<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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 0-9211
TARRAGON REALTY INVESTORS, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 94-2432628
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Park Avenue, East Building, 20th Floor, New York, NY 10017
--------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 949-5000
----------------------------------------------------
(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 ___
<TABLE>
<S> <C>
Common Stock, $.01 par value 8,128,554
- ------------------------------------------- -------------------------------
(Class) (Outstanding at August 2, 1999)
</TABLE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended June
30, 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>
June 30, December 31,
---------- ------------
1999 1998
---------- ----------
<S> <C> <C>
Assets
Real estate held for sale (net of accumulated depreciation
of $26,353 in 1999 and $20,884 in 1998) ................................. $ 59,027 $ 79,801
Less - allowance for estimated losses ...................................... (1,194) (1,194)
---------- ----------
57,833 78,607
Real estate held for investment (net of accumulated
depreciation of $31,310 in 1999 and $31,718 in 1998) .................... 236,167 215,368
Investments in and advances to partnerships ................................ 41,395 37,356
Cash and cash equivalents .................................................. 4,826 2,442
Restricted cash ............................................................ 8,030 7,368
Other assets, net .......................................................... 15,301 15,919
---------- ----------
$ 363,552 $ 357,060
========== ==========
Liabilities and Shareholders' Equity
Liabilities
Notes, debentures, and interest payable (including $4,536
in 1999 and $5,891 in 1998 due to affiliates) ........................... $ 274,634 $ 263,361
Other liabilities .......................................................... 15,712 17,014
---------- ----------
290,346 280,375
Commitments and contingencies ..............................................
Shareholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000; shares
outstanding, 8,180,345 in 1999 and 8,467,260 in 1998 (after deducting
2,703,225 in 1999 and 2,418,384 in 1998
held in treasury) ....................................................... 82 85
Special stock, $.01 par value; authorized shares, 10,000,000;
shares outstanding, none ................................................ -- --
Paid-in capital ............................................................ 301,625 305,098
Accumulated dividends in excess of accumulated earnings .................... (228,422) (228,408)
Accumulated other comprehensive income (loss) .............................. (79) (90)
---------- ----------
73,206 76,685
---------- ----------
$ 363,552 $ 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 For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue
Rentals .................................... $ 18,156 $ 13,924 $ 36,379 $ 27,785
Interest ................................... 391 222 428 437
Management fees ............................ 135 -- 254 --
Equity in income (loss) of
partnerships ............................. 26 194 (481) 374
-------- -------- -------- --------
18,708 14,340 36,580 28,596
Expenses
Property operations ........................ 8,962 7,703 18,148 15,109
Interest ................................... 5,373 3,894 10,516 7,626
Depreciation ............................... 2,832 1,671 5,326 3,771
Advisory fee to affiliate .................. -- 304 -- 736
General and administrative
Corporate ................................ 1,517 551 2,969 1,123
Property ................................. 805 -- 1,859 --
-------- -------- -------- --------
19,489 14,123 38,818 28,365
-------- -------- -------- --------
Income (loss) before gain on sale of
real estate, gain on sale of investments,
gain on insurance settlement, litigation
settlement, and extraordinary items ........ (781) 217 (2,238) 231
Gain on sale of real estate ................... 3,923 1,275 4,261 1,275
Gain on sale of investments ................... -- -- -- 117
Gain on insurance settlement .................. 231 -- 231 --
Litigation settlement ......................... (350) -- (350) --
-------- -------- -------- --------
Income from continuing operations ............. 3,023 1,492 1,904 1,623
Extraordinary items ........................... (244) (68) (248) (330)
-------- -------- -------- --------
Net income .................................... $ 2,779 $ 1,424 $ 1,656 $ 1,293
======== ======== ======== ========
Other comprehensive income (loss):
Unrealized gains (losses) on
marketable equity securities ............. 8 (28) 11 (61)
Realized gains on marketable
equity securities ........................ -- -- -- (117)
-------- -------- -------- --------
Net income (loss) recognized in
other comprehensive income (loss) .......... 8 (28) 11 (178)
-------- -------- -------- --------
Comprehensive income .......................... $ 2,787 $ 1,396 $ 1,667 $ 1,115
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
<PAGE> 4
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Earnings per share
Income from continuing operations ...... $ .37 $ .20 $ .23 $ .21
Extraordinary items .................... (.03) (.01) (.03) (.04)
------------- ------------- ------------- -------------
Net income ............................. $ .34 $ .19 $ .20 $ .17
============= ============= ============= =============
Weighted average shares of
common stock used in
computing earnings per share ........ 8,287,186 7,584,872 8,353,594 7,617,799
============= ============= ============= =============
Earnings per share - assuming dilution
Income from continuing operations ...... $ .36 $ .19 $ .23 $ .21
Extraordinary items .................... (.03) (.01) (.03) (.04)
------------- ------------- ------------- -------------
Net income ............................. $ .33 $ .18 $ .20 $ .17
============= ============= ============= =============
Weighted average shares of common
stock used in computing earnings
per share - assuming dilution ....... 8,394,791 7,710,898 8,462,781 7,732,217
