<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 JUNE 30, 1998
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 1,264,497
- ---------------------------- ------------------------------
(Class) (Outstanding at August 7, 1998)
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended June 30,
1998, have not been audited by independent certified public accountants, but, in
the opinion of 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>
June 30, December 31,
---------- ----------
1998 1997
---------- ----------
<S> <C> <C>
Assets
Real estate held for sale (net of accumulated depreciation
of $1,484 in 1998 and 1997) ................................... $ 4,370 $ 4,319
Less - allowance for estimated losses ........................... (241) (241)
---------- ----------
4,129 4,078
Real estate held for investment (net of accumulated
depreciation of $5,431 in 1998 and $4,986 in 1997) ............ 28,045 27,795
Investments in and advances to partnerships ..................... 3,048 1,991
Cash and cash equivalents ....................................... 462 1,011
Restricted cash ................................................. 776 737
Other assets, net ............................................... 1,787 1,865
---------- ----------
$ 38,247 $ 37,477
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Notes, debentures, and interest payable ......................... $ 26,172 $ 26,416
Advances from affiliates ........................................ 1,462 --
Other liabilities ............................................... 1,101 1,291
---------- ----------
28,735 27,707
Commitments and contingencies ...................................
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000;
shares issued and outstanding, 1,272,980 in 1998 and
1,317,812 in 1997 (after deducting 71,165 in 1998
and 30,175 in 1997 held in treasury) .......................... 13 13
Paid-in capital ................................................. 45,215 45,696
Accumulated dividends in excess of accumulated earnings ......... (35,716) (35,939)
---------- ----------
9,512 9,770
---------- ----------
$ 38,247 $ 37,477
========== ==========
</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 Three Months Ended For the Six Months Ended
-------------------------------- --------------------------------
June 30, May 31, June 30, May 31,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue
Rentals .............................. $ 2,517 $ 2,324 $ 4,999 $ 4,511
Interest ............................. 13 49 27 124
Equity in income (loss) of
partnerships ...................... (34) 27 (66) (62)
------------- ------------- ------------- -------------
2,496 2,400 4,960 4,573
Expenses
Property operations .................. 1,522 1,275 2,963 2,552
Interest ............................. 600 501 1,216 982
Depreciation ......................... 227 169 445 427
Advisory fee to affiliate ............ 44 89 97 142
General and administrative ........... 132 86 280 241
------------- ------------- ------------- -------------
2,525 2,120 5,001 4,344
------------- ------------- ------------- -------------
Income (loss) before gain on sale
of investments ....................... (29) 280 (41) 229
Gain on sale of investments ............ -- -- 264 --
------------- ------------- ------------- -------------
Net income (loss) ...................... $ (29) $ 280 $ 223 $ 229
============= ============= ============= =============
Earnings per share - basic and diluted
Net income (loss) ...................... $ (.02) $ .21 $ .17 $ .17
============= ============= ============= =============
Weighted average shares of
common stock used in computing
earnings per share ................... 1,277,151 1,341,904 1,291,516 1,342,670
============= ============= ============= =============
Weighted average shares of
common stock used in computing
earnings per share - assuming
dilution ............................. 1,290,707 1,350,517 1,305,016 1,352,501
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
<PAGE> 4
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Dividends
Common Stock in Excess of
---------------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1997 ........................... 1,317,812 $ 13 $ 45,696 $ (35,939) $ 9,770
Stock repurchases ................. (47,390) -- (481) -- (481)
Stock options exercised ........... 2,558 -- -- -- --
Net income ........................ -- -- -- 223 223
-------------- -------------- -------------- -------------- --------------
Balance, June 30, 1998 ............ 1,272,980 $ 13 $ 45,215 $ (35,716) $ 9,512
============== ============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
<PAGE> 5
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
--------------------------
June 30, May 31,
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected ........................................ $ 4,970 $ 4,421
Interest collected ....................................... 27 116
Interest paid ............................................ (1,127) (936)
Payments for property operations ......................... (3,010) (2,783)
General and administrative expenses paid ................. (230) (280)
Advisory fee paid to affiliate ........................... (40) (88)
Organizational costs paid ................................ (91) (22)
Deferred financing costs paid ............................ (24) (13)
