<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
--------------- ----------
Commission File Number 0-8003
TARRAGON REALTY INVESTORS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 94-2432628
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3100 Monticello, Suite 200, Dallas, TX 75205
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(214) 599-2200
----------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
Common Stock, $.01 par value 1,319,863
- ----------------------------- ----------------------------------
(Class) (Outstanding at November 3, 1997)
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended
September 30, 1997, have not been audited by independent certified public
accountants, but, in the opinion of the management of Tarragon Realty Investors,
Inc. (the "Company"), all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the Company's consolidated financial
position, consolidated results of operations, and consolidated cash flows at the
dates and for the periods indicated have been included.
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, November 30,
------------- ------------
1997 1996
Assets ---- ----
------
<S> <C> <C>
Real estate held for sale (net of accumulated depreciation
of $1,483 in 1997) ......................................................... $ 4,319 $ 241
Less - allowance for estimated losses ........................................ (241) (241)
------- -------
4,078 --
Real estate held for investment (net of accumulated
depreciation of $4,763 in 1997 and $5,575 in 1996) ......................... 28,154 22,248
Investments in and advances to partnerships .................................. 1,384 1,365
Cash and cash equivalents .................................................... 276 2,684
Restricted cash .............................................................. 652 479
Other assets, net ............................................................ 1,708 1,981
------- -------
$36,252 $28,757
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes, debentures, and interest payable ...................................... $23,394 $17,516
Other liabilities ............................................................ 2,579 1,372
------- -------
25,973 18,888
Commitments and contingencies ................................................
Minority interest ............................................................ 412 --
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000; shares issued and
outstanding, 1,321,346 in 1997 and 1,344,576 in 1996 (after deducting
26,641 in 1997 and 3,411 in 1996 held in treasury) ......................... 13 13
Paid-in capital .............................................................. 45,732 45,941
Accumulated distributions in excess of
accumulated earnings ....................................................... (35,878) (36,085)
------- -------
9,867 9,869
------- -------
$36,252 $28,757
======= =======
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
2
<PAGE> 3
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Four Months For the Ten Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
Rentals ............................. $ 3,142 $ 3,256 $ 7,653 $ 7,912
Interest ............................ 26 33 150 111
Equity in income (loss) of
partnerships ...................... 26 (9) (29) 23
---------- ---------- ---------- ----------
3,194 3,280 7,774 8,046
Expenses
Property operations ................. 2,056 2,214 4,608 4,958
Interest ............................ 675 682 1,657 1,622
Depreciation ........................ 244 321 671 755
Advisory fees to affiliate .......... 60 42 202 187
General and administrative .......... 184 161 425 386
---------- ---------- ---------- ----------
3,219 3,420 7,563 7,908
---------- ---------- ---------- ----------
Income (loss) before minority interest,
(loss) on sale of real estate, and
extraordinary gain ................. (25) (140) 211 138
Minority interest in (income) loss
of consolidated partnership ......... 3 -- (4) --
(Loss) on sale of real estate ......... -- -- -- (171)
---------- ---------- ---------- ----------
Income (loss) from continuing
operations .......................... (22) (140) 207 (33)
Extraordinary gain .................... -- -- -- 253
---------- ---------- ---------- ----------
Net income (loss) ..................... $ (22) $ (140) $ 207 $ 220
========== ========== ========== ==========
Earnings per share
Income (loss) from continuing
operations .......................... $ (.02) $ (.10) $ .15 $ (.02)
Extraordinary gain .................... -- -- -- .18
---------- ---------- ---------- ----------
Net income (loss) ..................... $ (.02) $ (.10) $ .15 $ .16
========== ========== ========== ==========
Weighted average shares of
common stock used in
computing earnings per share ........ 1,326,135 1,346,989 1,336,009 1,356,712
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
<PAGE> 4
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Month Ended For the Month Ended
------------------- -------------------
June 30, 1997 December 31, 1996
------------------- -------------------
<S> <C> <C>
Revenue
Rentals................................ $ 760 $ 708
Interest............................... 5 16
Equity in income (loss) of
partnerships......................... 13 (24)
----------- -------------
778 700
Expenses
Property operations.................... 503 427
Interest............................... 166 157
Depreciation........................... 57 79
Advisory fees to affiliate............. 12 13
General and administrative............. 48 40
