<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, 1999
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 Avenue, 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 per value 8,393,850
- ---------------------------- ----------------------------
(Class) (Outstanding at May 6, 1999)
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended March
31, 1999, 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 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,
--------- ------------
1999 1998
---- ----
Assets
------
<S> <C> <C>
Real estate held for sale (net of accumulated depreciation of
$19,266 in 1999 and $20,884 in 1998) ...................... $ 66,476 $ 79,801
Less - allowance for estimated losses ....................... (1,194) (1,194)
--------- ---------
65,282 78,607
Real estate held for investment (net of accumulated
depreciation of $35,793 in 1999 and $31,718 in 1998) ...... 228,207 215,368
Investments in and advances to partnerships ................. 40,150 37,356
Cash and cash equivalents ................................... 1,765 2,442
Restricted cash ............................................. 7,411 7,368
Other assets, net ........................................... 15,117 15,919
--------- ---------
$ 357,932 $ 357,060
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes, debentures, and interest payable (including $6,953
in 1999 and $5,891 in 1998 due to affiliates) ............. $ 269,684 $ 263,361
Other liabilities ........................................... 14,440 17,014
--------- ---------
284,124 280,375
Commitments and contingencies ...............................
Shareholders' equity
Common stock, $.01 par value; authorized
shares, 20,000,000; shares outstanding, 8,394,236
in 1999 and 8,467,260 in 1998 (after deducting 2,504,884
shares in 1999 and 2,418,384 shares in
1998 held in treasury) .................................... 84 85
Special stock, $.01 par value; authorized shares,
10,000,000; shares outstanding, none ...................... -- --
Paid-in capital ............................................. 304,223 305,098
Accumulated dividends in excess of accumulated earnings ..... (230,412) (228,408)
Accumulated other comprehensive income (loss) ............... (87) (90)
--------- ---------
73,808 76,685
--------- ---------
$ 357,932 $ 357,060
========= =========
</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 March 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue
Rentals ...................................................... $ 18,223 $ 13,861
Interest ..................................................... 37 215
Management fees .............................................. 119 --
Equity in income (loss) of partnerships ...................... (507) 180
----------- -----------
17,872 14,256
Expenses
Property operations .......................................... 9,186 7,406
Interest ..................................................... 5,143 3,732
Depreciation ................................................. 2,494 2,100
Advisory fee to affiliate .................................... -- 432
General and administrative ................................... 2,506 572
----------- -----------
19,329 14,242
----------- -----------
Income (loss) before gain on sale of real estate, gain on sale
of investments, and extraordinary items ....................... (1,457) 14
Gain on sale of real estate ..................................... 338 --
Gain on sale of investments ..................................... -- 117
----------- -----------
Income (loss) from continuing operations ........................ (1,119) 131
Extraordinary items ............................................. (4) (262)
----------- -----------
Net (loss) ...................................................... $ (1,123) $ (131)
=========== ===========
Other comprehensive income (loss):
Unrealized gains (losses) on marketable equity securities .... 3 (33)
Realized gains on marketable equity securities ............... -- (117)
----------- -----------
Net income (loss) recognized in other comprehensive income
(loss) ....................................................... 3 (150)
----------- -----------
Comprehensive (loss) ............................................ $ (1,120) $ (281)
=========== ===========
Earnings per share - basic and diluted
Income (loss) from continuing operations ........................ $ (.13) $ .02
Extraordinary items ............................................. -- (.04)
----------- -----------
Net (loss) ...................................................... $ (.13) $ (.02)
=========== ===========
Weighted average shares of common stock
used in computing earnings per share ......................... 8,420,740 7,651,094
=========== ===========
Weighted average shares of common stock used in
computing earnings per share - assuming dilution ............. 8,420,740 7,651,094
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
<PAGE> 4
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Dividends Accumulated
Common Stock in Excess of Other
-------------------------- Paid-in Accumulated Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Equity
---------- ---------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ... 8,467,260 $ 85 $ 305,098 $ (228,408) $ (90) $ 76,685
Repurchase of shares
of common stock ............ (86,500) (1) (975) -- -- (976)
Cash dividends
($.105 per share) .......... -- -- -- (881) -- (881)
Stock options exercised ...... 13,476 -- 100 -- -- 100
