<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, 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 1,207,697
- ------------------------------ ---------------------------------
(Class) (Outstanding at November 6, 1998)
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended
September 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>
September 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) .................................................... $ 4,383 $ 4,319
Less - allowance for estimated losses ............................................ (241) (241)
---------- ----------
4,142 4,078
Real estate held for investment (net of accumulated
depreciation of $5,658 in 1998 and $4,986 in 1997) ............................. 28,690 27,795
Investments in and advances to partnerships ...................................... 3,115 1,991
Cash and cash equivalents ........................................................ 145 1,011
Restricted cash .................................................................. 909 737
Other assets, net ................................................................ 1,931 1,865
---------- ----------
$ 38,932 $ 37,477
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Notes, debentures, and interest payable .......................................... $ 26,064 $ 26,416
Advances from affiliates ......................................................... 2,621 --
Other liabilities ................................................................ 1,621 1,291
---------- ----------
30,306 27,707
Commitments and contingencies.....................................................
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000; shares issued and
outstanding, 1,207,697 in 1998 and 1,317,812 in 1997 (after deducting
136,448 in 1998 and 30,175 in 1997 held in treasury) ........................... 12 13
Special stock, $.01 par value; authorized shares,
10,000,000; shares issued and outstanding, none ................................ -- --
Paid-in capital .................................................................. 44,420 45,696
Accumulated dividends in excess of accumulated earnings .......................... (35,806) (35,939)
---------- ----------
8,626 9,770
---------- ----------
$ 38,932 $ 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 For the Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Rentals ................................... $ 2,534 $ 2,382 $ 7,533 $ 6,945
Interest .................................. 8 21 35 134
Equity in income (loss) of
partnerships ............................ (10) 16 (76) (6)
------------ ------------ ------------ ------------
2,532 2,419 7,492 7,073
Expenses
Property operations ....................... 1,563 1,553 4,526 4,181
Interest .................................. 634 509 1,850 1,500
Depreciation .............................. 227 187 672 592
Advisory fee to affiliate ................. 45 48 142 189
General and administrative ................ 153 136 433 385
------------ ------------ ------------ ------------
2,622 2,433 7,623 6,847
------------ ------------ ------------ ------------
Income (loss) before gain on sale
of investments ............................ (90) (14) (131) 226
Gain on sale of investments ................. -- -- 264 --
------------ ------------ ------------ ------------
Net income (loss) ........................... $ (90) $ (14) $ 133 $ 226
============ ============ ============ ============
Earnings per share - basic and diluted
Net income (loss) ........................... $ (.07) $ (.01) $ .10 $ .17
============ ============ ============ ============
Weighted average shares of
common stock used in
computing earnings per share .............. 1,250,611 1,324,430 1,277,537 1,335,158
============ ============ ============ ============
Weighted average shares of
common stock used in
computing earnings per share -
assuming dilution ......................... 1,250,611 1,324,430 1,293,539 1,344,255
============ ============ ============ ============
</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 ......... (112,673) (1) (1,276) -- (1,277)
Stock options exercised ... 2,558 -- -- -- --
Net income ................ -- -- -- 133 133
---------- ---------- ---------- ---------- ----------
Balance, September 30,
1998 ................. 1,207,697 $ 12 $ 44,420 $ (35,806) $ 8,626
========== ========== ========== ========== ==========
</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 Nine Months
Ended September 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected ........................................ $ 7,567 $ 6,804
Interest collected ....................................... 35 116
Interest paid ............................................ (1,662) (1,400)
Payments for property operations ......................... (4,394) (3,935)
General and administrative expenses paid ................. (389) (401)
Advisory fee paid to affiliate ........................... (41) (137)
Organizational costs paid ................................ (160) (120)
Deferred financing costs paid ............................ (40) (69)
---------- ----------
Net cash provided by operating activities ............. 916 858
Cash Flows from Investing Activities
Acquisition of real estate ............................... -- (1,966)
Earnest money deposit refunded ........................... -- 50
Real estate improvements ................................. (1,631) (892)
Net contributions and advances to partnerships ........... (1,641) (549)
Distribution from partnership's investing activities ..... 705 --
---------- ----------
Net cash (used in) investing activities ............... (2,567) (3,357)
Cash Flows from Financing Activities
Proceeds from borrowings ................................. -- 2,050
