properties in 21 markets. No single market contributed more than 12% of our net operating income (as defined in Reportable Segments in Note 3) for the six months then ended. Our largest markets for the six months ended June 30, 2006 were Washington, D.C. Metro, Tampa and Las Vegas which contributed 11.5%, 9.3% and 8.5%, respectively, to our net operating income.
2. Merger with Summit Properties Inc.
On February 28, 2005, Summit Properties Inc. (Summit) was merged with and into Camden Summit Inc., one of our wholly-owned subsidiaries (Camden Summit), pursuant to an Agreement and Plan of Merger dated as of October 4, 2004 (the Merger Agreement), as amended. Prior to the effective time of the merger, Summit was the sole general partner of Summit Properties Partnership, L.P. (the Camden Summit Partnership). At the effective time of the merger, Camden Summit became the sole general partner of the Camden Summit Partnership and the name of such partnership was changed to Camden Summit Partnership, L.P. As of February 28, 2005, Summit owned or held an ownership interest in 48 operating communities comprised of 15,002 apartment homes with an additional 1,834 apartment homes under construction in five new communities.
The aggregate consideration paid for the merger was as follows:
Revisions to the purchase price during the six months ended June 30, 2006 included increases of $1.3 million to land and $0.7 million to properties under development, including land, as a result of purchase price adjustments primarily related to increases of $1.9 million in accounts payable, accrued expenses and other liabilities for litigation.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the time of merger, net of cash acquired:
In connection with the merger, we incurred $69.8 million of termination, severance and settlement of share-based compensation costs. Of this amount, Summit had paid $26.3 million prior to the effective time of the merger. As of June 30, 2006, substantially all costs were paid.
The following financial information for the three and six months ended June 30, 2005 gives effect to the merger as if it had occurred at the beginning of the period presented. The financial information for the three months ended June 30, 2005 represents actual results. The financial information for the six months ended June 30, 2005 includes pro forma results for the first two months of 2005 and actual results for the remaining four months. The pro forma results are based on historical data and are not intended to be indicative of the results of future operations.
3. Significant Accounting Policies
Operating Partnership and Minority Interests. Approximately 18% of our multifamily apartment homes at June 30, 2006 were held in Camden Operating, L.P (Camden Operating). Camden Operating has issued both common and preferred limited partnership units. As of June 30, 2006, we held 85.2% of the common limited partnership units and the sole 1.0% general partnership interest of the operating partnership. The remaining 13.8% of the common limited partnership units, comprising 1.6 million units, are primarily held by former officers, directors and investors of Paragon Group, Inc., which we acquired in 1997. Each common limited partnership unit is redeemable for one common share of Camden or cash at our election. Holders of common limited partnership units are not entitled to rights as shareholders prior to redemption of their common limited partnership units. Holders of common limited partnership units receive a cash dividend equivalent on a quarterly basis. No member of our management owns Camden Operating common limited partnership units, and two of our ten trust managers own Camden Operating common limited partnership units.
Camden Operating had $100 million of 7.0% Series B Cumulative Redeemable Perpetual Preferred Units outstanding as of June 30, 2006. Distributions on the preferred units are payable quarterly in arrears. The Series B preferred units are redeemable beginning in 2008 by Camden Operating for cash at par plus the amount of any accumulated and unpaid distributions. The Series B preferred units are convertible beginning in 2013 by the holder into a fixed number of corresponding Series B Cumulative Redeemable Perpetual Preferred Shares. The Series B preferred units are subordinate to present and future debt. In connection with our joint venture in Camden Main & Jamboree, LP, as discussed in Note 6, Investments in Joint Ventures, we issued 28,999 Series B common units during the six months ended June 30, 2006. Distributions on the Series B preferred units totaled $1.8 million for the three months and $3.5 million for the six months ended June 30, 2006 and 2005, respectively.
In 2002, Summit entered into two separate joint ventures with a major financial services institution (the investor member) to redevelop Summit Roosevelt and Summit Grand Parc, both located in the Washington, D.C. Metro area, in a manner to permit the use of federal rehabilitation income tax credits. The investor member contributed approximately $6.5 million for Summit Roosevelt and approximately $2.6 million for Summit Grand Parc in equity to fund a portion of the total estimated costs for the respective communities and will receive a preferred return on these capital investments and an annual asset management fee with respect to each community. The investor members interests in the joint ventures are subject to put/call rights during the sixth and seventh years after the respective communities are placed in service. The in service dates for Summit Roosevelt and Summit Grand Parc were January 1, 2003 and August 5, 2002, respectively. As a result of the merger, we have assumed these joint ventures and they are consolidated into our financial statements. As of June 30, 2006, the minority interest balance in these joint ventures totaled $9.8 million.
At June 30, 2006, approximately 23% of our multifamily apartment units were held in the Camden Summit Partnership. This operating partnership has issued common limited partnership units. As of June 30, 2006, we held 91.9% of the common limited partnership units and the sole 1.0% general partnership interest of
the Camden Summit Partnership. The remaining 7.1% of the common limited partnership units were primarily held by former officers, directors and investors of Summit. Holders of common limited partnership units receive a cash dividend equivalent on a quarterly basis. No member of our management owns Camden Summit Partnership common limited partnership units, and two of our ten trust managers own Camden Summit Partnership common limited partnership units.
Reportable Segments. The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting financial and descriptive information about an enterprises reportable segments. Although our multifamily communities are geographically diversified throughout the United States, management evaluates operating performance on an individual property level. However, as each of our apartment communities has similar economic characteristics, residents, and products and services, our apartment communities have been aggregated into one reportable segment. We therefore have determined we have one reportable segment with activities related to the ownership, development, construction and management of multifamily communities. Our multifamily communities generate rental revenue and other income through the leasing of apartment homes, which comprised 96.0% and 94.0% of our total consolidated revenues, excluding non-recurring gains on technology investments, for the six months ended June 30, 2006 and 2005, respectively.