Net income recognized in
other comprehensive
income (loss) .............. -- -- -- -- 3 3
Net loss ..................... -- -- -- (1,123) -- (1,123)
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 1999 ..... 8,394,236 $ 84 $ 304,223 $ (230,412) $ (87) $ 73,808
========== ========== ========== ========== ========== ==========
</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 Three Months
Ended March 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected ................................. $ 18,591 $ 14,096
Interest collected ................................ 31 57
Interest paid ..................................... (4,684) (3,505)
Payments for property operations .................. (10,297) (8,163)
General and administrative expenses paid .......... (2,857) (655)
Advisory fee paid to affiliate .................... -- (447)
Deferred borrowing costs paid ..................... (204) (469)
-------- --------
Net cash provided by operating activities ...... 580 914
Cash Flows from Investing Activities
Proceeds from sale of real estate ................. 557 --
Real estate improvements .......................... (2,126) (2,671)
Note receivable collections ....................... 63 57
Earnest money deposits received (paid), net ....... (152) 135
Net contributions and advances to partnerships .... (3,327) (6,393)
Proceeds from sale of marketable equity
securities...................................... -- 417
-------- --------
Net cash (used in) investing activities ........ (4,985) (8,455)
Cash Flows from Financing Activities
Proceeds from borrowings .......................... 10,130 15,142
Payments of mortgage notes payable ................ (4,957) (9,501)
Advances from affiliates .......................... 1,118 --
Margin account repayments, net .................... (714) (6)
Replacement escrow deposits, net .................. (5) (62)
Repurchase of shares of common stock .............. (976) (125)
Proceeds from the exercise of stock options ....... 52 --
Dividends to shareholders ......................... (920) (748)
-------- --------
Net cash provided by financing activities ...... 3,728 4,700
-------- --------
Net (decrease) in cash and cash equivalents ......... (677) (2,841)
Cash and cash equivalents, beginning of period ...... 2,442 4,262
-------- --------
Cash and cash equivalents, end of period ............ $ 1,765 $ 1,421
======== ========
</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 Three Months
Ended March 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Reconciliation of net (loss) to net cash provided by operating activities:
Net (loss) ........................................................... $(1,123) $ (131)
Extraordinary items .................................................. 4 262
Gain on sale of investments .......................................... -- (117)
Gain on sale of real estate .......................................... (338) --
Depreciation and amortization ........................................ 3,114 2,379
Equity in (income) loss of partnerships .............................. 507 (180)
Interest on advances to partnerships ................................. -- (158)
Non-cash compensation related to stock options exercised ............. 37 --
Changes in other assets and liabilities, net of effects of
noncash investing and financing activities
Decrease in interest receivable ................................. 1 --
(Increase) in other assets ...................................... (623) (1,560)
Increase (decrease) in other liabilities ....................... (1,074) 407
Increase in interest payable ................................... 75 12
------- -------
Net cash provided by operating activities .............................. $ 580 $ 914
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets disposed of and liabilities released in connection
with the sale of real estate:
Real estate ....................................................... $ 199 $ --
Other liabilities ................................................. 20 --
Gain on sale ...................................................... 338 --
------- -------
Cash received ................................................. $ 557 $ --
======= =======
</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 three month period ended March 31, 1999,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. 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, 1998. Dollar amounts in tables are
in thousands.
Effective November 23, 1998, National Income Realty Trust ("NIRT") incorporated
as a California corporation and on November 24, 1998, merged with and into the
Company, with the Company as the survivor. Pursuant to the terms of the
Agreement and Plan of Merger entered into by the Company and NIRT, each share
of beneficial interest of NIRT was converted into 1.97 shares of the Company's
common stock. As a result, the shareholders of NIRT became the owners of 85% of
the Company's common stock.
FOR ACCOUNTING PURPOSES, THE MERGER IS TREATED AS A REVERSE ACQUISITION OF THE
COMPANY BY NIRT USING THE PURCHASE METHOD OF ACCOUNTING, AND HISTORICAL
BALANCES AND OPERATIONS OF THE COMPANY FOUND IN THIS FORM 10-Q ARE THOSE OF
NIRT. SHARE AND PER SHARE INFORMATION HAS BEEN RESTATED RETROACTIVELY TO GIVE
EFFECT TO THE 1.97 TO 1 EXCHANGE RATIO IN THE MERGER. REFERENCES TO THE COMPANY
IN RELATION TO DATES PRIOR TO NOVEMBER 24, 1998, ARE INTENDED TO INCLUDE BOTH
OF THE COMPANY'S PREDECESSORS, NIRT AND VINLAND PROPERTY TRUST.