---------- ----------
Net cash provided by operating activities ............. 475 415
Cash Flows from Investing Activities
Acquisition of real estate ............................... -- (934)
Earnest money deposit paid ............................... -- (203)
Real estate improvements ................................. (746) (422)
Collections of notes receivable .......................... -- 690
Net contributions and advances to partnerships ........... (1,564) (108)
Distribution from partnership's investing
activities ............................................. 705 --
---------- ----------
Net cash (used in) investing activities ............... (1,605) (977)
Cash Flows from Financing Activities
Payments of notes payable ................................ (243) (237)
Replacement reserve (deposits) receipts, net ............. (37) 78
Stock repurchases ........................................ (481) (87)
Dividends paid to stockholders ........................... (120) --
Advances from affiliates ................................. 1,462 --
---------- ----------
Net cash provided by (used in) financing activities ... 581 (246)
---------- ----------
Net (decrease) in cash and cash equivalents ................ (549) (808)
Cash and cash equivalents, beginning of period ............. 1,011 2,684
---------- ----------
Cash and cash equivalents, end of period ................... $ 462 $ 1,876
========== ==========
</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 (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
--------------------------
June 30, May 31,
1998 1997
---------- ----------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income ................................................................... $ 223 $ 229
Gain on sale of investments .................................................. (264) --
Depreciation and amortization ................................................ 566 488
Equity in loss of partnerships ............................................... 66 62
Changes in other assets and other liabilities net of noncash investing and
financing activities:
(Increase) in other assets ................................................ (69) (20)
(Decrease) in other liabilities ........................................... (46) (358)
Decrease in interest receivable ........................................... -- 5
(Decrease) increase in interest payable ................................... (1) 9
---------- ----------
Net cash provided by operating activities ...................................... $ 475 $ 415
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the purchase of real
estate:
Real estate ............................................................... $ -- $ 6,213
Advances to partnerships .................................................. -- (572)
Other assets .............................................................. -- (3)
Notes and interest payable ................................................ -- (4,321)
Minority interest ......................................................... -- (383)
---------- ----------
Cash paid ............................................................. $ -- $ 934
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
6
<PAGE> 7
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 six-month period ended June 30, 1998, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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 year ended December 31, 1997. Certain 1997 balances have
been reclassified to conform to the 1998 presentation.
NOTE 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Investments in and advances to partnerships accounted for using the equity
method consisted of the following at June 30, 1998:
<TABLE>
<S> <C>
Larchmont Associates, L.P. ("Larchmont").......................... $ 1,615
National Omni Associates, L.P. ("Omni")........................... 1,433
----------
$ 3,048
==========
</TABLE>
In December 1997, the Company contributed $380,000 to Omni in exchange for a 15%
limited partner interest in this partnership. During January and February 1998,
the Company contributed an additional $1.1 million, and Omni purchased 5600
Collins Avenue, a 289-unit, high rise apartment building in Miami Beach,
Florida, for $32 million in February 1998. $26 million of the purchase price was
financed through first and second lien mortgages. Omni paid a brokerage
commission of $100,000 to Highland Funding Corp., for which Chester Beck, a
Director of the Company, serves as President, for consulting services provided
in connection with this acquisition. Omni also paid Tarragon Realty Advisors,
Inc. ("TRA"), the Company's advisor since March 1, 1994, an acquisition fee of
$150,000 in connection with this acquisition. In accordance with the partnership
agreement, the Company is to receive a preferred return of 10% compounded
monthly on its contributions. Through December 31, 2001, the Company will
receive 22% of the partnership's cash distributions from operating net cash
flow, as defined in the partnership agreement, until the preferred return has
been paid and the Company's contributions have been repaid. The Company will
receive 15% of subsequent cash distributions from the partnership. Any of the
preferred return not paid as of December 31, 2001, is to be paid out of
disposition net cash flow, as defined in the partnership agreement.