In addition to GAAP measures included in our consolidated statements of operations, our chief operating decision makers evaluate the financial performance of each community using a financial measure entitled net operating income. Each communitys performance is assessed based on growth of or decline in net operating income, which is defined as total property revenues less total property expenses as presented in our consolidated statements of operations and excludes certain revenue and expense items such as fee and asset management revenues and expenses, other indirect operating expenses, interest, depreciation and amortization expenses.
Below is a reconciliation of net operating income from our wholly-owned communities included in continuing operations to its most directly comparable GAAP measure, income from continuing operations before gain on sale of properties, equity in income of joint ventures and minority interests:
Real Estate Assets, at Cost. Real estate assets are carried at cost plus capitalized carrying charges. Carrying charges are primarily interest and real estate taxes which are capitalized as part of properties under development. Expenditures directly related to the development, acquisition and improvement of real estate assets, excluding internal costs relating to acquisitions of operating properties, are capitalized at cost as land, buildings and improvements. Indirect development costs, including salaries and benefits and other related costs attributable to the development of properties, are also capitalized. All construction and carrying costs are capitalized and reported on the balance sheet in properties under development until the apartment homes are substantially completed. Upon substantial completion of the apartment homes, the total cost for the apartment homes and the associated land is transferred to buildings and improvements and land, respectively, and the assets are depreciated over their estimated useful lives using the straight-line method of depreciation.
Upon the acquisition of real estate, we assess the fair value of acquired assets, including land, buildings, the value of in-place leases, including above and below market leases, and acquired liabilities. We then allocate the purchase price of the acquired property based on relative fair value. We assess fair value based on estimated cash flow projections and available market information.
Carrying charges, principally interest and real estate taxes, of land under development and buildings under construction are capitalized as part of properties under development and buildings and improvements to the extent such charges do not cause the carrying value of the asset to exceed its net realizable value. Capitalized interest was $5.5 million and $10.7 million for the three and six months ended June 30, 2006, respectively, and $4.5 million and $7.6 million for the three and six months ended June 30, 2005, respectively. Capitalized real estate taxes were $0.9 million and $1.6 million for the three and six months ended June 30, 2006, respectively, and $1.1 million and $1.8 million for the three and six months ended June 30, 2005, respectively. All operating expenses associated with completed apartment homes for properties in the development and leasing phase are expensed. Upon substantial completion of the project, all apartment homes are considered operating and we begin expensing all items which were previously considered carrying costs.
We capitalized $24.2 million and $17.4 million during the six months ended June 30, 2006 and 2005, respectively, of renovation and improvement costs which we believe extended the economic lives and enhanced the earnings of our multifamily properties. Depreciation and amortization is computed over the expected useful lives of depreciable property on a straight-line basis as follows:
Property operating and maintenance expense and income from discontinued operations included repair and maintenance expenses totaling $10.3 million and $19.6 million for the three and six months ended June 30, 2006, respectively, and $8.8 million and $16.7 million for the three and six months ended June 30, 2005, respectively. Costs recorded as repair and maintenance include all costs which do not alter the primary use, extend the expected useful life or improve the safety or efficiency of the related asset. Our largest repair and maintenance expenditures related to landscaping, interior painting and floor coverings.
Impairment of Long-Lived Assets. In accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows and costs to sell, an impairment charge equal to the excess is recognized. During the six months ended June 30, 2006 and 2005, we did not recognize any expense due to impairments of long-lived assets.
Discontinued Operations. In accordance with SFAS No. 144, the results of operations for properties sold during the period or classified as held for sale at the end of the current period are required to be classified as
discontinued operations in the current and prior periods. The property-specific components of earnings classified as discontinued operations include net operating income and depreciation expense. The gain or loss on the eventual disposal of the held for sale properties is also classified as discontinued operations. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value less costs to sell, and are presented separately in the accompanying consolidated balance sheets. Subsequent to classification of a property as held for sale, no further depreciation is recorded. Should the classification of a property change from held for sale to held and used, the property will be measured at the lower of its (a) carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been classified as held and used or (b) fair value at the date of the subsequent decision not to sell. Properties sold by our unconsolidated entities are not included in discontinued operations and related gains or losses are reported as a component of equity in income of joint ventures.
Recent Accounting Pronouncements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)) requiring the compensation cost relating to share-based payments be recognized over their vesting periods in the income statement based on their estimated fair values. In April 2005, the SEC issued Staff Accounting Bulletin No. 107, Shared-Based Payment providing for a phased-in implementation process for SFAS No. 123(R). SFAS No. 123(R) is effective for all public entities in the first annual reporting period beginning after June 15, 2005. We adopted SFAS No. 123(R) on January 1, 2006 using the modified prospective method. The impact of adopting this pronouncement is discussed in Note 11 Share-based Compensation.
In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154). This pronouncement applies to all voluntary changes in accounting principle and revises the requirements for accounting for and reporting a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle, unless it is impracticable to do so. This pronouncement also requires changes to the method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements, including those which are in a transition phase (such as SFAS No. 123(R)) as of the effective date of SFAS No. 154. The adoption of SFAS No. 154 did not have a material impact on our financial position, results of operations or cash flows.
In June 2005, the FASB issued Emerging Issues Task Force (EITF) Issue No. 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. EITF Issue No. 04-05 provides a framework for determining whether a general partner controls, and should consolidate, a limited partnership or a similar entity. EITF Issue No. 04-05 was effective after June 29, 2005, for all newly formed limited partnerships and for any pre-existing limited partnerships that modify their partnership agreements after that date. General partners of all other limited partnerships are required to apply the consensus no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The adoption of EITF Issue No. 04-05 did not have a material impact on our financial position, results of operations or cash flows.