Immediately following the merger, the Company acquired Tarragon Realty
Advisors, Inc. ("TRA"), the Company's advisor since March 1, 1994, and NIRT's
advisor since April 1, 1994, from William S. Friedman and his wife, Lucy N.
Friedman, for 100,000 shares of the Company's common stock and options to
acquire 350,000 additional shares of the Company's common stock at prices
ranging between $13 and $16 per share. William S. Friedman is the President,
Chief Executive Officer, and a Director of the Company and also served as
President, Chief Executive Officer, and a Trustee of NIRT and as Director and
Chief Executive Officer of TRA. The Friedman family owns approximately 34% of
the outstanding shares of common stock of the Company. In addition to the
options to acquire 350,000 shares received in connection with the Company's
purchase of TRA discussed above, Mr. Friedman also holds options to acquire
450,000 shares of the Company's common stock at prices ranging between $12 and
$15 per share.
NOTE 2. REAL ESTATE
In the first quarter of 1999, the Company sold a portion of the University
Center parking lot for $575,000. The Company received net cash proceeds of
$557,000 and recognized a gain of $338,000 in connection with this sale.
In March 1999, the Company removed from consideration for sale four apartment
properties with an aggregate 740 units and an aggregate net carrying value of
$13.3 million. These properties are included in "Real estate held for
investment" in the accompanying March 31, 1999, Consolidated Balance Sheet. The
Company made the decision not to pursue selling these properties due to the
availability of favorable long term fixed rate financing.
7
<PAGE> 8
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN PARTNERSHIPS
Investments in partnerships, accounted for using the equity method, consisted
of the following at March 31, 1999:
<TABLE>
<S> <C>
801 Pennsylvania Avenue ..................... $ --
Ansonia Apartments, L.P. .................... 14,516
Antelope Pines Estates, L.P. ................ 337
Danforth National Apartments, Ltd. .......... 2,164
Larchmont Associates, L.P. .................. 1,909
National Omni Associates, L.P. .............. 5,809
Orange National Partners, Ltd. .............. 4,091
RI Panama City, Ltd. ........................ 1,385
RI Windsor, Ltd. ............................ 2,838
Sacramento Nine ............................. 615
Tarragon Huntsville Apartments, L.L.C ....... 688
Tarragon Savannah, L.P. ..................... 2,895
Tarragon Stoneybrook Apartments, L.L.C ...... 2,350
Woodcreek Garden Apartments, L.P. ........... 553
-------
$40,150
=======
</TABLE>
Set forth below are summarized financial data for these partnerships as of and
for the three months ended March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
March 31, 1999
Ansonia Danforth Omni Windsor
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Real estate ....................... $ 71,010 $ 15,949 $ 32,664 $ 18,688
Accumulated depreciation .......... (1,054) (284) (790) (486)
Other assets ...................... 1,879 304 995 134
Notes and interest payable ........ (55,324) (13,535) (26,050) (15,962)
Other liabilities ................. (1,995) (3,648) (1,010) (3,790)
-------- -------- -------- --------
Partners' capital (deficit) ....... $ 14,516 $ (1,214) $ 5,809 $ (1,416)
======== ======== ======== ========
The Company's proportionate
share of capital (deficit) ..... $ 14,516 $ (978) $ 5,809 $ (708)
Advances .......................... -- 3,142 -- 3,546
-------- -------- -------- --------
Investments in and advances to
partnerships ................... $ 14,516 $ 2,164 $ 5,809 $ 2,838
======== ======== ======== ========
Three months ended March 31, 1999
Rental revenue .................... $ 2,852 $ 397 $ 1,130 $ 555
Property operating expenses ....... (1,547) (229) (636) (256)
Interest expense .................. (940) (359) (514) (378)
Depreciation expense .............. (379) (89) (176) (99)
-------- -------- -------- --------
Net income (loss) ................. $ (14) $ (280) $ (196) $ (178)
======== ======== ======== ========
Equity in income (loss) of
partnerships ................... $ (14) $ (224) $ (196) $ (89)
======== ======== ======== ========
<CAPTION>
March 31, 1999
Other Construction/
Operating Lease-Up Other Total
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Real estate ....................... $ 54,362 $ 40,050 $ 3,038 $ 235,761
Accumulated depreciation .......... (3,890) (370) -- (6,874)