Payments of notes payable ................................ (370) (2,487)
Advances from affiliates, net ............................ 2,510 636
Replacement reserve receipts (deposits), net ............. 46 (237)
Stock repurchases ........................................ (1,277) (209)
Dividends paid to stockholders ........................... (124) --
---------- ----------
Net cash provided by (used in) financing activities ... 785 (247)
---------- ----------
Net (decrease) in cash and cash equivalents ................ (866) (2,746)
Cash and cash equivalents, beginning of period ............. 1,011 3,022
---------- ----------
Cash and cash equivalents, end of period ................... $ 145 $ 276
========== ==========
</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 Nine Months
Ended September 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Reconciliation of net income to net cash provided by
operating activities
Net income ........................................................... $ 133 $ 226
Gain on sale of investments .......................................... (264) --
Equity in loss of partnerships ....................................... 76 6
Depreciation and amortization ........................................ 854 739
Changes in other assets and liabilities, net of effects
of noncash investing and financing activities
(Increase) in other assets .................................... (214) (317)
Increase in other liabilities ................................. 271 165
Increase in interest payable .................................. 60 39
---------- ----------
Net cash provided by operating activities ............................ $ 916 $ 858
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection
with the purchase of real estate
Real estate ....................................................... $ -- $ 5,749
Other assets ...................................................... -- 171
Notes and interest payable ........................................ -- (3,275)
Other liabilities ................................................. -- (679)
---------- ----------
Cash paid ..................................................... $ -- $ 1,966
========== ==========
</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 nine-month period ended September 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. Dollar amounts
in tables are in thousands. 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 September 30, 1998:
<TABLE>
<S> <C>
Larchmont Associates, L.P. ("Larchmont")................ $ 1,725
National Omni Associates, L.P. ("Omni")................. 1,390
-------------
$ 3,115
=============
</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.
Set forth below are summarized financial data for the partnerships accounted for
using the equity method as of and for the nine months ended September 30, 1998
(unaudited):
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 Total
---------- ---------- ----------
<S> <C> <C> <C>
Real estate held for investment ................ $ 8,043 $ 32,337 $ 40,380
Accumulated depreciation ....................... (457) (433) (890)
Other assets ................................... 361 1,464 1,825
Notes and interest payable ..................... (5,282) (26,050) (31,332)
Due to partners ................................ (2,032) -- (2,032)
Other liabilities .............................. (130) (1,113) (1,243)
---------- ---------- ----------
Partners' capital .............................. $ 503 $ 6,205 $ 6,708
========== ========== ==========
The Company's proportionate share of capital ... $ 331 $ 1,390 $ 1,721
Advances ....................................... 1,394 -- 1,394
---------- ---------- ----------
Investments in and advances to partnerships .... $ 1,725 $ 1,390 $ 3,115
========== ========== ==========
Rental revenue ................................. $ 1,505 $ 2,876 $ 4,381
Property operating expenses .................... (940) (1,426) (2,366)
Interest expense ............................... (366) (1,424) (1,790)
Depreciation expense ........................... (169) (432) (601)
---------- ---------- ----------
Net income (loss) .............................. $ 30 $ (406) $ (376)
========== ========== ==========
Equity in income (loss) of partnerships ........ $ 14 $ (90) $ (76)
========== ========== ==========
</TABLE>
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.
NOTE 3. ADVANCES FROM AFFILIATES
Affiliates of TRA advanced $2.6 million to the Company during the first nine
months of 1998 pursuant to a two-year $5 million line of credit. Advances under
the line of credit bear interest at the London Interbank Offered Rate plus 1%
per annum. The line of credit was provided to the Company in part to facilitate
Omni's acquisition of 5600 Collins Avenue and the Company's stock repurchases.
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 nine
month periods ended September 30, 1998 and 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. The effect of stock options on the weighted average shares
of common stock outstanding - assuming dilution for the three month periods
ended September 30, 1998 and 1997, is not reflected below because their effect
is anti-dilutive.
8
<PAGE> 9
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 4. EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding ....... 1,250,611 1,324,430 1,277,537 1,335,158
Stock options ..................... -- -- 16,002 9,097
------------ ------------ ------------ ------------
Weighted average shares of
common stock outstanding -
assuming dilution .............. 1,250,611 1,324,430 1,293,539 1,344,255
============ ============ ============ ============
</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.