----------- -------------
786 716
----------- -------------
(Loss) before minority interest........... (8) (16)
Minority interest in income
of consolidated partnership............ - (3)
----------- -------------
Net (loss)................................ $ (8) $ (19)
=========== =============
Earnings per share
Net (loss)................................ $ (.01) $ (.01)
=========== =============
Weighted average shares of
common stock used in
computing earnings per share........... 1,331,363 1,344,190
=========== =============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
<PAGE> 5
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Distributions
Common Stock in Excess of
--------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
--------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance, November 30,
1996....................... 1,344,576 $ 13 $ 45,941 $ (36,085) $ 9,869
Repurchase of common
stock..................... (23,230) -- (209) -- (209)
Net income..................... -- -- -- 207 207
--------- -------- --------- ---------- --------
Balance, September 30,
1997...................... 1,321,346 $ 13 $ 45,732 $ (35,878) $ 9,867
========= ======== ========= ========== ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
5
<PAGE> 6
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Ten Months
Ended September 30,
-----------------------------
1997 1996
---------- ------------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected .......................... $ 7,513 $ 7,882
Interest collected ......................... 135 111
Interest paid .............................. (1,586) (1,507)
Payments for property operations ........... (4,602) (4,668)
General and administrative expenses paid ... (432) (292)
Advisory fees paid to affiliate ............ (137) (238)
Organizational costs paid .................. (120) --
Deferred financing costs paid .............. (72) --
---------- ------------
Net cash provided by operating activities 699 1,288
Cash Flows from Investing Activities
Acquisition of real estate ................. (1,971) (1,763)
Proceeds from the sale of real estate ...... -- 66
Earnest money deposit received ............. -- 250
Earnest money deposits (paid) refunded ..... 50 (636)
Real estate improvements ................... (984) (651)
Collections of notes receivable ............ 691 8
Acquisition of partnership interests ....... -- (818)
Distributions from partnership ............. 38 --
Advances to partnership .................... (658) --
Contribution from minority partner of
consolidated partnership ................. 25 --
---------- ------------
Net cash (used in) investing activities . (2,809) (3,544)
Cash Flows from Financing Activities
Proceeds from borrowings ................... 2,050 --
Payments of notes payable .................. (2,521) (307)
Advances from affiliates ................... 636 260
Replacement reserve receipts (deposits), net (254) 64
Common stock repurchases ................... (209) (229)
---------- ------------
Net cash (used in) financing activities . (298) (212)
---------- ------------
Net (decrease) in cash and cash equivalents .. (2,408) (2,468)
Cash and cash equivalents, beginning of period 2,684 2,847
---------- ------------
Cash and cash equivalents, end of period ..... $ 276 $ 379
========== ============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
6
<PAGE> 7
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Ten Months
Ended September 30,
--------------------
1997 1996
------ ------
<S> <C> <C>
Reconciliation of net income to net cash provided by
operating activities
Net income ....................................................... $ 207 $ 220
Extraordinary gain ............................................... -- (253)
Loss on sale of real estate ...................................... -- 171
Minority interest in income of consolidated partnership ......... 4 --
Depreciation and amortization .................................... 828 853
Equity in (income) loss of partnerships .......................... 29 (23)
Changes in other assets and liabilities, net of effects
of noncash investing and financing activities
(Increase) in other assets ................................ (312) (406)
Increase (decrease) in other liabilities ................. (66) 670
Decrease in interest receivable ........................... 5 --
Increase in interest payable .............................. 4 56
------ ------
Net cash provided by operating activities ........................ $ 699 $1,288
====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection
with the purchase of real estate
Real estate ................................................... $9,722 $4,344
Advances to partnership ....................................... (572) --
Other assets .................................................. 153 39
Notes and interest payable .................................... (6,270) (2,510)
Other liabilities ............................................. (679) (110)
Minority interest ............................................. (383) --
------ ------
Cash paid ................................................. $1,971 $1,763
====== ======
Assets disposed of and liabilities released in connection
with the sale of real estate
Real estate ................................................... $ -- $5,337
Other assets .................................................. -- 156
Notes and interest payable .................................... -- (5,362)
Other liabilities ............................................. -- (147)