Other assets ...................... 1,688 521 -- 5,521
Notes and interest payable ........ (39,461) (31,037) -- (181,369)
Other liabilities ................. (3,503) (9,457) (3,028) (26,431)
-------- -------- ------- ---------
Partners' capital (deficit) ....... $ 9,196 $ (293) $ 10 $ 26,608
======== ======== ======= =========
The Company's proportionate
share of capital (deficit) .... $ 975 $ 51 $ 10 $ 19,675
Advances .......................... 2,440 8,319 3,028 20,475
-------- -------- ------- ---------
Investments in and advances to
partnerships .................. $ 3,415 $ 8,370 $ 3,038 $ 40,150
======== ======== ======= =========
Three months ended March 31, 1999
Rental revenue .................... $ 2,262 $ 744 $ -- $ 7,940
Property operating expenses ....... (1,145) (404) -- (4,217)
Interest expense .................. (673) (518) -- (3,382)
Depreciation expense .............. (347) (142) -- (1,232)
-------- -------- ------- ---------
Net income (loss) of .............. $ 97 $ (320) $ -- $ (891)
======== ======== ======= =========
Equity in income (loss) of
partnerships .................. $ 177 $ (161) $ -- $ (507)
======== ======== ======= =========
</TABLE>
"Other Operating" includes 801 Pennsylvania Avenue, Antelope Pines, Larchmont,
Sacramento Nine, and Woodcreek Garden. "Construction/Lease-Up" includes Orange
National, RI Panama City, and Tarragon Savannah. "Other" includes Tarragon
Huntsville and Tarragon Stoneybrook.
8
<PAGE> 9
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 4. INVESTMENTS IN MARKETABLE EQUITY SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," investments in marketable equity securities are carried
at fair value. These investments are included in "Other assets" in the
accompanying Consolidated Balance Sheets. These investments are considered
available for sale, and unrealized holding gains and losses are included in
other comprehensive income (loss). During the first quarter of 1999, unrealized
gains of $3,000 were incurred.
NOTE 5. NOTES AND INTEREST PAYABLE
During the first quarter of 1999, the Company closed separate mortgage loans
secured by three properties totaling $10.1 million. After the payoff of $4.2
million in existing debt, establishing escrows for taxes, insurance, and
repairs, and closing costs, the Company received net cash proceeds of $5.6
million. Additionally, the Company and the lender agreed to extend the maturity
date of a $1.6 million loan secured by The Vintage at Legacy Lakes, originally
scheduled to mature in March 1999, to June 1999.
Also during the first quarter of 1999, the Company received additional advances
of $1.1 million from William S. Friedman, President, Chief Executive Officer,
and Director of the Company, or affiliates of his, pursuant to a two year line
of credit arrangement. Advances under the line credit, totaling $7 million as
of March 31, 1999, bear interest at LIBOR plus 1% per annum and are payable in
January 2001.
NOTE 6. EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
shares of common stock outstanding for the three month periods ended March 31,
1999 and 1998. The effect of stock options on weighted average shares of common
stock outstanding - assuming dilution for the three month periods ended March
31, 1999 and 1998, is not reflected because their effect is anti-dilutive.
NOTE 7. INCOME TAXES
No provision has been made for federal income taxes because the Company's
management believes the Company has qualified as a Real Estate Investment
Trust, as defined under Sections 856 through 860 of the Internal Revenue Code
of 1986, and expects that it will continue to do so.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims and routine litigation arising in the
ordinary course of business. Management of the Company does not believe that
the results of these claims and litigation, individually or in the aggregate,
will have a material adverse effect on its business, financial position, or
results of operations.
[This space intentionally left blank]
9
<PAGE> 10
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 9. SUBSEQUENT EVENTS
In April 1999, the Company obtained a $6 million line of credit secured by
shares of the Company's common stock valued at no less than two times the
outstanding balance of the line of credit, approximately 20% of which are owned
by the Friedman family and the remainder of which are held in treasury. Advances
under the line of credit bear interest at the 30-day LIBOR plus 1.75% per annum.