In January 1998, Kearny Wrap LLC, in which the company held an effective 25%
nonmanaging member interest, closed on the disposition of its primary asset, a
wraparound mortgage secured by a 1 million square foot distribution facility net
leased to the United States Postal Service located in Kearny, New Jersey. The
gross sale price was $3.4 million, and the Company received $705,000
representing its proportionate share of the net sale proceeds. In connection
with the disposition, the Company recognized a gain of $264,000.
The following unaudited information summarizes the results of operations for
Larchmont and Omni for the six months ended June 30, 1998. Larchmont's sole
property, Larchmont West, a 504-unit apartment complex in Toledo, Ohio, is
currently under renovation. As discussed above, Omni's sole property, 5600
Collins Avenue, was acquired in February 1998.
7
<PAGE> 8
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
<TABLE>
<CAPTION>
Larchmont Omni
---------- ----------
<S> <C> <C>
Rental revenue .................... $ 986 $ 1,822
Property operating expenses ....... (661) (891)
Interest expense .................. (253) (884)
Depreciation expense .............. (112) (261)
---------- ----------
Net (loss) ........................ $ (40) $ (214)
========== ==========
</TABLE>
NOTE 3. ADVANCES FROM AFFILIATES
TRA advanced $1.5 million to the Company during the first six months of 1998 in
part to facilitate Omni's acquisition of 5600 Collins Avenue. Such advances bear
interest at prime plus 1% per annum and are payable on demand.
NOTE 4. EARNINGS PER SHARE
Income (loss) per share of common stock is computed based upon the weighted
average number of shares of common stock outstanding for the three and six month
periods ended June 30, 1998, and May 31, 1997.
Following is a reconciliation of the weighted average shares of common stock
outstanding used in the computation of earnings per share and earnings per share
- - assuming dilution.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
----------------------------- -----------------------------
June 30, May 31, June 30, May 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding ..... 1,277,151 1,341,904 1,291,516 1,342,670
Stock options ................... 13,556 8,613 13,500 9,831
------------ ------------ ------------ ------------
Weighted average shares of
common stock outstanding -
assuming dilution ............ 1,290,707 1,350,517 1,305,016 1,352,501
============ ============ ============ ============
</TABLE>
NOTE 5. 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, and
expects that it will continue to do so.
NOTE 6. 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, financial position, or results
of operations.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes thereto included
elsewhere in this report.
Tarragon Realty Investors, Inc., (the "Company") is a Nevada corporation
incorporated April 2, 1997, and the ultimate successor in interest to Vinland
Property Trust (the "Trust"), a California business trust which was established
July 18, 1973, and commenced operations April 2, 1974. The Trust was formed to
invest in real estate, including commercial and multifamily properties. On July
10, 1997, the shareholders of the Trust approved the conversion of the Trust
into a Nevada corporation, which was accomplished by incorporating the Trust as
a California corporation and merging it into the Company, a wholly-owned
subsidiary of the Trust, with the Company as the surviving entity. The effective
date of the merger of the Trust and the Company was July 25, 1997. References to
the Company, its Board of Directors, its stockholders, and its shares of common
stock in relation to dates prior to July 25, 1997, refer to the Trust, its Board
of Trustees, its shareholders, and its shares of beneficial interest. While the
Trust had a November 30 fiscal year end, the Company has a December 31 fiscal
year end. Accordingly, the following discussion compares the three and six month
periods ended June 30, 1998, to the three and six month periods ended May 31,
1997.
The Company's real estate at June 30, 1998, consisted of fourteen properties,
including nine apartment complexes, one shopping center, one combination office
building and shopping center, one combination office/retail/medical facility,
one office park, and one farm and luxury residence. Except for three properties,
all of the Company's real estate 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 multifamily 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 $462,000 at June 30, 1998, compared to $1
million at December 31, 1997. The Company's principal sources of cash have been
property operations, collections of mortgages receivable, and refinancing
proceeds. The Company does not anticipate funding additional mortgage loans
except in connection with the sale of real estate. Therefore, as existing
mortgages receivable have been paid off, this source of cash has declined and is
expected to continue to decline. Management believes that cash on hand along
with funds to be 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.