In June 2005, the FASB issued FASB Staff Position (FSP) 78-9-1, Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-05. The EITF acknowledged the consensus in EITF Issue No. 04-05 conflicts with certain aspects of Statement of Position (SOP) 78-9, Accounting for Investments in Real Estate Ventures. The EITF agreed the assessment of whether a general partner, or the general partners as a group, controls a limited partnership should be consistent for all limited partnerships, irrespective of the industry within which the limited partnership operates. Accordingly, the guidance in SOP 78-9 was amended in FSP 78-9-1 to be consistent with the guidance in EITF Issue No. 04-05. The effective dates for this FSP are the same as those mentioned above in EITF Issue No. 04-05. The adoption of FSP 78-9-1 did not have a material impact on our financial position, results of operations or cash flows.
In April 2006, the FASB issued FSP FASB Interpretation (FIN) 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R). FIN 46(R)-6 addresses how a reporting enterprise should determine variability associated with a variable interest entity or variable interests in an entity when applying the provisions of FIN 46(R). FIN 46(R)-6 is effective for reporting periods beginning after June 15, 2006. We will evaluate the impact of FIN 46(R)-6 at the time any reconsideration event occurs under the provisions of FIN 46(R), and for any new entities with which we become involved in future periods.
In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires we recognize in our financial statements the impact of a tax position, if the position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are in the process of assessing the impact of FIN 48 and have not determined what impact, if any, our adoption of FIN 48 will have on our financial position, results of operations or cash flows.
Reclassifications. Certain reclassifications have been made to amounts in prior period financial statements to conform with current period presentations. We reclassified two properties previously included in discontinued operations to continuing operations during the three months ended June 30, 2006 as management made the decision not to sell these assets. As a result, we adjusted the current and prior period consolidated financial statements to reflect this reclassification. Additionally, we recorded a depreciation charge of $2.6 million during the three months ended June 30, 2006 on these assets in accordance with the provisions of SFAS No. 144.
In our Consolidated Statements of Operations for the three and six months ended June 30, 2006, we present separately income on deferred compensation plans and expense on deferred compensation plans. In the accompanying Consolidated Statements of Operations, we reclassified the income and expense on deferred compensation plans to be consistent with our 2006 presentation which resulted in a $2.1 million increase to non-property income and to other expenses for the three and six months ended June 30, 2005.
4. Per Share Data
Basic earnings per share is computed using income from continuing operations and the weighted average number of common shares outstanding. Diluted earnings per share reflects common shares issuable from the assumed conversion of common share options and awards granted and units convertible into common shares. Only those items that have a dilutive impact on our basic earnings per share are included in diluted earnings per share. For the three and six months ended June 30, 2006, 3.4 million and 3.5 million operating units convertible into common shares, respectively, were excluded from the diluted earnings per share calculated as they were not dilutive. For the three months ended June 30, 2005, 0.4 million common shares issuable from the assumed conversion of common share options and awards granted and 2.4 million units convertible into common shares were excluded from the diluted earnings per share calculation as they were not dilutive.
The following table presents information necessary to calculate basic and diluted earnings per share for the three and six months ended June 30, 2006 and 2005:
5. Property Acquisitions and Dispositions
Acquisitions. On January 31, 2006, we acquired the remaining 80% interest in Camden-Delta Westwind, LLC, a joint venture in which we had a 20% interest, in accordance with the Agreement and Assignment of Limited Liability Company Interest. The 80% interest was previously owned by Westwind Equity, LLC (Westwind), an unrelated third-party. In consideration for such assignment and assumption, we paid Westwind $31.0 million, of which a $2.0 million non-refundable earnest money deposit was paid in October 2005. Concurrent with this transaction, the mezzanine loan we had provided to the joint venture, which totaled $12.1 million, was canceled. Additionally, we repaid the outstanding balance of the construction loan, totaling $46.8 million, which had been provided to the joint venture by a third-party lender. We used proceeds from our unsecured line of credit facility to fund this purchase. The intangible assets acquired at acquisition include in-place leases of $0.5 million. The purchase price was allocated to the tangible and intangible assets acquired based on their estimated fair value at the date of acquisition.
Subsequent to June 30, 2006, we acquired Camden Stoneleigh, a 390 apartment home community located in Austin, Texas for $35.3 million using proceeds from our unsecured line of credit.
Dispositions and Assets Held for Sale. Under SFAS No. 144, the operating results of assets designated as held for sale are included in discontinued operations for all periods presented. Additionally, all gains and losses on the sale of these assets are included in discontinued operations. For the three and six months ended June 30, 2006 and 2005, income from discontinued operations included the results of operations of three operating properties, containing 1,260 apartment homes, classified as held for sale at June 30, 2006 and the results of
operations of five operating properties sold in 2006 through their sale dates. For the three and six months ended June 30, 2005, income from discontinued operations also included the results of operations of all communities classified as held for sale at June 30, 2005, including two operating properties sold during the first six months of 2005. As of June 30, 2006, the three operating properties classified as held for sale had a net book value of $22.7 million.
The following is a summary of income from discontinued operations for the periods presented below:
During the six months ended June 30, 2006, we recognized gains on sale of discontinued operations of $51.0 million from the sale of five operating properties, containing 1,781 apartment homes. These sales generated net proceeds of approximately $87.8 million of which, $48.1 million was deposited as of June 30, 2006, with a qualified intermediary for use in a deferred like-kind exchange. For the six months ended June 30, 2005, we recognized gains on sale of discontinued operations of $36.1 million on the sale of two operating properties, containing 886 apartment homes. These sales generated net proceeds of approximately $95.8 million.
At June 30, 2006, we had several undeveloped land parcels classified as held for sale as follows:
($ in millions)
During the six months ended June 30, 2006, we recognized a gain on the sale of land located adjacent to one of our pre-development assets in College Park, Maryland of $0.8 million. Additionally, we recognized a gain on the sale of land sold to a joint venture in Houston, Texas of $0.5 million as discussed in Note 6. The gains recognized on the sales of these assets were not included in discontinued operations due to our continuing involvement with these assets. These sales generated net proceeds of approximately $11.4 million.