Payment terms under the line of credit include monthly interest only, with the
principal due at its maturity of October 1999. Under certain conditions, the
Company may extend the maturity an additional 18 months. The Company received
$2.2 million in net cash proceeds at closing of the transaction, after the
payoff of two loans, which were also secured by shares of the Company's common
stock. These loans included a $1.5 million note payable scheduled to mature in
July 1999 and a $2.2 million note payable scheduled to mature in January 2000.
Also in April 1999, the Company sold its K-Mart Shopping Center in Thomasville,
Georgia, for $1.6 million and The Phoenix Apartments, acquired in connection
with the merger of the Company and NIRT in November 1998, for $2.7 million,
recognizing gains totaling approximately $440,000. The Company received
aggregate net cash proceeds of $2.9 million after the mortgage payoff for K-Mart
and closing costs.
In May 1999, the Company sold One Turtle Creek Office Complex for $9.7 million,
recognizing a gain of approximately $3.2 million based on a post-merger net
carrying value of $5.9 million. This property was purchased by Vinland Property
Trust in March 1992 and had a November 1998 pre-merger net carrying value of
$4.1 million. The Company received net cash proceeds of $3.2 million after the
mortgage payoff and closing costs.
[This space intentionally left blank]
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes thereto.
Introduction
Tarragon Realty Investors, Inc. (the "Company"), a Nevada corporation
incorporated on April 2, 1997, is the successor in interest to National Income
Realty Trust ("NIRT") and Vinland Property Trust ("Vinland"). NIRT was a
California business trust organized on October 31, 1978. It commenced
operations as a real estate investment trust ("REIT") on March 27, 1979. NIRT
invested in income-producing real estate through acquisitions, leases, and
partnerships. Vinland was established on July 18, 1973, and commenced
operations on April 2, 1974, as a REIT. Vinland was formed as a California
business trust to invest in commercial and multifamily real estate. In July
1997, Vinland merged with the Company, its wholly-owned subsidiary.
Effective November 23, 1998, NIRT incorporated as a California corporation and
on November 24, 1998, merged with and into the Company, with the Company as the
survivor. Pursuant to the terms of the Agreement and Plan of Merger entered
into by the Company and NIRT, each share of beneficial interest of NIRT was
converted into 1.97 shares of common stock of the Company. As a result, the
shareholders of NIRT became the owners of 85% of the Company's common stock.
FOR ACCOUNTING PURPOSES THE MERGER WAS TREATED AS A REVERSE ACQUISITION OF THE
COMPANY BY NIRT USING THE PURCHASE METHOD OF ACCOUNTING, AND RESULTS OF
OPERATIONS AND CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998, OF THE
COMPANY FOUND IN THIS FORM 10-Q ARE THOSE OF NIRT. SHARE AND PER SHARE
INFORMATION HAS BEEN RESTATED RETROACTIVELY TO GIVE EFFECT TO THE 1.97 TO 1
EXCHANGE RATIO IN THE MERGER. REFERENCES TO THE COMPANY IN RELATION TO DATES
PRIOR TO NOVEMBER 24, 1998, ARE INTENDED TO INCLUDE BOTH OF THE COMPANY'S
PREDECESSORS, NIRT AND VINLAND.
Immediately following the merger, the Company acquired Tarragon Realty
Advisors, Inc. ("TRA"), the Company's advisor since March 1, 1994, and NIRT's
advisor since April 1, 1994, from William S. Friedman and his wife, Lucy N.
Friedman, for 100,000 shares of the Company's common stock and options to
acquire 350,000 additional shares of the Company's common stock at prices
ranging between $13 and $16 per share.
At March 31, 1999, the Company's directly-owned real estate portfolio was
comprised of 78 properties (21 held for sale) located throughout the United
States, with concentrations in the Southeast and Southwest. These properties
include 51 apartment complexes, 14 shopping centers, four office buildings, one
office park, one combination office building and shopping center, one
combination office/retail/medical facility, five parcels of land, and one
single-family residence.
In 1997, the Company began a program of acquiring and developing income
producing real estate, primarily apartment communities, through joint ventures.
At March 31, 1999, the Company held interests in 14 joint ventures or
partnerships accounted for using the equity method. Through its investments in
these entities, the Company has ownership interests in 21 apartment
communities, three of which are under construction and one on which
construction is expected to begin in mid-1999, and three office buildings.