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
<PAGE> 5
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 ........ (302,141) (3) (3,582) -- -- (3,585)
Cash dividends
($.21 per share) ....... -- -- -- (1,670) -- (1,670)
Stock options exercised .. 15,226 -- 109 -- -- 109
Net income recognized in
other comprehensive
income (loss) .......... -- -- -- -- 11 11
Net income ............... -- -- -- 1,656 -- 1,656
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1999 ... 8,180,345 $ 82 $ 301,625 $ (228,422) $ (79) $ 73,206
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
5
<PAGE> 6
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected ............................................ $ 36,744 $ 27,598
Interest collected ........................................... 70 101
Interest paid ................................................ (9,580) (7,164)
Payments for property operations ............................. (18,252) (15,883)
General and administrative expenses paid ..................... (6,463) (1,161)
Advisory fee paid to affiliate ............................... -- (658)
Organizational costs paid .................................... -- (153)
Deferred financing costs paid ................................ (528) (1,415)
---------- ----------
Net cash provided by operating activities .................. 1,991 1,265
Cash Flows from Investing Activities
Acquisition of real estate ................................... (1,674) (3,807)
Proceeds from the sale of real estate ........................ 6,489 972
Real estate improvements ..................................... (5,119) (6,251)
Earnest money deposits paid .................................. (337) (403)
Note receivable collections .................................. 76 127
Investments in marketable equity securities .................. -- (81)
Proceeds from sale of marketable equity securities ........... -- 417
Net contributions and advances to partnerships ............... (5,966) (12,732)
---------- ----------
Net cash (used in) investing activities .................... (6,531) (21,758)
Cash Flows from Financing Activities
Proceeds from borrowings ..................................... 23,143 37,892
Payments of mortgage notes payable ........................... (10,197) (17,429)
Advances (repayments of advances) from affiliates, net ....... (1,518) 1,316
Margin account borrowings (repayments), net .................. (1,101) 843
Replacement escrow deposits, net ............................. (13) (791)
Distribution from partnership's financing activities ......... 1,771 3,758
Repurchase of shares of common stock ......................... (3,585) (1,108)
Proceeds from the exercise of stock options .................. 64 --
Dividends to shareholders .................................... (1,640) (1,884)
---------- ----------
Net cash provided by financing activities .................. 6,924 22,597
---------- ----------
Net increase in cash and cash equivalents ....................... 2,384 2,104
Cash and cash equivalents, beginning of period .................. 2,442 4,262
---------- ----------
Cash and cash equivalents, end of period ........................ $ 4,826 $ 6,366
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
6
<PAGE> 7
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income ........................................................................ $ 1,656 $ 1,293
Extraordinary items ............................................................... 248 330
Litigation settlement ............................................................. 350 --
Gain on insurance settlement ...................................................... (231) --
Gain on sale of investments ....................................................... -- (117)
Gain on sale of real estate ....................................................... (4,261) (1,275)
Depreciation and amortization ..................................................... 6,573 4,270
Equity in (income) loss of partnerships ........................................... 481 (374)
Interest on advances to partnerships .............................................. (347) (338)
Noncash 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 1
(Increase) in other assets..................................................... (2,770) (3,844)
Increase in other liabilities ................................................. 111 1,244
Increase in interest payable .................................................. 143 75
---------- ----------
Net cash provided by operating activities ............................................ $ 1,991 $ 1,265
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the
purchase of real estate:
Real estate ....................................................................... $ 9,493 $ 10,634
Other assets ...................................................................... 302 765
Notes and interest payable ........................................................ (7,973) (7,060)
Other liabilities ................................................................. (148) (532)
---------- ----------
Cash paid ....................................................................... $ 1,674 $ 3,807
========== ==========
Assets disposed of and liabilities released in connection with
the sale of real estate:
Real estate ....................................................................... $ 10,524 $ 677
Other assets ...................................................................... 200 71
Notes and interest payable ........................................................ (8,186) (1,046)
Other liabilities ................................................................. (303) (5)
Gain on sale ...................................................................... 4,261 1,275
Extraordinary loss on early extinguishment of debt ................................ (7) --
---------- ----------
Cash received ................................................................... $ 6,489 $ 972
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
7
<PAGE> 8
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the six month period ended June 30, 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.