Subsequent to June 30, 2006, we sold Camden Oaks, a 446 apartment home community located in Dallas, Texas, for $19.2 million. Proceeds from the sale of this property were deposited with a qualified intermediary for use in a deferred like-kind exchange. Subsequent to this transaction, the exchange account was liquidated as the deferred like-kind exchange was completed.
6. Investments in Joint Ventures
The joint ventures described below do not qualify as variable interest entities under the provisions of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated Financial Statements (FIN 46(R)) or the consolidation requirements of the EITF Issue No. 04-05. Accordingly, we utilize the guidance provided by SOP 78-9 and Accounting Principles Board Opinion 18, when determining the basis of accounting for these ventures. Because we do not control the voting interest of these joint ventures, we account for these entities using the equity method. The joint ventures in which we have
an interest have been funded with secured, third-party debt. We are not committed to any additional funding on third-party debt in relation to our joint ventures.
In June 1998, we completed a transaction in which one of our wholly-owned subsidiaries and TMT-Nevada, LLC, a wholly-owned subsidiary of a private pension fund, formed Sierra-Nevada Multifamily Investments, LLC (Sierra-Nevada). TMT-Nevada holds an 80% interest in Sierra-Nevada and Camden USA, Inc. holds the remaining 20% interest. We are providing property management services to the joint ventures, and fees earned for these services totaled $0.2 million and $0.5 million for the three and six months ended June 30, 2006, respectively, and $0.3 million and $0.6 million for the three and six months ended June 30, 2005, respectively. At June 30, 2006, Sierra-Nevada owned 14 apartment communities with 3,098 apartment homes and had total assets of $137.0 million and secured debt totaling $179.9 million.
In April 1998, we acquired, through one of our wholly-owned subsidiaries, a 50% interest in Denver West Apartments, LLC (Denver West), which owns Camden Denver West, a 320 apartment home community located in Denver, Colorado. The remaining 50% interest is owned by a private investor. We are providing property management services to the joint ventures, and fees earned for these services totaled $19,000 and $39,000 for the three and six months ended June 30, 2006, respectively and $19,000 and $37,000 million for the three and six months ended June 30, 2005, respectively. At June 30, 2006, Denver West had total assets of $22.1 million and secured debt totaling $17.2 million.
As a result of the Summit merger, we assumed a 25% interest in the Station Hill, LLC (Station Hill) joint venture, in which we and Hollow Creek, LLC, a subsidiary of a major financial services company, are members. In January 2006, Station Hill sold two properties, Summit Creek, a 260 apartment home community located in Charlotte, North Carolina, and Summit Hill, a 411 apartment home community located in Raleigh, North Carolina, for an aggregate of $47.5 million. Our share of these dispositions totaled $11.9 million. We are providing property management services to the joint ventures, and fees earned for these services totaled $10,000 and $29,000 for the three and six months ended June 30, 2006, respectively and $53,000 and $71,000 million for the three and six months ended June 30, 2005, respectively. At June 30, 2006, the joint venture owned one 232 apartment home community located in Charlotte, North Carolina with total assets of $11.8 million and had third-party secured debt totaling $9.1 million. Subsequent to June 30, 2006, we sold the remaining property in the joint venture, Summit Hollow, for $15.5 million. Our share of this disposition totaled $3.9 million. We have commenced the termination of the joint ventures operations.
In March 2005, we sold 12 apartment communities containing 4,034 apartment homes (located in the Las Vegas, Phoenix, Houston, Dallas, and Orange County, California markets) to 12 individual affiliated joint ventures in return for a 20% minority interest in the joint ventures, totaling $45.3 million and approximately $369.3 million in cash. Of the total proceeds received, approximately $52.2 million was recognized as an immediate distribution in accordance with the provisions of SOP 78-9. The remaining 80% interest of each joint venture is owned by clients of the Tuckerman Group LLC who contributed $104.7 million to the joint ventures. We are providing property management services to the joint ventures, and fees earned for these services totaled $0.3 million and $0.5 million for the three and six months ended June 30, 2006, respectively and $0.3 million for the three and six months ended June 30, 2005. At June 30, 2006, the joint ventures had total assets of $391.2 million and had third-party secured debt totaling $272.6 million.
In January 2006, we sold undeveloped land located in Houston, Texas in return for a 30% interest in Camden Plaza, LP of $3.2 million and approximately $3.8 million in cash. Of the total proceeds received, approximately $2.0 million was recognized as an immediate distribution in accordance with the provisions of SOP 78-9 and was applied against our initial investment balance. The remaining 70% interest is owned by Onex Real Estate Partners, an unaffiliated third-party, which contributed $3.2 million to the joint venture. The joint venture is developing a 271 apartment home community at a total estimated cost to complete of $42.9 million. Concurrent with this transaction, we provided a $6.4 million mezzanine loan to the joint venture, which had a balance of $6.8 million at June 30, 2006, and is reported as Notes receivable affiliates. At June 30, 2006, the joint venture had total assets of $18.3 million and had third-party secured debt totaling $6.9 million.
In March 2006, we contributed $1.4 million in cash and $1.9 million in common limited partnership units in return for a 30% interest in Camden Main & Jamboree, LP totaling $3.3 million. The remaining 70% interest is owned by Onex Real Estate Partners, an unaffiliated third-party, which contributed $7.7 million to the joint venture. The joint venture purchased Main & Jamboree, a 290 apartment home community located in Irvine, California, which is currently under development and has a total estimated cost to complete of $107.1 million. Concurrent with this transaction, we provided a mezzanine loan totaling $15.8 million to the joint venture, which had a balance of $16.5 million at June 30, 2006, and is reported as Notes receivable affiliates. At June 30, 2006, the joint venture had total assets of $81.9 million and had third-party secured debt totaling $54.5 million.