The Company invested $746,000 in capital improvements to its properties during
the first six months of 1998 compared to $422,000 during the first six months of
fiscal 1997 and anticipates an additional $1.4 million will be incurred during
the remainder of 1998.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
During the first six months of 1998, the Company advanced $464,000 to Larchmont
Associates Limited Partnership, in which the Company holds a 57% interest,
largely to fund capital improvements to Larchmont West Apartments, the
partnership's sole property. The Company expects such advances to continue
through the second half of 1998. Advances are subject to repayment with simple
interest at 18% prior to any other distributions to the partners.
Also, during the first six months of 1998, the Company contributed $1.1 million
to National Omni Associates, L.P. ("Omni"), which purchased 5600 Collins Avenue,
a 289-unit, high rise apartment building in Miami Beach, Florida, in February
1998.
In January 1998, the Company received $705,000 representing its proportionate
share of the net sale proceeds from the disposition of the wraparound mortgage
owned by Kearny Wrap LLC ("Kearny"), in which the Company held a 25% interest.
The Company received advances from Tarragon Realty Advisors, Inc., ("TRA")
totaling $1.5 million during the first six months of 1998. Such advances bear
interest at prime plus 1% per annum, are payable on demand, and were made on a
short-term basis in part to facilitate Omni's acquisition of 5600 Collins
Avenue.
The Company made principal payments on notes payable of $243,000 during the
first six months of 1998. Principal payments of $250,000 are due during the
remainder of 1998.
In December 1995, the Company's Board of Directors (the "Board") authorized the
Company to repurchase up to 139,200 of its shares of common stock in open market
and negotiated transactions, of which 77,565 had been purchased through June 30,
1998. During the first six months of 1998, the Company repurchased 47,390 shares
of its common stock in open market transactions at a total cost of $481,000.
In January 1998, the Company paid a cash dividend of $.10 per share, totaling
$120,000, to stockholders of record on December 26, 1997.
Results of Operations
For the three and six month periods ended June 30, 1998, the Trust reported a
net loss of $29,000 and net income of $223,000, respectively, compared to net
income of $280,000 and $229,000 for the three and six month periods ended May
31, 1997. The underlying components of the change in results of operations are
discussed in the following paragraphs.
Net rental income (rental revenue less property operating expenses) remained
relatively stable at $995,000 and $2 million for the three and six month periods
ended June 30, 1998, compared to $1 million and $2 million for the three and six
month periods ended May 31, 1997. Increases in net rental income of $120,000 and
$275,000, respectively, were contributed by two properties acquired in 1997. Net
rental income for properties held in both years fell by $174,000 and $199,000
for the three and six month periods ended June 30, 1998, compared to the three
and six month periods ended May 31, 1997, primarily due to increased vacancy
losses at One Turtle Creek Office Complex. Due to several significant tenant
move-outs, occupancy at this property dropped from 90% at May 31, 1997, to 60%
at January 31, 1998, but had been increased to 73% as of July 31, 1998.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Interest expense increased $99,000 and $234,000 for the three and six month
periods ended June 30, 1998, compared to the three and six month periods ended
May 31, 1997. Approximately half of the increases resulted from the 1997
acquisitions, and half resulted from long term financing obtained on existing
properties during 1997 which increased debt outstanding by $3.2 million.
Advisory fees to TRA decreased $45,000 for the three and six month periods ended
June 30, 1998, compared to the three and six month periods ended May 31, 1997.
The advisory fee is an incentive fee equal to 16% per annum of adjusted funds
from operations, as defined in the advisory agreement approved by the Board and
stockholders. The Company's funds from operations decreased for these periods
chiefly due to increased vacancy losses and interest expense as discussed above.
See "Funds from Operations" below.
General and administrative expenses increased from $86,000 and $241,000 for the
three and six month periods ended May 31, 1997, to $132,000 and $280,000 for the
three and six month periods ended June 30, 1998. These increases are primarily
due to increases in advisor expense reimbursements and amortization of expenses
related to the conversion of the Trust, the Company's predecessor, into a
corporation in 1997.