Loss on sale .................................................. -- (171)
Extraordinary gain ............................................ -- 253
------ ------
Cash received .............................................. $ -- $ 66
====== ======
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
7
<PAGE> 8
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Month Ended For the Month Ended
------------------- -------------------
June 30, 1997 December 31, 1996
------------------- -------------------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected .................................. $ 722 $ 709
Interest collected ................................. 3 19
Interest paid ...................................... (195) (186)
Payments for property operations ................... (569) (667)
General and administrative expenses paid ........... (66) (31)
Advisory fees paid to affiliate .................... (28) --
Organizational costs paid .......................... (14) --
Deferred financing costs paid ...................... (37) (3)
----------- -------------
Net cash (used in) operating activities .......... (184) (159)
Cash Flows from Investing Activities
Acquisition of real estate ......................... -- (5)
Earnest money deposits paid ........................ (14) --
Real estate improvements ........................... (110) (92)
Collections of notes receivable .................... 1 685
Advances to partnership ............................ (38) (40)
----------- -------------
Net cash provided by (used in) investing
activities ..................................... (161) 548
Cash Flows from Financing Activities
Payments of notes payable .......................... (32) (34)
Replacement reserve receipts (deposits), net...... 20 (17)
Common stock repurchases ........................... (1) --
----------- -------------
Net cash (used in) financing activities .......... (13) (51)
----------- -------------
Net increase (decrease) in cash and cash
equivalents ...................................... (358) 338
Cash and cash equivalents, beginning of period ....... 1,876 2,684
----------- -------------
Cash and cash equivalents, end of period ............. $ 1,518 $ 3,022
=========== =============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
8
<PAGE> 9
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Month Ended For the Month Ended
------------------- -------------------
June 30, 1997 December 31, 1996
------------------- -------------------
<S> <C> <C>
Reconciliation of net (loss) to net cash (used in)
operating activities
Net (loss) ...................................................... $ (8) $ (19)
Minority interest in income of
consolidated partnership ...................................... -- 3
Equity in (income) loss of partnerships ........................ (13) 24
Depreciation and amortization ................................... 67 89
Changes in other assets and liabilities, net of
effects of noncash investing activity
(Increase) decrease in other assets ....................... (175) 5
(Decrease) in other liabilities ........................... (20) (231)
Decrease in interest receivable ........................... -- 5
(Decrease) in interest payable ............................ (35) (35)
----- -------
Net cash (used in) operating activities ............................ $(184) $ (159)
===== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection
with the purchase of real estate
Real estate ................................................... $-- $ 3,973
Advances to partnership ....................................... -- (572)
Other assets .................................................. -- (18)
Notes and interest payable .................................... -- (2,995)
Minority interest ............................................. -- (383)
----- -------
Cash paid ................................................. $-- $ 5
===== =======
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
9
<PAGE> 10
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the ten month period ended September 30, 1997,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1996.
Earnings per share have been computed based on the weighted average number of
shares of common stock outstanding for the four and ten month periods ended
September 30, 1997 and 1996. Certain 1996 balances have been reclassified to
conform to the 1997 presentation.
At the annual meeting of shareholders held on July 10, 1997, the shareholders of
Vinland Property Trust (the "Trust"), predecessor to the Company, approved a
proposal to convert the Trust from a California business trust into a Nevada
corporation. The conversion was accomplished by incorporating the Trust as a
California corporation and merging it into the Company, which was a wholly-owned
subsidiary of the Trust, with the Company as the surviving entity. While the
Trust had a November 30 fiscal year end, the Company has a December 31 fiscal
year end. Accordingly, the accompanying Consolidated Financial Statements
include Statements of Operations and Statements of Cash Flows for the four and
ten month periods ended September 30, 1997, and the one month periods ended June
30, 1997, and December 31, 1996. The one month period ended December 31, 1996,
represents the transition period.
NOTE 2. REAL ESTATE
In March 1997, after receiving an offer to purchase One Turtle Creek Office
Complex, the Company initiated a formal marketing program to sell this property
and reclassified it to real estate held for sale. Accordingly, the Company
ceased depreciation of this property in March 1997.