NOTE 7. SUBSEQUENT EVENTS
In October 1998, the Company obtained first mortgage financing secured by Holly
House Apartments in the amount of $1.8 million, receiving net proceeds of $1.4
million after funding required escrows and closing costs. The Company will pay
TRA a financing fee of $17,600 in connection with this transaction.
On October 20, 1998, at a Special Meeting of stockholders of the Company, the
stockholders approved by a vote of 93% of the shares voted a proposal to form a
consolidated entity with National Income Realty Trust ("NIRT"), with the Company
as the survivor. The shares of beneficial interest of NIRT are to be converted
into 1.97 shares of common stock of the Company. Simultaneously, the Company
will acquire TRA for 100,000 shares of its common stock and options to acquire
350,000 shares of its common stock for prices ranging between $13 and $16 per
share. It is anticipated that the transaction will be consummated in November
1998.
[This space intentionally left blank.]
9
<PAGE> 10
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.
The Company's real estate at September 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 $145,000 at September 30, 1998, compared to $1
million at December 31, 1997. The Company's principal sources of cash have been
property operations, refinancing proceeds, and advances from affiliates of
Tarragon Realty Advisors, Inc. ("TRA"), the Company's advisor. Sources of cash
projected through the end of 1998 include net financing proceeds upon the
refinancing of three properties of $6.7 million. During the first quarter of
1999, the Company expects to receive $4.3 million from the sale of one
commercial property presently under contract for sale. Management believes that
cash on hand along with funds to be provided by property operations and these
anticipated external sources is sufficient to fund any needed property
maintenance and capital improvements as well as meet the Company's debt service
obligations. For the remainder of 1998, the Company expects to invest $500,000
in capital improvements to its properties and make principal payments (excluding
mortgage payoffs in connection with refinancings) of $123,000. Assuming the
timing of planned refinancings is consistent with expectations, the Company will
also repay advances from affiliates of TRA of $2.6 million in the fourth quarter
of 1998.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The Company invested $1.6 million in capital improvements to its properties
during the first nine months of 1998.
During the first nine months of 1998, the Company advanced $541,000 to Larchmont
Associates Limited Partnership, a partnership in which the Company holds 57%
interest, largely to fund capital improvements to Larchmont West Apartments, the
partnership's sole property. Advances are subject to repayment with simple
interest at 18% prior to any other distributions to the partners.
Also, during the first nine 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 affiliates of TRA totaling $2.5 million
during the first nine months of 1998 pursuant to a two-year $5 million line of
credit. Advances under the line of credit bear interest at the London Interbank
Offered Rate plus 1% per annum. The line of credit was provided to the Company
in part to facilitate Omni's acquisition of 5600 Collins Avenue and the
Company's stock repurchases.
The Company made principal payments on notes payable of $370,000 during the
first nine months 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, all of which had been purchased through September
30, 1998. In September 1998, the Board authorized the Company to repurchase up
to an additional 127,000 shares of common stock, of which 3,648 had been
purchased through September 30, 1998. During the first nine months of 1998, the
Company repurchased 112,673 shares of its common stock in open market
transactions at a total cost of $1.3 million.
In January 1998, the Company paid a cash dividend of $.10 per share, totaling
$124,000, to stockholders of record on December 26, 1997.
Results of Operations
For the three and nine month periods ended September 30, 1998, the Trust
reported a net loss of $90,000 and net income of $133,000, respectively,
compared to a net loss of $14,000 and net income of $226,000 for the three and
nine month periods ended September 30, 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) increased to
$971,000 and $3 million for
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
the three and nine month periods ended September 30, 1998, from $829,000 and
$2.8 million for the three and nine month periods ended September 30, 1997.
Increases in net rental income of $59,000 and $327,000, respectively, were
contributed by two properties acquired in 1997. Net rental income for properties
held in both years fell by $83,000 for the nine months ended September 30, 1998,
compared to the nine months ended September 30, 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 69% at September 30,
1997, to 59% at January 31, 1998, but had been increased to 80% as of October
31, 1998. Additionally, several additional leases are currently in negotiations.
Interest expense increased $125,000 and $350,000 for the three and nine month
periods ended September 30, 1998, compared to the three and nine month periods
ended September 30, 1997. The increases resulted primarily from long term
financing obtained on three properties during 1997 which increased debt
outstanding by $3.2 million.
Advisory fees to TRA decreased $3,000 and $47,000 for the three and nine month
periods ended September 30, 1998, compared to the corresponding periods in 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. See "Funds from Operations" below.