In January 1998, the Company recognized a gain of $264,000 relating to Kearny's
disposition of a wraparound mortgage.
Funds from Operations
The following information should be read in conjunction with all of the
financial statements and notes thereto included elsewhere in this report and
with the discussion set forth above in "Liquidity and Capital Resources" and
"Results of Operations."
Funds from operations ("FFO") for the three and six months periods ended June
30, 1998, and May 31, 1997, are as follows (unaudited) (dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- --------------------------
June 30, May 31, June 30, May 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) ...................... $ (29) $ 280 $ 223 $ 229
Gain on sale of investments ............ -- -- (264) --
Depreciation and amortization of
real estate assets ................... 235 181 462 451
Depreciation and amortization of
real estate assets of partnerships ... 29 21 91 68
---------- ---------- ---------- ----------
Funds from operations .................. $ 235 $ 482 $ 512 $ 748
========== ========== ========== ==========
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Funds from Operations (Continued)
The Company generally considers FFO to be an appropriate measure of the
performance of an equity real estate investment trust ("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 of real estate assets, 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 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 dividends. 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.
Allowances for Estimated Losses and Provisions for Losses
The Company's management periodically evaluates the carrying values of the
Company's properties held for sale. Generally accepted accounting principles
require that the carrying value of 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
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
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 evaluations 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.
12
<PAGE> 13
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, financial condition, or results of operations.
Tax Matters
The Company has elected and, in the opinion of the Company's management,
qualified to be treated as a REIT, as defined under Sections 856 through 860 of
the Internal Revenue Code of 1986 (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
stockholders.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has initiated an assessment to determine the extent to which the
Company is vulnerable to Year 2000 Issues. Management does not anticipate a
material impact on the Company's business, financial position, or results of
operations from the Year 2000 Issue.
Possible Consolidation with National Income Realty Trust and Acquisition of
Advisor
On February 19, 1998, the Company and National Income Realty Trust ("NIRT")
jointly announced the agreement of their respective boards to form a single
consolidated entity with the Company, for convenience, as the survivor. The
surviving consolidated entity is intended to operate as a self-administered
REIT. The consolidation transaction will be submitted to shareholders of each of
the Company and NIRT for approval at special meetings to be held during 1998.
Under the proposed agreement, each shareholder of NIRT will receive 1.97 shares
of the Company's common stock for each share of beneficial interest of NIRT
held. NIRT, also a REIT, has a similar opportunistic approach to real estate
investment and had total consolidated assets of approximately $266 million as of
December 31, 1997. Upon the approval and consummation of the consolidation
transaction by the respective shareholders of each entity, the Company will
acquire TRA, the Company's advisor since March 1, 1994, and NIRT's advisor since
April 1, 1994, for 100,000 shares of the Company's common stock and options to
acquire 350,000 shares of the Company's common stock at prices ranging between
$13 and $16 per share. The resulting consolidated entity with the Company as the
survivor
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Possible Consolidation with National Income Realty Trust and Acquisition of
Advisor (Continued)
will emerge from these transactions as an integrated, self-administered,
self-managed REIT controlling approximately 14,000 apartment units and 2.1
million square feet of retail and office space, primarily in California,
Florida, and Texas. The consolidation transaction will be accounted for as a
reverse acquisition of the Company by NIRT.
William S. Friedman, President, Chief Executive Officer, and Director of the
Company, also serves as Director and Chief Executive Officer of TRA and as
Trustee, President, and Chief Executive Officer of NIRT. TRA is owned by Mr.
Friedman and his wife, Lucy N. Friedman. The Friedman family also owns
approximately 30% of the outstanding shares of common stock of the Company and
approximately 33% of the outstanding shares of beneficial interest of NIRT.