In September and October 1996, the Company advanced $572,000 to 18607 Ventura
Associates, Ltd. (the "Partnership"), which purchased Tarzana Towne Plaza (the
"Property"), a 37,000 square foot combination office/retail/medical building
located in Tarzana, California, in October 1996. This acquisition was financed
with a $3.0 million first mortgage loan. In December 1996, the Company converted
its advances to a 1% general partner interest and a 59% limited partner interest
in the Partnership. As the Company holds a controlling interest in the
Partnership, the operations of the Property have been consolidated. In
connection with the transaction, the Company paid an acquisition fee of $21,630
to Tarragon Realty Advisors, Inc. ("Tarragon"), the Company's advisor since
March 1, 1994. Minority interest in the accompanying September 30, 1997,
consolidated balance sheet represents the minority partner's interest in the
underlying net assets of the Partnership.
In January 1997, the Company purchased The Brooks Apartments, a 104-unit
property located in Addison, Texas, for $2.2 million. The Company assumed an
existing mortgage loan of $1.3 million and paid cash of $909,000 at closing. In
connection with this transaction, the Company paid Tarragon an acquisition fee
of $22,000.
10
<PAGE> 11
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 2. REAL ESTATE (Continued)
In August 1997, the Company purchased Park 20 West Office Park, a 69,066 square
foot property located in Tallahassee, Florida, for $3.5 million. A portion of
the purchase price was financed through a $648,000 loan to the Company from
Tarragon which bore interest at prime plus 1% per annum and was repaid in
October 1997. See NOTE 5. "ADVANCES FROM AFFILIATES." Also, in connection with
the acquisition, the Company assumed an existing first mortgage loan of $1.9
million and paid cash of $1 million. The Company paid Tarragon an acquisition
fee of $34,550 in connection with this transaction.
NOTE 3. NOTES RECEIVABLE
In December 1996, the Company received $600,000 as payment in full of the Swiss
Village note receivable which had matured in November 1996.
NOTE 4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Investments in partnerships, accounted for under the equity method, include the
Company's investments in a partnership and a limited liability company ("LLC"),
as described below. In December 1995, the Company acquired a 20% general partner
interest and an effective 37% limited partner interest in Larchmont Associates
Limited Partnership for a cash investment of $418,000. The partnership owns
Larchmont West Apartments, a 504-unit complex in Toledo, Ohio, which
collateralizes nonrecourse mortgage debt of $5.5 million.
In consideration of a $400,000 cash capital contribution, in June 1996, the
Company acquired an effective 25% nonmanaging member interest in Kearny Wrap
LLC, which owns a $21.7 million wraparound mortgage loan secured by a 1 million
square foot distribution facility net leased to the United States Postal Service
located in Kearny, New Jersey. The note bears interest at 6% per annum and
matures in 2013. The $16.9 million underlying first mortgage loan bears interest
at 6% per annum and matures in 1998.
Advances to partnerships included in the accompanying November 30, 1996,
consolidated balance sheet represent $572,000 advanced during 1996 to 18607
Ventura Associates, Ltd., in which the Company acquired a 60% interest in
December 1996. See NOTE 2. "REAL ESTATE."
NOTE 5. ADVANCES FROM AFFILIATES
Advances from affiliates at September 30, 1997, include the $648,000 loan from
Tarragon in connection with the Park 20 West Office Park acquisition described
in NOTE 2. "REAL ESTATE." They also include non-interest bearing advances of
$110,000 and $526,000 from Lucy Friedman, 50% stockholder of Tarragon and a
principal stockholder of the Company, and Tarragon, respectively. Such advances
were made to the Company on a short-term basis and were repaid in October 1997.
Advances from affiliates are presented with "Other liabilities" in the
accompanying September 30, 1997, Consolidated Balance Sheet.
11
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TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. NOTES PAYABLE
In July 1997, the Company closed a first mortgage loan of $2.1 million secured
by Collegewood Apartments. At closing, the $2.1 million existing mortgage was
paid off, and the Company paid cash of $260,000 to establish an escrow for
property improvements. In connection with this financing, the Company paid
Tarragon a fee of $20,500.
NOTE 7. INCOME TAXES
No provision has been made for federal income taxes because the Company's
management believes the Company has qualified as a Real Estate Investment Trust,
as defined in Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended, and expects that it will continue to do so.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims and routine litigation arising in the
ordinary course of business. Management of the Company does not believe that the
results of these claims and litigation, individually or in the aggregate, will
have a material adverse effect on its business or financial position.
