<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 MARCH 31, 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
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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 1,277,022
- ---------------------------- ----------------------------
(Class) (Outstanding at May 7, 1998)
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended March
31, 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>
March 31, December 31,
---------- -----------
1998 1997
---------- -----------
<S> <C> <C>
Assets
Real estate held for sale (net of accumulated depreciation
of $1,484 in 1998 and 1997)................................................ $ 4,319 $ 4,319
Less - allowance for estimated losses ........................................ (241) (241)
---------- ----------
4,078 4,078
Real estate held for investment (net of accumulated
depreciation of $5,203 in 1998 and $4,986 in 1997).......................... 27,777 27,795
Investments in and advances to partnerships................................... 2,796 1,991
Cash and cash equivalents..................................................... 272 1,011
Restricted cash............................................................... 607 737
Other assets, net............................................................. 1,741 1,865
---------- ----------
$ 37,271 $ 37,477
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Notes, debentures, and interest payable....................................... $ 26,316 $ 26,416
Other liabilities (including $270 due to affiliates).......................... 1,268 1,291
---------- ----------
27,584 27,707
Commitments and contingencies................................................
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000;
shares issued and outstanding, 1,284,897 in 1998 and
1,317,812 in 1997 (after deducting 63,090 in 1998
and 30,175 in 1997 held in treasury)........................................ 13 13
Paid-in capital............................................................... 45,361 45,696
Accumulated dividends in excess of accumulated earnings....................... (35,687) (35,939)
---------- ----------
9,687 9,770
---------- ----------
$ 37,271 $ 37,477
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
2
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TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------------
March 31, February 28,
1998 1997
------------- -------------
<S> <C> <C>
Revenue
Rentals .................................................. $ 2,482 $ 2,187
Interest ................................................. 14 75
Equity in (loss) of partnerships ........................ (32) (89)
------------- -------------
2,464 2,173
Expenses
Property operations ...................................... 1,441 1,277
Interest ................................................. 616 481
Depreciation ............................................. 218 258
Advisory fee to affiliate ................................ 53 53
General and administrative ............................... 148 155
------------- -------------
2,476 2,224
------------- -------------
(Loss) before gain on sale of investments .................. (12) (51)
Gain on sale of investments ................................ 264 --
------------- -------------
Net income (loss) .......................................... $ 252 $ (51)
============= =============
Earnings per share - basic and diluted
Net income (loss) .......................................... $ .19 $ (.04)
============= =============
Weighted average shares of common stock
used in computing earnings per share ..................... 1,304,430 1,343,867
============= =============
Weighted average shares of common stock used
in computing earnings per share - assuming dilution ...... 1,319,206 1,351,149
============= =============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
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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 ............ (32,915) -- (335) -- (335)
Net income ................... -- -- -- 252 252
----------- ---------- ---------- ---------- ----------
Balance, March 31,
1998 ...................... 1,284,897 $ 13 $ 45,361 $ (35,687) $ 9,687
=========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
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TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
March 31, February 28,
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected ............................................. $ 2,477 $ 2,137
Interest collected ............................................ 8 81
Interest paid ................................................. (545) (474)
Payments for property operations .............................. (1,532) (1,535)
General and administrative expenses paid ...................... (100) (207)
Advisory fee paid to affiliate ................................ (40) (7)
Deferred financing costs paid ................................. (8) (19)
---------- ----------
Net cash provided by (used in) operating activities ........ 260 (24)
Cash Flows from Investing Activities
Acquisition of real estate .................................... -- (895)
Earnest money deposit paid .................................... -- (100)
Real estate improvements ...................................... (201) (211)
Collections of notes receivable ............................... -- 686
Net contributions and advances to partnerships ................ (1,279) (86)
Distribution from partnership's investing
activities .................................................. 705 --
---------- ----------
Net cash (used in) investing activities .................... (775) (606)
Cash Flows from Financing Activities
Payments of notes payable ..................................... (120) (142)
Replacement reserve (deposits) receipts, net .................. 69 (53)
Stock repurchases ............................................. (335) (11)
Dividends paid to stockholders ................................ (108) --
Advances from affiliates ...................................... 270 --
---------- ----------
Net cash (used in) financing activities .................... (224) (206)