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 the Company's 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.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On February 19, 1998, Tarragon Realty Investors, Inc., (the "Company") and
National Income Realty Trust ("NIRT") announced the agreement of their
respective boards to form a single consolidated entity with the Company as the
survivor. On May 21, 1998, the Board of Directors approved the written forms of
documents relating to such transaction, and, on June 5, 1998, the Company and
NIRT each executed an Agreement and Plan of Merger (the "Merger Agreement"). The
Merger Agreement provides, subject to shareholder approval of each entity, for
the incorporation of NIRT as a California corporation and the merger of that
California corporation with and into the Company, with the Company as the
surviving entity. Under the Merger Agreement, at the consummation of the
transaction, each shareholder of NIRT will receive 1.97 shares of the Company's
common stock for each share of beneficial interest of NIRT held.
Also on June 5, 1998, as contemplated by the Merger Agreement, the Company and
others executed a Stock Purchase Agreement (the "Advisor Acquisition Agreement")
pursuant to which, subject to the consummation of the Merger Agreement, the
Company will acquire from William S. and Lucy N. Friedman all of the issued and
outstanding stock of Tarragon Realty Advisors, Inc. ("TRA"), the contractual
advisor to the Company since March 1, 1994, and to NIRT since April 1, 1994, for
100,000 shares of the Company's common stock and options to acquire 350,000
shares of the Company's common stock at prices ranging between $13 and $16 per
share. Assuming the approval and implementation of the Merger Agreement, at the
time of consummation of the Advisor Acquisition Agreement, TRA will become a
wholly-owned subsidiary of the Company, and the Company will assume indebtedness
of up to $1 million of TRA.
Under the terms of the Advisor Acquisition Agreement, Mr. Friedman is also to
enter into an employment agreement with TRA for a term of four years at a salary
of $300,000 per year with a broad covenant by Mr. Friedman not to compete with
the Company and a right of first refusal in favor of the Company and TRA with
regard to any real estate investment opportunity which might come to Mr.
Friedman's attention. Under the employment agreement, Mr. Friedman is to work
substantially full time for the Company, and the Company is to grant to Mr.
Friedman options to purchase 650,000 shares of common stock for a term of ten
years at varying exercise prices ranging from $12 per share to $18 per share. If
for any reason the Merger Agreement is not consummated, the Advisor Acquisition
Agreement will also not be consummated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated June 5, 1998, between
Tarragon Realty Investors, Inc., and National Income Realty
Trust (incorporated by reference to Exhibit 3.6 to
Registration Statement No. 333-60527 on Form S-4).
2.2 Stock Purchase Agreement dated June 5, 1998, among Tarragon
Realty Investors, Inc., Tarragon Realty Advisors, Inc.,
William S. Friedman, and Lucy N. Friedman (incorporated by
reference to Exhibit 3.7 to Registration Statement No.
333-60527 on Form S-4).
27.0 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
None.
15
<PAGE> 16
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: August 14, 1998 By: /s/ William S. Friedman
-------------------- -----------------------------------
William S. Friedman
President, Chief Executive
Officer, and Director
Date: August 14, 1998 By: /s/ Robert C. Irvine
-------------------- -----------------------------------
Robert C. Irvine
Executive Vice President and
Chief Financial Officer
Date: August 14, 1998 By: /s/ Erin D. Davis
-------------------- -----------------------------------
Erin D. Davis
Vice President and
Chief Accounting Officer
16
<PAGE> 17
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated June 5, 1998, between
Tarragon Realty Investors, Inc., and National Income Realty
Trust
2.2 Stock Purchase Agreement dated June 5, 1998, among Tarragon
Realty Investors, Inc., Tarragon Realty Advisors, Inc.,
William S. Friedman, and Lucy N. Friedman
27.0 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 462
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (241)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 39,330
<DEPRECIATION> (6,915)
<TOTAL-ASSETS> 38,247
<CURRENT-LIABILITIES> 0
<BONDS> 26,172
0
0
<COMMON> 13
<OTHER-SE> 9,499
<TOTAL-LIABILITY-AND-EQUITY> 38,247
<SALES> 0
<TOTAL-REVENUES> 4,960
<CGS> 0
<TOTAL-COSTS> 2,963
<OTHER-EXPENSES> 542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,216
<INCOME-PRETAX> 223
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<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