NOTE 9. SUBSEQUENT EVENT
In October 1997, the Company obtained first mortgage financing in the amount of
$1.7 million secured by Briarwest Shopping Center, which had been unencumbered
since the previous mortgage was paid off in February 1997. After establishing an
escrow for taxes and insurance and paying closing costs, the Company received
net cash proceeds of $1.6 million. A financing fee of $17,000 was paid to
Tarragon in connection with this transaction.
[This space intentionally left blank.]
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes thereto.
Introduction
Tarragon Realty Investors, Inc., (the "Company") was organized on July 18, 1973,
as a nationwide real estate investment trust to invest in multifamily and
commercial properties. The Company commenced operations on April 2, 1974.
The Company's real estate at September 30, 1997, consisted of 14 properties,
including nine apartment complexes, one shopping center, one combination office
building and shopping center, one combination office/retail/medical building,
one office park, and one farm and luxury residence. All of the Company's real
estate, except four properties, is encumbered by mortgages.
The Company's management continues to focus on the capital appreciation of the
Company's existing portfolio and the search for additional investments.
Management's first priority is to invest surplus funds in needed improvements to
the current real estate portfolio. The Company intends to use additional funds,
generated from property operations, sales, and refinancings, to make selective
acquisitions, both residential and commercial, with a preference for properties
in the same geographical regions of the United States in which the Company
currently operates. However, because of various real estate industry conditions,
including competing entities and the overall volatility of the real estate
market, there is no assurance that the Company will be able to continue to
increase the size of its portfolio.
Liquidity and Capital Resources
Cash and cash equivalents totaled $276,000 at September 30, 1997, as compared to
$2.7 million at November 30, 1996. The Company's principal sources of cash have
been property operations, collections of notes receivable, and refinancing
proceeds. Management believes that cash on hand along with funds provided by
property operations and anticipated external sources, such as property sales and
refinancings, is sufficient to fund any needed property maintenance and capital
improvements as well as meet the Company's debt service obligations.
In December 1996, the Company received $600,000 as payment in full of the Swiss
Village note receivable which had matured in November 1996. The Company expects
collections of notes receivable to decline as existing mortgage loans are paid
off and does not anticipate funding additional loans in the future except in
connection with property sales.
In December 1996, the Company acquired Tarzana Towne Plaza, a 37,000 square foot
combination office/retail/ medical building located in Tarzana, California,
through the acquisition of a controlling interest in 18607 Ventura Associates,
Ltd., the partnership which owns the property. The Company had advanced $572,000
to the partnership during 1996. These advances were converted to a 1% general
partner interest and a 59% limited partner interest in the partnership in
December 1996.
During 1997, the Company purchased two properties for an aggregate purchase
price of $5.8 million, the cash portion of which was $2 million.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The Company made capital improvements totaling $984,000 to its properties during
the ten months ended September 30, 1997, compared to $651,000 during the
corresponding period of 1996, and anticipates an additional $230,000 will be
incurred during the remainder of 1997.
During the ten months ended September 30, 1997, the Company made advances
totaling $658,000 to Larchmont Associates Limited Partnership, in which the
Company holds an effective 57% interest, largely to fund capital improvements
and operations of Larchmont West Apartments, the partnership's sole property.
The Company expects such advances to continue during the fourth quarter of 1997
and first half of 1998. Advances are subject to repayment with simple interest
at 18% prior to any other distributions to the partners.
In July 1997, the Company obtained first mortgage financing of $2.1 million
secured by Collegewood Apartments. At closing, the existing mortgage of $2.1
million was paid off, and the Company paid cash of $260,000 to establish an
escrow for property repairs. The Company made other principal payments on notes
payable of $471,000 during the ten months ended September 30, 1997.
Principal payments of $117,000 are due during the remainder of 1997.
The Company received advances from affiliates totaling $636,000 during the third
quarter of 1997. Such advances were made on a short-term basis and were repaid
in October 1997. See NOTE 5. "ADVANCES FROM AFFILIATES" in the Notes to
Consolidated Financial Statements.
In December 1995, the Company's Board of Directors authorized the Company to
repurchase up to 139,200 of its shares of common stock in open market and
negotiated transactions, of which 26,641 had been purchased through September
30, 1997. During the ten months ended September 30, 1997, the Company
repurchased 23,230 shares in open market transactions at a total cost of
$209,000.