General and administrative expenses increased from $136,000 and $385,000 for the
three and nine month periods ended September 30, 1997, to $153,000 and $433,000
for the three and nine month periods ended September 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 nine months ended September 30,
1998 and 1997, are as follows (unaudited) (dollars in thousands):
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Funds from Operations (Continued)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) ...................... $ (90) $ (14) $ 133 $ 226
Gain on sale of investments ............ -- -- (264) --
Depreciation and amortization of
real estate assets ................... 239 242 706 671
Depreciation and amortization of
real estate assets of partnerships ... 83 24 174 90
---------- ---------- ---------- ----------
Funds from operations .................. $ 232 $ 252 $ 749 $ 987
========== ========== ========== ==========
</TABLE>
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.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Allowances for Estimated Losses and Provisions for Losses (Continued)
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.
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 Year 2000 Issues
The Year 2000 Issue is the result of electronic devices storing the applicable
year as a two-digit field rather than four. Consequently, 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, process invoices,
or engage in similar normal business activities. Following is a discussion of
the status of the Company's assessment of its exposure to Year 2000 Issues.
State of Readiness
With regards to the Company's Information Technology Systems, certain
computer equipment and software of the Company's properties and TRA, the
Company's advisor which provides accounting and information services to the
Company, were found not to be Year 2000 compliant. The Company and TRA
have begun to replace the computer equipment with Year 2000 compliant
equipment and to upgrade the software to Year 2000 compliant versions. These
upgrades were planned regardless of Year 2000 Issues,
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Impact of Year 2000 Issues (Continued)
State of Readiness (Continued)
but they were accelerated in order to ensure compliance. These upgrades
are expected to be completed by the third quarter of 1999. With regard to
embedded technology issues, such as with elevators in commercial buildings,
sprinkler systems, security gates, and security alarms, the Company is
currently assessing the potential risks. The Company believes that such risks
will not materially affect the Company's business.
The Company is currently assessing potential risks related to third parties,
including utility companies, banks, and phone companies. The Company
believes there is minimal risk that these third parties will not be Year 2000
compliant.
Costs to Address the Year 2000 Issues
To date, TRA has incurred $20,000 for replacing noncompliant hardware and
$25,000 for purchasing upgraded accounting software. Of these costs,
approximately $3,000 has been charged back to the Company through expense
reimbursements. The Company is also upgrading the rent software at its
properties. This upgraded software is being provided free of charge by the
software manufacturer. Expected remaining costs are $25,000 for software
conversion, including consulting fees, and $20,000 for additional hardware.
The Company's share of these costs will be approximately 10%. Costs incurred
after the consummation of the merger of the Company and National Income
Realty Trust ("NIRT"), as discussed below, will be borne entirely by the
consolidated entity.
The Risks of Year 2000 Issues
Potential material risks related to the Year 2000 include the following. If
the Company's and TRA's computer systems and software are not successfully
upgraded prior to 2000, the ability of the Company to provided timely
financial information may be impaired. However, the Company is confident
that these upgrades will be completed in a timely manner. Similarly, the
Company's ability to provide financial information could be adversely
affected if computer systems of banks with which the Company does business
do not become Year 2000 compliant. Also, if the computer systems of utility
companies which provide services to the Company do not become Year 2000
compliant, tenants of the Company's properties could be inconvenienced or
even harmed. However, the Company believes it is unlikely that these banks
and utility companies will not become Year 2000 compliant.
Contingency Plans
The Company has not fully completed contingency plans. However, one focus of
the plans will be to source alternate third party vendors that are likely to
successfully become Year 2000 compliant. The Company anticipates having the
contingency plans in place by mid-year 1999.
Consolidation with National Income Realty Trust and Acquisition of Advisor
On February 19, 1998, the Company and 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
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Consolidation with National Income Realty Trust and Acquisition of Advisor
(Continued)
consolidated entity will operate as a self-administered REIT. The consolidation
transaction was approved by shareholders of each of the Company and NIRT at
special meetings held in October 1998. Under the Merger Agreement (as
hereinafter defined), 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 consummation of the consolidation transaction, 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 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, planned sources and uses of cash, and assessment and
resolution of Year 2000 issues. 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.]