All of the Company's directly-owned real estate, except for ten properties, and
all properties held in joint ventures, are encumbered by mortgages. In the past,
the Company held mortgage loans, but such loans are now made only in connection
with, and to facilitate, the sale or acquisition of real estate. As a result of
the payoff of existing mortgages, the portfolio of loans has declined so that it
is no longer a significant part of the Company's operations.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Introduction (Continued)
The Company's long term objective is to increase the value of its real estate
portfolio through increased operating income, resulting in higher equity values
for and increased dividends to shareholders. Intensive management of and
consistent capital improvements to the existing portfolio are aimed at
achieving increased operating income.
Inflation works both for and against the Company's operations. A benefit of
inflation is that revenue from rentals of its real estate properties generally
tracks increases in inflation. The same is true, however, for property
operating expenses. A benefit of the present low rate of inflation is that
interest rates on new borrowings are now lower than previously experienced.
This allows for larger loans and/or lower debt service payments, thus improving
the Company's liquidity.
The Company places additional focus on enhancing the quality of its portfolio
with selective and opportunistic acquisitions, concentrated on older,
under-managed, and under-performing multifamily projects in geographic regions
where the Company presently operates. Properties that the Company's management
believes have peaked in value or do not provide operating efficiencies within
the Company's portfolio have been placed on the market for sale. While the
Company has identified the properties it desires to sell, market conditions
will determine which of them will actually be sold.
The Company intends to continue investing in new construction of apartment
properties, either directly or through joint ventures, relying on the strength
and experience of its partners in regions or property types where the Company
has little or no experience. To the extent it invests in construction projects,
the Company is subject to business risks, such as cost overruns and delays,
associated with development activities.
In addition to raising capital through operating income and the selective
disposition of certain assets, the Company expects to continue generating funds
for investment through new borrowings and refinancings.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $1.8 million at March 31, 1999, compared
to $2.4 million at December 31, 1998. The Company's principal sources of cash
have been property operations and external sources, such as property sales and
refinancings. The Company expects these sources will continue to be sufficient
to meet projected cash requirements, including debt service obligations,
property maintenance and improvements, and continuation of regular dividends.
In January 1999, the Company sold a portion of the University Center parking
lot, receiving net cash proceeds of $557,000.
The Company invested $2.1 million in capital improvements to its properties
during the first quarter of 1999, including $1.1 million of construction costs
for The Vintage at Legacy Lakes. The Company expects to spend $21.6 million on
construction of this property during the remainder of 1999 and 2000, $20.9
million of which should be funded by the construction loan. The Company
anticipates spending an additional $8 million for capital improvements to its
other properties during the remainder of 1999.
During the first quarter of 1999, the Company made net contributions and
advances totaling $3.3 million to partnerships accounted for using the equity
method. The bulk of these funds went to Tarragon Stoneybrook Apartments,
L.L.C., and Ansonia Apartments, L.P. Tarragon Stoneybrook is constructing a
luxury apartment
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
community in Orlando, Florida. The Company plans to fund an additional $3.3
million of development costs, and a construction loan is expected to fund the
remaining costs. The advances to Ansonia were used for major renovations to
four of its properties. The Company expects to fund an additional $500,000
for these capital improvements during the remainder of 1999.
During the first quarter of 1999, the Company obtained first mortgage financing
totaling $10.1 million and received net cash proceeds of $5.6 million after the
payoff of existing debt of $4.2 million, funding escrows, and paying associated
closing costs. The Company made other principal payments totaling $757,000
during the three months ended March 31, 1999. Principal payments of $15 million,
including balloon payments of $12.9 million, are due during the remainder of
1999. The Company intends to either pay off the maturing mortgages or extend the
due dates while seeking to obtain long term refinancing. While management is
confident of its ability to acquire financing as needed, there is no assurance
that the Company will continue to be successful in its efforts in this regard.
During the three months ended March 31, 1999, the Company received additional
advances of $1.1 million from William S. Friedman, President, Chief Executive
Officer, and Director of the Company, or affiliates of his, under a two year
line of credit arrangement.
During the three months ended March 31, 1999, the Company repurchased 86,500 of
its shares of common stock at a total cost of $976,000. In September 1998 and
March 1999, the Board of Directors authorized the Company to repurchase up to
an aggregate 620,000 shares of its common stock, of which 160,960 had been
purchased as of March 31, 1999.
Cash dividends to shareholders totaling $881,000, or $0.105 per share, were
declared by the Board in March 1999 and paid in May 1999. The Company has paid
regular quarterly cash distributions since September 1993.