---------- ----------
Net (decrease) in cash and cash equivalents ..................... (739) (836)
Cash and cash equivalents, beginning of period .................. 1,011 2,684
---------- ----------
Cash and cash equivalents, end of period ........................ $ 272 $ 1,848
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
5
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TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------
March 31, February 28,
1998 1997
---------- ----------
<S> <C> <C>
Reconciliation of net income (loss) to net cash provided
by (used in) operating activities
Net income (loss) ............................................................ $ 252 $ (51)
Gain on sale of investments .................................................. (264) --
Depreciation and amortization ................................................ 285 288
Equity in loss of partnerships ............................................... 32 89
Changes in other assets and liabilities net of noncash
investing and financing activities
Decrease in other assets .................................................. 121 197
(Decrease) in other liabilities ........................................... (186) (541)
Decrease in interest receivable ........................................... -- 5
Increase (decrease) in interest payable ................................... 20 (11)
---------- ----------
Net cash provided by (used in) operating activities ....................... $ 260 $ (24)
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the purchase of real
estate:
Real estate ............................................................... $ -- $ 6,189
Advances to partnership ................................................... -- (572)
Other assets .............................................................. -- (18)
Notes and interest payable ................................................ -- (4,321)
Minority interest ......................................................... -- (383)
---------- ----------
Cash paid ............................................................. $ -- $ 895
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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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 three-month period ended March 31, 1998,
are not necessarily indicative of the results that may be expected for the
fiscal 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 fiscal 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 March 31, 1998:
<TABLE>
<S> <C>
Larchmont Associates, L.P. ("Larchmont").......................... $ 1,315
National Omni Associates, L.P. ("Omni")........................... 1,481
----------
$ 2,796
==========
</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. The Company will receive 22% of the partnership's
cash distributions 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.
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 three months ended March 31, 1998. Larchmont's sole
property, Larchmont West, a 504-unit apartment property in Toledo, Ohio, is
currently under renovation. As discussed above, Omni's sole property, 5600
Collins Avenue, was acquired in February 1998, and the summarized results of
operations below include only two months' activity.
7
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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 .............................. $ 477 $ 746
Property operating expenses ................. (329) (301)
Interest expense ............................ (142) (348)
Depreciation expense ........................ (80) (102)
--------- ---------
Net (loss) .................................. $ (74) $ (5)
========= =========
</TABLE>
NOTE 3. ADVANCES FROM AFFILIATES
Other liabilities at March 31, 1998, included $270,000 advanced by TRA during
the first quarter 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-month periods
ended March 31, 1998, and February 28, 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
------------------------------
March 31, February 28,
1998 1997
------------- ------------
<S> <C> <C>
Weighted average shares of
common stock outstanding ............ 1,304,430 1,343,867
Stock options .......................... 14,776 7,282
------------- ------------
Weighted average shares of
common stock outstanding -
assuming dilution ................... 1,319,206 1,351,149
============= ============
</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
Introduction
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes thereto.
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 months ended
March 31, 1998, to the three months ended February 28, 1997.
The Company's real estate at March 31, 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 $272,000 at March 31, 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 property. 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 $201,000 in capital improvements to its properties during
the first quarter of 1998 compared to $211,000 during the first fiscal quarter
of 1997 and anticipates an additional $1.9 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 quarter of 1998, the Company advanced $179,000 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 quarter of 1998. Advances are subject to repayment with
simple interest at 18% prior to any other distributions to the partners.
Also, during the first three 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 $270,000 during the first quarter 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 $120,000 during the
first quarter of 1998. Principal payments of $373,000 are due during the
remainder of 1998.
In December 1995, the Company's Board of Directors authorized the Company to
repurchase up to 139,200 of its shares of common stock in open market and
negotiated transactions, of which 63,090 had been purchased through March 31,
1998. During the first quarter of 1998, the Company repurchased 32,915 shares of
its common stock in open market transactions at a total cost of $335,000.
In January 1998, the Company paid a cash dividend of $.10 per share, totaling
$108,000, to stockholders of record on December 26, 1997.