Subsequent to June 30, 2006, we sold undeveloped land located in College Park, Maryland and contributed $4.3 million in cash in return for a 30% interest in Camden College Park, LP. The remaining 70% interest is owned by affiliates of Onex Real Estate Partners, an unaffiliated third-party, which contributed $10.1 million to the joint venture. The joint venture is developing a 508 apartment home community. Concurrent with this transaction, we provided a mezzanine loan totaling $6.7 million to the joint venture.
7. Third-party Construction Services
At June 30, 2006, we were under contract on third-party construction projects ranging from $2.9 million to $34.7 million per contract. We earn fees on these projects ranging from 2.8% to 7.8% of the total contracted construction cost, which we recognize as earned. Fees earned from third-party construction projects totaled $1.3 million and $1.9 million for the three and six months ended June 30, 2006, respectively, compared with $0.6 million and $1.1 million for the three and six months ended June 30, 2005, respectively, and are included in Fee and asset management income in our consolidated statements of operations.
We recorded costs and cost over-runs on third-party construction projects of $2.2 million and $2.5 million during the three and six months ended June 30, 2006, respectively, and $0.2 million and $1.5 million during the three and six months ended June 30, 2005, respectively. These costs are first applied against revenues earned on each project and any excess is included in Fee and asset management expenses in our consolidated statements of operations.
The Camden Summit Partnership was the developer of one apartment community which was owned by a third-party. Under the development and other related agreements, the Camden Summit Partnership had guaranteed certain aspects relating to the construction, lease-up and management of that apartment community. The Camden Summit Partnership had also committed to fund certain development cost overruns, if any, and lease-up losses. During the three months ended June 30, 2006, the apartment community was sold to a third-party and our obligations were satisfied upon sale.
8. Notes Receivable
We have a mezzanine financing program under which we provide secured financing to owners of real estate properties. We had $9.2 million in secured notes receivable outstanding as of June 30, 2006 to unrelated third parties. These notes, which mature through 2009, accrue interest at rates ranging from 9% to 11% per annum, which is recognized as earned.
The following is a summary of our notes receivable under this program, excluding notes receivable from affiliates:
($ in millions)
We have reviewed the terms and conditions underlying each note and management believes these notes do not qualify for consolidation under the provisions of FIN 46(R). Management believes these notes are collectable, and no impairment existed at June 30, 2006.
During the six months ended June 30, 2006, one loan totaling $4.1 million was repaid. This loan had an interest rate of 11%. Included in this repayment was $41,000 of prepayment penalties, which are included in Fee and asset management income in our consolidated statements of operations.
We provided mezzanine construction financing in connection with one joint venture transaction discussed in Note 5 and two joint venture transactions discussed in Note 6. As of June 30, 2006 and December 31, 2005, the balance of Notes receivable affiliates totaled $23.3 million and $11.9 million, respectively. The note outstanding at December 31, 2005 was cancelled on January 31, 2006 in connection with our acquisition of the remaining 80% interest in the joint venture. At the time the mezzanine loan was cancelled, the balance of the note was $12.1 million. The notes outstanding as of June 30, 2006 accrue interest at 14% per year and mature through 2009.
9. Notes Payable
The following is a summary of our indebtedness:
In January 2005, we entered into a credit agreement which increased our unsecured credit facility to $600 million, with the ability to further increase it up to $750 million. This $600 million unsecured line of credit originally matured in January 2008. In January 2006, we entered into an amendment to our credit agreement to extend the maturity by two years to January 2010 and to amend certain covenants. The scheduled interest rate is based on spreads over the London Interbank Offered Rate (LIBOR) or the Prime Rate. The scheduled interest rate spreads are subject to change as our credit ratings change. Advances under the line of credit may be priced at the scheduled rates, or we may enter into bid rate loans with participating banks at rates below the scheduled rates. These bid rate loans have terms of six months or less and may not exceed the lesser of $300 million or the
remaining amount available under the line of credit. The line of credit is subject to customary financial covenants and limitations, all of which we were in compliance with at June 30, 2006.
Our line of credit provides us with the ability to issue up to $100 million in letters of credit. While our issuance of letters of credit does not increase our borrowings outstanding under our line, it does reduce the amount available. At June 30, 2006, we had outstanding letters of credit totaling $33.8 million, and had $305.2 million available, under our unsecured line of credit.
As part of the Summit merger, we assumed Summits unsecured letter of credit facility, which matures in July 2008 and has a total commitment of $20.0 million. The letters of credit issued under this facility serve as collateral for performance on contracts and as credit guarantees to banks and insurers. As of June 30, 2006, there were $6.2 million of letters of credit outstanding under this facility.
During 2006, we repaid $75.0 million of maturing unsecured notes with an effective interest rate of 6.04%. We repaid these notes payable using proceeds available under our unsecured line of credit.
At June 30, 2006 and 2005, the weighted average interest rate on our floating rate debt, which includes our unsecured line of credit, was 5.3% and 3.8%, respectively.
Our indebtedness, excluding our unsecured line of credit, had a weighted average maturity of 5.8 years. Scheduled repayments on outstanding debt, including our line of credit, and the weighted average interest rate on maturing debt at June 30, 2006 are as follows:
10. Related Party Transactions
We perform property management services for properties owned by joint ventures in which we own an interest. Management fees earned on these properties totaled $0.6 million and $1.1 million for the three and six months ended June 30, 2006, respectively, as compared to $0.7 million and $1.2 million for the three and six months ended June 30, 2005, respectively. See further discussion of our investments in joint ventures in Note 6.
In conjunction with our merger with Summit, we acquired employee notes receivable from nine former employees of Summit totaling $3.9 million. Subsequent to the merger, five employees repaid their loans totaling $1.8 million. At June 30, 2006, the notes receivable had an outstanding balance of $2.0 million. As of June 30, 2006, the employee notes receivable were 100% secured by Camden common shares.