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 10, 1998, Tarragon Realty Investors, Inc.,'s ("Tarragon" or the
"Company") Registration Statement on Form S-4 No. 333-60527 was declared
effective by the Securities and Exchange Commission (the "Commission") which
covers the issuance of up to 7,586,000 shares of Tarragon Common Stock in
connection with certain transactions contemplated including the following two
agreements:
(a) Agreement and Plan of Merger dated June 5, 1998 (the
"Merger Agreement") between Tarragon and National Income
Realty Trust ("NIRT"), and
(b) Stock Purchase Agreement dated June 5, 1998 (the "Advisor
Acquisition Agreement") among Tarragon, Tarragon Realty
Advisors, Inc. ("TRA"), William S. Friedman, and Lucy N.
Friedman.
Included in such Registration Statement was a Joint Proxy Statement/Prospectus
which was mailed to the respective shareholders of Tarragon and NIRT in
connection with separate Special Meetings of the stockholders of Tarragon and
the shareholders of NIRT, each scheduled for Tuesday, October 20, 1998. At such
meetings, the shareholders of each entity were to consider and vote upon a
proposal to approve and adopt the Merger Agreement and the transactions
contemplated thereby including the issuance of shares of Tarragon Common Stock
pursuant to the Merger Agreement.
On October 20, 1998, at its Special Meeting of stockholders, the only matter
voted upon by the stockholders of Tarragon was a proposal to approve and adopt
the Merger Agreement and the transactions contemplated by the Merger Agreement,
including the issuance of shares of Tarragon Common Stock pursuant to the Merger
Agreement and the conversion of the shares of the successor to NIRT into the
right to receive 1.97 shares of Tarragon Common Stock pursuant to the Merger
Agreement . As of September 4, 1998, the record date for the determination of
holders of Tarragon Common Stock entitled to receive notice of and to vote at
the Special Meeting, there were 1,272,180 shares of Tarragon Common Stock
outstanding and entitled to vote, with each share of Tarragon Common Stock being
entitled to one vote. At such meeting, a total of 714,508 votes were cast FOR
(93.4% of the total of 765,050 shares voted or 56.16% of those entitled to
vote), 11,084 shares were voted AGAINST such proposal, and 39,458 shares
ABSTAINED from voting.
Tarragon anticipates consummating the Merger Agreement and the Advisor
Acquisition Agreement during November 1998.
ITEM 5. OTHER INFORMATION
On October 15, 1998, Robert C. Irvine resigned as Executive Vice President and
Chief Financial Officer of the Company for personal reasons. Effective October
21, 1998, Erin D. Davis, Vice President and Chief Accounting Officer, was
appointed to the additional position of Chief Financial Officer of the Company.
On November 2, 1998, John C. Strickland was appointed Managing Director for Real
Estate Transactions of the Company. Also, on November 1, 1998, Bruce A. Schnitz
ceased to be Chief Operating Officer of the Company, and William S. Friedman,
President and Chief Executive Officer, also assumed the duties of Chief
Operating Officer.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
Exhibit 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)
Exhibit 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)
Exhibit 27.0 Financial Data Schedule
</TABLE>
(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>
June 5, 1998 September 21, 1998 5. Other Events
7. Financial Statements and Exhibits
</TABLE>
[This space intentionally left blank.]
18
<PAGE> 19
SIGNATURES
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 16, 1998 By: /s/ William S. Friedman
-------------------- -------------------------------------
William S. Friedman
President, Chief Executive
Officer, and Trustee
Date: November 16, 1998 By: /s/ Erin D. Davis
--------------------- -------------------------------------
Erin D. Davis
Chief Financial Officer
(Principal Financial and Accounting
Officer)
19
<PAGE> 20
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
EXHIBIT 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)
EXHIBIT 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)
EXHIBIT 27.0 Financial Data Schedule Page 21
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 145
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (241)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 40,215
<DEPRECIATION> (7,142)
<TOTAL-ASSETS> 38,932
<CURRENT-LIABILITIES> 0
<BONDS> 26,064
0
0
<COMMON> 12
<OTHER-SE> 8,614
<TOTAL-LIABILITY-AND-EQUITY> 38,932
<SALES> 0
<TOTAL-REVENUES> 7,492
<CGS> 0
<TOTAL-COSTS> 4,526
<OTHER-EXPENSES> 814
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,850
<INCOME-PRETAX> 133
<INCOME-TAX> 0
<INCOME-CONTINUING> 133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