Results of Operations
For the three months ended March 31, 1998, the Company reported net income of
$252,000 compared to a net loss of $51,000 for the three months ended February
28, 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
from $910,000 for the three months ended February 28, 1997, to $1 million for
the three months ended March 31, 1998. This increase is primarily attributable
to the operations of the 1997 acquisitions.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Interest expense increased $135,000 for the three months ended March 31, 1998,
compared to the three months ended February 28, 1997. Approximately half of the
increase resulted from the 1997 acquisitions, and half resulted from long term
financing obtained on existing properties during 1997.
In January 1998, the Company recognized a gain of $264,000 relating to Kearny's
disposition of a wraparound mortgage.
Allowance 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 of
properties held for sale are less than the carrying values thereof at the time
of evaluation, an allowance for loss is provided by a charge against operations.
The review of properties held for sale generally includes selective site
inspections, a review of the property's current rents compared to market rents,
a review of the property's expenses, a review of maintenance requirements,
discussions with the manager of the property, and a review of the surrounding
area. Future reviews could cause the Company's management to adjust current
estimates of fair value.
The Company's management also evaluates the Company's properties held for
investment for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. This evaluation
generally consists of a review of the property's cash flow and current and
projected market conditions, as well as any changes in general and local
economic conditions. If an impairment loss exists based on the results of this
review, a loss is recognized by a charge against current earnings and a
corresponding reduction in the respective asset's carrying value. The amount of
this impairment loss is equal to the amount by which the carrying value of the
property exceeds its estimated fair value.
Income Tax Aspects
The Company has elected and, in the opinion of the Company's management,
qualified to be treated as a Real Estate Investment Trust ("REIT"), as defined
under Sections 856 through 860 of the Internal Revenue Code of 1986 (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.
11
<PAGE> 12
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.
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 month periods ended March 31, 1998,
and February 28, 1997, are as follows (unaudited) (dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
March 31, February 28,
1998 1997
-------- ------------
<S> <C> <C>
Net income (loss) ................................ $ 252 $(51)
(Gain) on sale of investments .................... (264) --
Depreciation and amortization of
real estate assets ............................. 227 270
Depreciation and amortization of
real estate assets of partnerships ............. 62 62
----- ----
Funds from operations ............................ $ 277 $281
===== ====
</TABLE>
The Company generally considers FFO to be an appropriate measure of the
performance of an equity REIT. FFO, as defined by the National Association of
Real Estate Investment Trusts ("NAREIT"), equals net income (loss), computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization 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
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Funds From Operations (Continued)
(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.
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 additional 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.
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.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Risks Associated with Forward-Looking Statements Included in this Form 10-Q
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of management
for future operations, including plans and objectives relating to capital
expenditures on Company properties. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive, and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate, and, therefore, there can be no assurance that the forward-looking
statements included in this Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
-----------------------------------------
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27.0 - Financial Data Schedule.
(b) Reports on Form 8-K:
None.
[This space intentionally left blank.]
14
<PAGE> 15
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: May 12, 1998 By: /s/ William S. Friedman
---------------- ------------------------------------
William S. Friedman
President, Chief Executive
Officer, and Director
Date: May 12, 1998 By: /s/ Robert C. Irvine
---------------- ------------------------------------
Robert C. Irvine
Executive Vice President and
Chief Financial Officer
Date: May 12, 1998 By: /s/ Erin D. Davis
---------------- ------------------------------------
Erin D. Davis
Vice President and
Chief Accounting Officer
15
<PAGE> 16
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
EXHIBIT 27.0 Financial Data Schedule Page 17
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 272
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (241)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 38,783
<DEPRECIATION> (6,687)
<TOTAL-ASSETS> 37,271
<CURRENT-LIABILITIES> 0
<BONDS> 26,316
0
0
<COMMON> 13
<OTHER-SE> 9,674
<TOTAL-LIABILITY-AND-EQUITY> 37,271
<SALES> 0
<TOTAL-REVENUES> 2,464
<CGS> 0
<TOTAL-COSTS> 1,441
<OTHER-EXPENSES> 271
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 616
<INCOME-PRETAX> 252
<INCOME-TAX> 0
<INCOME-CONTINUING> 252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