11. Share-based Compensation
Adoption of SFAS 123(R). We adopted SFAS No. 123(R) effective January 1, 2006 using the modified prospective method. Under this method, we account for share-based awards on a prospective basis, with compensation expense, net of estimated forfeitures, being recognized in our statement of operations beginning in the first quarter of 2006 using the grant-date fair values.
SFAS 123(R) requires measurement of compensation cost for all share-based awards at fair value on the grant date and recognition of compensation expense over the requisite service period for awards expected to vest. The fair value of stock option grants was determined using the Black-Scholes valuation model, which is consistent with our prior valuation techniques utilized for options granted after January 1, 2003, as previously reported in disclosures required under SFAS No. 123, Accounting for Stock Based Compensation, (SFAS No. 123) as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS No. 148). Employee awards granted prior to January 1, 2003 were accounted for under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) and related interpretations.
The adoption of SFAS No. 123(R) changes the accounting for our stock options and share awards (SAs) under our 2002 Share Incentive Plan and our 1993 Share Incentive Plan as discussed below.
Share Awards. SAs have a vesting period of five years. The compensation cost for share awards is based on the market value of the shares on the date of grant. The fair value method under SFAS No. 123(R) is similar to the fair value method under SFAS No. 123, as amended by SFAS No. 148, with respect to measurement and recognition of share-based compensation. However, SFAS No. 123 permitted us to recognize forfeitures as they occurred, while SFAS No. 123(R) requires us to estimate future forfeitures. To determine our estimated future forfeitures, we used actual forfeiture history.
Employee Share Purchase Plan. We have established an ESPP for all active employees, officers, and trust managers who have completed one year of continuous service. The adoption of SFAS No. 123(R) had no effect on the accounting surrounding our ESPP as the plan was previously deemed compensatory under the provisions of SFAS No. 123.
Valuation Assumptions. The weighted average fair value of options granted was $7.88 and $4.47 in 2006 and 2005, respectively. We calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The following assumptions were used for each respective period:
Our computation of expected volatility for 2006 is based on the historical volatility of our common shares over a time period equal to the expected term of the option and ending on the grant date. Prior to 2006, our computation of expected volatility was based on historical volatility of our common shares over a time period from the inception of the 1993 Share Incentive Plan and ending on the grant date. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield on our common shares is calculated using the annual dividends paid in prior year. Our computation of expected life for 2006 was determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards.
Share-based Compensation Award Activity. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $2.4 million and $2.8 million, respectively. As of June 30, 2006, there was approximately $0.8 million of total unrecognized compensation cost related to unvested options, which is expected to be amortized over a weighted average of 1.0 years.
The following table summarizes share options outstanding and exercisable at June 30, 2006:
The following table summarizes activity under our 1993 and 2002 Share Incentive Plans for the six months ended June 30, 2006:
(1) Forfeited amounts include estimated forfeitures on share awards granted to employees through June 30, 2006.
(2) Intrinsic value is calculated using the closing price on June 30, 2006 of $73.55 per share.
Pro Forma Information for Periods Prior to the Adoption of SFAS 123(R). The following table illustrates the effect on net income and net income per share had we applied the fair value recognition provisions of SFAS No. 123 to all outstanding and unvested option grants and Employee Share Purchase Plan (ESPP) awards for the three and six months ended June 30, 2005, prior to the adoption of SFAS No. 123(R):
(in thousands, except per share amounts)
Impact of SFAS No. 123(R). Share-based compensation expense recognized under SFAS No. 123(R) during the three and six months ended June 30, 2006 decreased income from continuing operations and net income by $5,000 and $0.4 million, respectively, and decreased capitalized compensation cost by $39,000 and $49,000, respectively. The $0.4 million decrease to income from continuing operations and net income for the six months ended June 30, 2006 was primarily related to expense associated with the accelerated vesting of certain share awards granted to individuals who met retirement conditions as defined in the 2002 Share Incentive Plan. As a result of SFAS 123(R), there was no impact to basic earnings per share for the three months ended June 30, 2006, a $0.01 impact to basic earnings per share for the six months ended June 30, 2006 and no impact to diluted earnings per share for the three and six months ended June 30, 2006.
In our Consolidated Balance Sheets as of June 30, 2006, we presented unvested share awards as a component of Additional paid-in capital. We previously presented unvested share awards as a separate component of shareholders equity. In the accompanying Consolidated Balance Sheets, we reclassified the unvested share awards outstanding as of December 31, 2005 totaling $13.0 million to additional paid-in capital. These amounts represent the unvested portions of the estimated fair value of obligations under our share awards. There was no impact to the Consolidated Statements of Cash Flows as a result of our adoption of SFAS 123(R).
12. Net Change in Operating Accounts
The effect of changes in the operating accounts on cash flows from operating activities is as follows:
13. Commitments and Contingencies
Construction Contracts. As of June 30, 2006, we were obligated for approximately $230.4 million of additional expenditures on our recently completed projects and those currently under development (a substantial amount of which we expect to be funded with our unsecured line of credit).
Fair Housing Amendments Act Contingency. Prior to our merger with Oasis Residential, Inc., Oasis had been contacted by certain regulatory agencies with regard to alleged failures to comply with the Fair Housing Amendments Act (the Fair Housing Act) as it pertained to nine properties (seven of which we currently own) constructed for first occupancy after March 31, 1991. On February 1, 1999, the Justice Department filed a lawsuit against us and several other defendants in the United States District Court for the District of Nevada alleging (1) that the design and construction of these properties violates the Fair Housing Act and (2) that we, through the merger with Oasis, had discriminated in the rental of dwellings to persons because of handicap. The complaint requests an order that (i) declares that the defendants policies and practices violate the Fair Housing Act; (ii) enjoins us from (a) failing or refusing, to the extent possible, to bring the dwelling units and public use and common use areas at these properties and other covered units that Oasis has designed and/or constructed into compliance with the Fair Housing Act, (b) failing or refusing to take such affirmative steps as may be necessary to restore, as nearly as possible, the alleged victims of the defendants alleged unlawful practices to positions they would have been in but for the discriminatory conduct, and (c) designing or constructing any covered multifamily dwellings in the future that do not contain the accessibility and adaptability features set forth in the Fair Housing Act; and requires us to pay damages, including punitive damages, and a civil penalty.