After the end of the third quarter, the Company obtained a first mortgage loan
of $1.7 million secured by Briarwest Shopping Center, receiving net cash
proceeds of $1.6 million.
Results of Operations
For the four and ten month periods ended September 30, 1997, the Company
reported a net loss of $22,000 and net income of $207,000, respectively,
compared to a net loss of $140,000 and net income of $220,000 for the
corresponding periods in 1996. The underlying components of the change in
results of operations are discussed in the following paragraphs.
The Company sold Polynesia Village Apartments ("Polynesia") in October 1996 and
realized a gain of $844,000. The loss of the operations of Polynesia caused a
reduction in net operating results for the four and ten month periods ended
September 30, 1997, of $125,000 and $318,000, respectively, compared to the
corresponding periods in 1996. This reduction was partially mitigated by the
contribution to net operating results from the properties acquired during 1996
and 1997.
Upon reclassifying One Turtle Creek Office Complex to real estate held for sale
in March 1997, the Company ceased depreciation on this property, resulting in
decreases in depreciation expense for the four and ten month periods ended
September 30, 1997, of $130,000 and $230,000, respectively, compared to the
corresponding periods in 1996.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
During the first half of fiscal 1996, the Trust recorded a loss on the sale of
real estate of $171,000 and an extraordinary gain of $253,000 both related to
the sale of the Villas at Central Park Apartments in January 1996.
The primary reason the Company reported net losses for the four month periods
ended September 30, 1997 and 1996, but net income for the ten month periods
ended September 30, 1997 and 1996, is that the Company incurs greater costs
related to property replacements during the summer months than in the earlier
months of the year. Replacement expenses are expected to be lighter in the
fourth quarter of 1997 than those incurred in the four months ended September
30, 1997.
Allowance for Estimated Losses and Provisions for Losses
The Company's management, on a quarterly basis, reviews the carrying values of
the Company's mortgage loans and properties held for sale. Generally accepted
accounting principles require that the carrying value of a mortgage loan or a
property held for sale cannot exceed the lower of its cost or its estimated fair
value less estimated costs to sell. In those instances in which estimates of
fair value less estimated selling costs of the collateral securing the Company's
mortgage loans or properties held for sale are less than the carrying values
thereof at the time of evaluation, an allowance for loss is provided by a charge
against operations. The evaluation of the carrying values of the mortgage loans
is based on management's review and evaluation of the collateral properties
securing the mortgage loans. The review of collateral properties and properties
held for sale generally includes selective site inspections, a review of the
property's current rents compared to market rents, a review of the property's
expenses, a review of maintenance requirements, discussions with the manager of
the property, and a review of the surrounding area. Future quarterly reviews
could cause the Company's management to adjust current estimates of fair value.
The Company's management also evaluates the Company's properties held for
investment for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. This evaluation
generally consists of a review of the property's cash flow and current and
projected market conditions, as well as any changes in general and local
economic conditions. If an impairment loss exists based on the results of this
review, a loss is recognized by a charge against current earnings and a
corresponding reduction in the respective asset's carrying value. The amount of
this impairment loss is equal to the amount by which the carrying value of the
property exceeds its estimated fair value.
Income Tax Aspects
The Company has elected and, in the opinion of the Company's management,
qualified to be treated as a Real Estate Investment Trust ("REIT"), as defined
under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Code requires a REIT to distribute at least 95% of its REIT
taxable income plus 95% of its net income from foreclosure property, as defined
in Section 857 of the Code, to its shareholders.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Environmental Matters
Under various federal, state, and local environmental laws, ordinances, and
regulations, the Company may be potentially liable for removal or remediation
costs, as well as certain other potential costs (including governmental fines
and injuries to persons and property) relating to hazardous or toxic substances
where property-level managers have arranged for the removal, disposal, or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the air,
and third parties may seek recovery from the Company for personal injury
associated with such materials.
The Company's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Company's
business, assets, or results of operations.
Funds From Operations
The following information should be read in conjunction with all of the
financial statements and notes thereto and with the discussion set forth in
"Liquidity and Capital Resources" and "Results of Operations" included elsewhere
in this report.