Results of Operations
The Company reported a net loss of $1.1 million for the three months ended March
31, 1999, compared to a net loss of $131,000 for the three months ended March
31, 1998. The 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 $6.5 million for the three months ended March 31, 1998, to $9 million for
the corresponding period in 1999.
Multifamily Properties
The Company's multifamily portfolio, which accounted for 93% of the
Company's real estate and included 9,588 operating units at March 31, 1999,
reported an increase in net rental income of $1.4 million, or 27%, for the
three months ended March 31, 1999, compared to the corresponding period in
1998. $1.1 million of this increase resulted from properties acquired in
1998. A decrease of $59,000 resulted from the sale of Spring Pines
Apartments in December 1998. The remainder of the increase comes from higher
rents and decreased vacancy losses for multifamily properties held in both
years, as well as from the elimination of management fees on most of the
Company's multifamily properties in connection with the Company's
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Multifamily Properties (Continued)
acquisition of TRA in November 1998. Overall, physical occupancy levels have
increased for multifamily properties held in both years.
Commercial Properties
The Company's commercial portfolio included 1.9 million square feet at March
31, 1999. The commercial properties reported an overall increase in net
rental income of $628,000. An increase of $527,000 resulted from properties
acquired in 1998. A decrease of $47,000 resulted from the sale of Mountain
View Shopping Center in April 1998. The remainder of the increase comes from
decreased vacancy and other rental losses for commercial properties held in
both years. Overall, physical occupancy levels have increased for commercial
properties held in both years.
Equity in earnings of partnerships decreased $687,000 for the three months
ended March 31, 1999, compared to the corresponding period in 1998
substantially due to start-up losses at five properties still under
construction or which just recently completed construction and higher operating
expenses at 5600 Collins Avenue, the sole property of National Omni Associates.
Interest expense increased $1.4 million for the three months ended March 31,
1999, compared to the corresponding period in 1998. An increase of $657,000
resulted from the 1998 property acquisitions. In addition, long term and
interim mortgage financing, including advances under line of credit facilities,
obtained on properties held in both years increased mortgage loans by $40.5
million and the related interest expense by $802,000 for the same period. A
decrease of $61,000 in interest expense resulted from the sale of two
properties in 1998.
Depreciation expense increased $394,000 for the three months ended March 31,
1999, compared to the corresponding period in 1998 primarily due to the
properties acquired in 1998.
In connection with the Company's acquisition of TRA in November 1998, the
Company no longer pays advisory fees. Through November 24, 1998, the advisory
fee was an incentive fee of 16% of adjusted funds from operations, as defined
in the advisory agreement. See "Funds from Operations" below for the
calculation and definition of funds from operations.
General and administrative expenses increased $1.9 million for the three months
ended March 31, 1999, compared to the corresponding period in 1998. A
significant portion of the increase is due to the Company paying all costs
previously borne by TRA in lieu of paying advisory, property management,
acquisition, and refinancing fees subsequent to the Company's acquisition of
TRA.
During the first quarter of 1999, the Company recognized a gain of $338,000
relating to the sale of a portion of University Center.
During the first quarter of 1998, the Company recognized gains totaling
$117,000 on the sale of investments in marketable equitable securities.
Also, the Company recognized extraordinary expenses resulting from prepayment
penalties and the write-off of deferred financing expenses associated with
certain refinancings of $4,000 during the three months ended March 31, 1999,
and $262,000 during the three months ended March 31, 1998.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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, 1999
and 1998, are as follows (unaudited) (dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Net (loss) ................................................ $(1,123) $ (131)
Extraordinary loss ........................................ 4 262
Gain on sale of real estate ............................... (338) --
Depreciation and amortization of real estate assets ....... 2,554 2,159
Depreciation and amortization of real estate assets of
partnerships ........................................... 843 158
------- -------
Funds from operations ..................................... $ 1,940 $ 2,448
======= =======
</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, 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 cash distributions. The Company's calculation of FFO may differ from
the methodology for calculating FFO utilized by other REITs and, accordingly,
may not be comparable to such other REITs.
Included in FFO for the three months ended March 31, 1998, are gains totaling
$117,000 resulting from the Company's sale of investments in marketable equity
securities.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Allowance for Estimated Losses and Provisions for Losses
The Company's management periodically reviews 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 costs to sell. In those
instances in which estimates of fair value less costs to sell of the Company's
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 property manager, 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.