With any acquisition, we plan for and undertake renovations needed to correct deferred maintenance, life/safety and Fair Housing matters. On January 30, 2001, a consent decree was ordered and executed in the above Justice Department action. Under the terms of the decree, we were ordered to make certain retrofits and implement certain educational programs and Fair Housing advertising. These changes are to take place by July 31, 2006. The costs associated with complying with the decree have been accrued for and are not material to our consolidated financial statements.
Merger Class Action Lawsuit. On October 6, 2004, a purported class action complaint was filed in the General Court of Justice, Superior Court Division, of the State of North Carolina, County of Mecklenburg, by an alleged Summit stockholder. This complaint named as defendants Camden, Summit and each member of the board of directors of Summit and principally alleges that the merger of Camden and Summit and the acts of the Summit directors constitute a breach of the Summit defendants fiduciary duties to Summit stockholders. The plaintiff in the lawsuit sought, among other things (1) a declaration that each defendant has committed or aided and abetted a breach of fiduciary duty to the Summit stockholders, (2) to preliminarily and permanently enjoin the merger, (3) to rescind the merger in the event that it is consummated, (4) an order to permit a stockholders committee to ensure an unspecified fair procedure, adequate procedural safe-guards and independent input by
plaintiff in connection with any transaction for Summit shares, (5) unspecified compensatory damages and (6) attorneys fees. On November 3, 2004, Camden removed the lawsuit to the United States District Court for the Western District of North Carolina, Charlotte Division, and filed an Answer and Counterclaim for declaratory judgment denying the plaintiffs allegations of wrongdoing.
On September 23, 2005, the parties to the action executed a stipulation of settlement. Under the terms of the stipulation, the defendants admit to no wrongdoing or fault. The stipulation contemplates a dismissal of all claims with prejudice and a release in favor of all defendants of any and all claims related to the merger that have been or could have been asserted by the plaintiffs or any members of the putative class. In connection with negotiations relating to the stipulation, the parties agreed to include, and have included, in the joint proxy statement/prospectus relating to the merger additional disclosures regarding the merger.
The stipulation of settlement is subject to the customary conditions, including final court approval of the settlement. On March 27, 2006, the court approved the settlement, and in accordance with the settlement, it dismissed the action with prejudice and awarded the class counsel $383,000 in fees and expenses. Pursuant to the terms of the stipulation, Camden, as successor to Summit, paid such fees on May 1, 2006. Under the terms of the settlement, all Camden entities were released and the lawsuit dismissed.
The defendants vigorously deny all liability with respect to the facts and claims alleged in this action, and specifically deny that any further supplemental disclosure was required under any applicable rule, statute, regulation, or law. However, the defendants considered it desirable that this action be settled to avoid the substantial burden, expense, risk, inconvenience and distraction of continued litigation and to fully and finally resolve the settled claims.
Other Contingencies. On May 25, 2001, through a joint venture of the Camden Summit Partnership and SZF, LLC, a Delaware limited liability company in which the Camden Summit Partnership owned 29.78% until July 3, 2003, on which date the Camden Summit Partnership purchased its joint venture partners 70.22% interest, the Camden Summit Partnership entered into an agreement with Brickell View, L.C. (Brickell View), a Florida limited liability company, and certain of its affiliates relating to the formation of Coral Way, LLC, a Delaware limited liability company, to develop a new community in Miami, Florida. Brickell View agreed to be the developer of that community and certain of its affiliates signed guarantees obligating them to pay certain costs relating to the development. On August 12, 2003, the Camden Summit Partnership received notice of two suits filed by Brickell View and certain of its affiliates against SZF, LLC and certain entities affiliated with the Camden Summit Partnership. The suits were originally filed in the Miami-Dade Circuit Court and were subsequently removed to the U.S. District Court for the Southern District of Florida. One of the suits was remanded to the Miami-Dade Circuit Court, while the other was dismissed on October 12, 2005, after the execution of a tolling agreement to allow the pending Miami-Dade Circuit Court matter to proceed. The dismissed case may proceed after the pending matter is resolved, depending upon the nature of the resolution. Both suits related to the business agreement among the parties in connection with the development and construction of the community by Coral Way. Brickell View and its affiliates allege, among other things, breach of an oral joint venture agreement, breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duties and constructive fraud on the part of SZF, LLC and Camden Summit Partnership and its affiliates, and seek both a declaratory judgment that the guarantee agreements have been constructively terminated and unspecified monetary damages. We intend to enforce our rights under the agreements. We do not believe there is any basis for allowing Brickell View or its affiliates to be released from their obligations under the development agreement or the guarantees. We believe the allegations made by Brickell View and its affiliates are not supported by the facts and we intend to vigorously defend against these suits.
On December 19, 2003, the Camden Summit Partnership received notice of a demand for arbitration asserted by Bermello, Ajamil & Partners, Inc. against Coral Way, LLC for unpaid architectural fees. In this demand, Bermello, Ajamil & Partners, Inc. allege they are entitled to an increased architectural fee as a result of an increase in the cost of the project. We believe the allegations made by Bermello, Ajamil & Partners, Inc. are not supported by the facts, and we will vigorously defend against this claim. Additionally, the Camden Summit Partnership has asserted a counter-claim against Bermello, Ajamil & Partners, Inc. for damages related to the cost to correct certain structural and other design defects, and delay damages.