Funds from operations ("FFO") for the four and ten month periods ended September
30, 1997 and 1996, are as follows (unaudited) (dollars in thousands):
<TABLE>
<CAPTION>
For the Four Months For the Ten Months
Ended September 30, Ended September 30,
------------------ --------------------
1997 1996 1997 1996
----- ----- ------- -----
<S> <C> <C> <C> <C>
Net income (loss) ..................... $ (22) $(140) $ 207 $ 220
Extraordinary gain .................... -- -- -- (253)
Loss on sale of real estate ........... -- -- -- 171
Depreciation and amortization of
real estate assets .................. 303 321 754 755
Depreciation and amortization of
real estate assets of partnerships .. 43 39 127 88
Minority interest in deprecation and
amortization of real estate assets of
consolidated partnership ............ (11) -- (27) --
----- ----- ------- -----
Funds from operations ................. $ 313 $ 220 $ 1,061 $ 981
===== ===== ======= =====
</TABLE>
The Company generally considers FFO to be an appropriate measure of the
performance of an equity REIT. FFO, as defined by the National Association of
Real Estate Investment Trusts ("NAREIT"), equals net income (loss), computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures are calculated to reflect FFO on the same basis. The amortization
of deferred financing costs is not
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Funds From Operations (Continued)
added back to net income (loss) in the Company's calculation. This treatment is
consistent with the Company's historical calculation of FFO. The Company
believes that FFO is useful to investors as a measure of the performance of an
equity REIT because, along with cash flows from operating activities, investing
activities, and financing activities, it provides investors an understanding of
the ability of the Company to incur and service debt and to make capital
expenditures. The Company believes that in order to facilitate a clear
understanding of its operating results, FFO should be examined in conjunction
with net income (loss) as presented in the financial statements included
elsewhere in this report. FFO does not represent cash generated from operating
activities in accordance with GAAP and therefore should not be considered an
alternative to net income as an indication of the Company's operating
performance or to cash flow as a measure of liquidity and is not necessarily
indicative of cash available to fund cash needs and cash distributions. The
Company's calculation of FFO may differ from the methodology for calculating FFO
utilized by other REITs and, accordingly, may not be comparable to such other
REITs.
Risks Associated with Forward-Looking Statements Included in this Form 10-Q
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of management
for future operations, including plans and objectives relating to capital
expenditures on Company properties. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive, and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate, and, therefore, there can be no assurance that the forward-looking
statements included in this Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
[This space intentionally left blank.]
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27.0 - Financial Data Schedule.
(b) Reports on Form 8-K:
The following current reports on Form 8-K were filed during the period
covered by this report or with respect to events which occurred during
the period covered by this report:
<TABLE>
<CAPTION>
Date of Event Date Filed Items Reported
- ------------- ---------- --------------
<S> <C> <C>
July 10, 1997 August 19, 1997 5. Other Events
July 25, 1997 October 28, 1997 5. Other Events
8. Change in Fiscal Year
August 15, 1997 September 2, 1997 2. Acquisition or Disposition of Assets
7. Financial Statements and Exhibits
August 15, 1997 November 3, 1997 2. Acquisition or Disposition of Assets
7. Financial Statements and Exhibits
</TABLE>
[This space intentionally left blank.]
18
<PAGE> 19
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARRAGON REALTY INVESTORS, INC.
Date: November 14, 1997 By:/s/ William S. Friedman
----------------------------- -----------------------------
William S. Friedman
President, Chief Executive
Officer, and Director
Date: November 14, 1997 By:/s/ Robert C. Irvine
----------------------------- -----------------------------
Robert C. Irvine
Executive Vice President and
Chief Financial Officer
Date: November 14, 1997 By:/s/ Erin D. Davis
----------------------------- -----------------------------
Erin D. Davis
Vice President and
Chief Accounting Officer
19
<PAGE> 20
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
EXHIBIT 27.0 Financial Data Schedule Page 21
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 276
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (241)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 38,719
<DEPRECIATION> (6,246)
<TOTAL-ASSETS> 36,252
<CURRENT-LIABILITIES> 0
<BONDS> 23,394
0
0
<COMMON> 13
<OTHER-SE> 9,854
<TOTAL-LIABILITY-AND-EQUITY> 36,252
<SALES> 0
<TOTAL-REVENUES> 7,774
<CGS> 0
<TOTAL-COSTS> 4,608
<OTHER-EXPENSES> 873
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,657
<INCOME-PRETAX> 207
<INCOME-TAX> 0
<INCOME-CONTINUING> 207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