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 position, or results of operations.
Tax Matters
As more fully discussed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, the Company has elected and, in the opinion of
the Company's management, qualified to be taxed as a REIT, as defined under
Sections 856 through 860 of the Internal Revenue Code of 1986. A REIT is
required 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 Internal
Revenue Code of 1986, on an annual basis to shareholders.
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 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.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Impact of Year 2000 Issues (Continued)
State of Readiness
With regard to the Company's Information Technology Systems, certain
computer equipment and software were found not to be Year 2000 compliant.
The Company has 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, but
they were accelerated in order to ensure compliance. These upgrades are on
schedule to be completed by August 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 completing assessment of its external property management
companies' state of readiness and is actively involved with their Year 2000
readiness programs to ensure the business impact is minimal to non-existent.
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 Year 2000 Issues
To date, the Company has expended approximately $20,000 for replacing
noncompliant hardware and approximately $40,000 for accounting software
conversion, including consulting fees. Some of these costs represent the
Company's allocation of expenditures incurred by TRA prior to the Company's
acquisition of TRA. The Company is also upgrading the accounting/management
software at its properties. This upgraded property software is being
provided free of charge by the software manufacturer. Expected remaining
costs are $36,000 for software conversion, including consulting fees, and
$10,000 for additional hardware.
Risks of Year 2000 Issues
Potential material risks related to the Year 2000 include the following. If
the Company'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.
17
<PAGE> 18
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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates which may
adversely affect its financial position, results of operations, and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through its regular operating and financing activities. The
Company does not use financial instruments for trading or other speculative
purposes.
At March 31, 1999, the Company had approximately $97.1 million of variable rate
debt. Based upon this balance of variable rate debt, if the indexes upon which
these rates are based, primarily the 30-day LIBOR, increased 100 basis points,
the Company's earnings and cash flows would decrease by $971,000. Conversely, if
interest rates decreased by 100 basis points, the Company's earnings and cash
flows would increase by $971,000.
The estimated fair value of the Company's variable rate debt at March 31, 1999,
is $98.1 million. A 100 basis point increase in interest rates would result in a
$1.4 million decrease in the fair value of the Company's variable rate debt, and
a 100 basis point decrease in interest rates would result in a $1.4 million
increase in the fair value of the Company's variable rate debt.
The Company has entered into reverse repurchase agreements with an investment
bank for three mortgage-backed securities ("MBSs") secured separately by
mortgages on three of the Company's properties. Increases in market interest
rates generally cause decreases in the value of the MBSs, requiring the Company
to deposit additional funds with the investment bank (assuming no change in the
investment bank's margin requirements). Decreases in market interest rates
generally cause increases in the value of the MBSs, resulting in the release of
margin funds to the Company by the investment bank (assuming no change in the
investment bank's margin requirements). Additionally, the repurchase price bears
interest at a variable rate based on LIBOR. An increase in interest rates of 100
basis points would result in a decrease of $214,000 in the Company's earnings
and a decrease of $1.2 million in the Company's cash flow. A 100 basis point
decrease in interest rates would result in an increase of $216,000 in the
Company's earnings and an increase of $1.1 million in the Company's cash flow.
18
<PAGE> 19
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.
19
<PAGE> 20
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: May 17, 1999 By: /s/ William S. Friedman
--------------- -----------------------------------
William S. Friedman
President, Chief Executive
Officer, and Director
Date: May 17, 1999 By: /s/ Erin D. Davis
--------------- -----------------------------------
Erin D. Davis
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
20
<PAGE> 21
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
EXHIBIT 27.0 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,765
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (1,194)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 349,742
<DEPRECIATION> (55,059)
<TOTAL-ASSETS> 357,932
<CURRENT-LIABILITIES> 0
<BONDS> 269,684
0
0
<COMMON> 84
<OTHER-SE> 73,724
<TOTAL-LIABILITY-AND-EQUITY> 357,932
<SALES> 0
<TOTAL-REVENUES> 17,872
<CGS> 0
<TOTAL-COSTS> 9,186
<OTHER-EXPENSES> 2,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,143
<INCOME-PRETAX> (1,119)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,119)
<DISCONTINUED> 0
<EXTRAORDINARY> (4)
<CHANGES> 0
<NET-INCOME> (1,123)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