On May 6, 2003, the Camden Summit Partnership purchased certain assets of Brickell Grand, Inc. (Brickell Grand), including the community known as Summit Brickell. At the time of purchase, Summit Brickell was subject to a $4.1 million claim of construction lien filed by the general contractor, Bovis Lend Lease, Inc. (Bovis), due to Brickell Grands alleged failure to pay the full amount of the construction costs. Bovis sought to enforce this claim of lien against Brickell Grand in a suit filed on October 18, 2002 in Miami-Dade Circuit Court, Florida. In September 2003, Bovis filed an amended complaint seeking to enforce an increased claim of lien of $4.6 million. On May 31, 2005, we paid Bovis $1.3 million, which was credited against amounts owed by the Camden Summit Partnership to Bovis. Settlement documents in this matter were executed and on December 22, 2005, we paid Bovis an additional $2.7 million to resolve this matter. There are executory terms of the settlement to be fulfilled on the part of Bovis and Camden Summit Partnership (Camden will pay an additional $0.3 million upon the completion of certain matters by Bovis); however, it is anticipated that those matters will be completed in the third quarter of 2006. This case was dismissed on February 22, 2006, although the Court retains jurisdiction to enforce the Settlement Agreement.
In January 2005, Brickell Grand, Inc. filed suit in Miami-Dade Circuit Court, Florida, asserting claims for breach of contract, fraud in the inducement, and rescission alleging Summit has an obligation to indemnify Brickell Grand, Inc. in the Bovis lawsuit and that Summit had failed to properly market the Summit Brickell apartments, increasing Brickell Grand Inc.s cost overrun obligations. Brickell Grand, Inc. also claims Summit misappropriated its identity by filing eviction actions in its name. Brickell Grand, Inc. seeks rescission of the sale of Summit Brickell or, alternatively, unspecified damages. We assumed Summits obligations as part of the merger. We continue to believe these allegations made by Brickell Grand, Inc. are not supported by the facts, and intend to vigorously defend against these claims.
On December 30, 2005, the Camden Summit Partnership, L.P. filed suit against Willy A. Bermello, Luis Ajamil, and Henry Pino to enforce the terms of a promissory note executed by them in conjunction with the Camden Summit Partnerships purchase of Summit Brickell Grand Apartments. Bermello, Ajamil, and Pino were entitled to certain credits against the promissory note based on a formula agreed upon between the parties. Bermello, Ajamil, and Pino filed a Second Amended Counter-Claim on July 10, 2006, alleging the Camden Summit Partnership fraudulently induced them to execute the promissory note and seek to void the promissory note. We do not believe there is any basis for Bermello, Ajamil, and Pino to be released from their obligations under the promissory note. We believe the allegations made are not supported by the facts and we intend to vigorously pursue collection of the promissory note and defend against these claims.
All costs and expenses expected to be incurred associated with the defense of the above matters were accrued for at the time of merger. A reasonable estimate of our exposure to loss cannot be made as of June 30, 2006 should an unfavorable outcome occur.
On January 3, 2006, Camden Builders, Inc. received notice of a legal action filed by four individuals, which suit was filed in the K-192nd Judicial District in the Dallas County District Court, Dallas County, Texas. The petition alleged, among other things, breach of contract, rescission, fraud, warranty and deceptive trade practices by defendant Camden relative to construction of plaintiffs respective town homes located in the Farmers Market area of downtown Dallas, Texas which plaintiffs each independently purchased. The case was resolved during the three months ended June 30, 2006. Under the terms of the settlement, all Camden entities were released and the lawsuit dismissed.
In the ordinary course of our business, we issue letters of intent indicating a willingness to negotiate for acquisitions, dispositions or joint ventures. Such letters of intent are non-binding, and neither party to the letter of intent is obligated to pursue negotiations unless and until a definitive contract is entered into by the parties. Even if definitive contracts are entered into, the letters of intent relating to the purchase and sale of real property and resulting contracts generally contemplate that such contracts will provide the purchaser with time to evaluate the property and conduct due diligence, during which periods the purchaser will have the ability to terminate the contracts without penalty or forfeiture of any deposit or earnest money. There can be no assurance that definitive contracts will be entered into with respect to any matter covered by letters of intent or that we will consummate any transaction contemplated by any definitive contract. Furthermore, due diligence periods for real property are
frequently extended as needed. An acquisition or sale of real property becomes probable at the time the due diligence period expires and the definitive contract has not been terminated. We are then at risk under a real property acquisition contract, but only to the extent of any earnest money deposits associated with the contract, and are obligated to sell under a real property sales contract.
We are currently in the due diligence period for certain acquisitions and dispositions. No assurance can be made we will be able to complete the negotiations or become satisfied with the outcome of the due diligence.
We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our consolidated financial statements.
Lease Commitments. At June 30, 2006, we had long-term operating leases covering certain land, office facilities and equipment. Rental expense totaled $0.7 million for the three months ended June 30, 2006 and 2005, and totaled $1.4 million and $1.3 million for the six months ended June 30, 2006 and 2005, respectively. Minimum annual rental commitments for the remainder of 2006 are $0.8 million and for the years ending December 31, 2007 through 2010 are $2.2 million, $2.0 million, $1.6 million and $1.4 million, respectively, and $9.0 million in the aggregate thereafter.
Employment Agreements. At June 30, 2006, we had employment agreements with six of our senior officers, the terms of which expire at various times through August 20, 2007. Such agreements provide for minimum salary levels, as well as various incentive compensation arrangements, which are payable based on the attainment of specific goals. The agreements also provide for severance payments plus a gross-up payment if certain situations occur, such as termination without cause or a change of control. In the case of four of the agreements, the severance payment equals one times the respective current salary base in the case of termination without cause and 2.99 times the respective average annual compensation over the previous three fiscal years in the case of change of control. In the case of the other two agreements, the severance payment generally equals 2.99 times the respective average annual compensation over the previous three fiscal years in connection with, among other things, a termination without cause or a change of control, and the officer would be entitled to receive continuation and vesting of certain benefits in the case of such termination.