On November 24, 1998, National Income Realty Trust ("NIRT") 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. Mr. 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 January 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 April 1999, the Company sold its K-Mart Shopping Center in Thomasville,
Georgia, for $1.6 million and Phoenix Apartments for $2.7 million, recognizing
gains totaling $440,000. The Company received aggregate net cash proceeds of
$2.9 million after the mortgage payoff for K-Mart and closing costs.
8
<PAGE> 9
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 2. REAL ESTATE (Continued)
In May 1999, the Company sold One Turtle Creek Office Complex for $9.7 million,
recognizing a gain of $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.
Also in May 1999, the Company sold approximately 40% of its K-Mart Shopping
Center in Charlotte, North Carolina, for $1.1 million, recognizing a gain of
$326,000. In connection with the sale, the Company paid off the $1.2 million
mortgage on the entire property which required $156,000 in addition to the net
proceeds of the sale.
The Company purchased Orlando Central Park, a 138,574 square foot office
building located in Orlando, Florida, in May 1999 for $9.5 million, $8 million
of which was financed with a mortgage.
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. In June 1999, the Company removed from consideration for sale
three apartment properties with an aggregate 424 units and an aggregate net
carrying value of $7.3 million and one commercial property with square footage
of 72,065 and a net carrying value of $3 million. These properties are included
in "Real estate held for investment" in the accompanying June 30, 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. Also in June 1999, the Company decided to pursue marketing for sale
two commercial properties with aggregate square footage of 253,336 and an
aggregate net carrying value of $13.4 million. These properties are classified
as held for sale at June 30, 1999, and depreciation will cease as of July 1,
1999. As the estimated fair values of these properties exceeded their carrying
values at the time of determination to reclassify, no losses were recognized
upon their reclassification.
NOTE 3. INVESTMENTS IN PARTNERSHIPS
Investments in partnerships, accounted for using the equity method, consisted
of the following at June 30, 1999:
<TABLE>
<S> <C>
801 Pennsylvania Avenue .......................... $ --
Ansonia Apartments, L.P. ......................... 14,655
Antelope Pines Estates, L.P. ..................... 319
Danforth National Apartments, Ltd. ............... 2,317
Larchmont Associates, L.P. ....................... 1,767
National Omni Associates, L.P. ................... 5,600
Orange National Partners, Ltd. ................... 4,074
RI Panama City, Ltd. ............................. 1,412
RI Windsor, Ltd. ................................. 2,820
Sacramento Nine .................................. 661
Tarragon Huntsville Apartments, L.L.C ............ 703
Tarragon Savannah, L.P. .......................... 1,349
Tarragon Stoneybrook Apartments, L.L.C ........... 4,712
Woodcreek Garden Apartments, L.P. ................ 1,006
----------
$ 41,395
==========
</TABLE>
9
<PAGE> 10
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN PARTNERSHIPS (Continued)
Set forth below are summarized financial data for these partnerships as of and
for the six months ended June 30, 1999 (unaudited):
<TABLE>
<CAPTION>
June 30, 1999 Other Construction/
Ansonia Danforth Omni Windsor Operating Lease-Up Total
--------- --------- --------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate .................... $ 73,063 $ 16,183 $ 32,762 $ 18,691 $ 54,805 $ 53,569 $ 249,073
Accumulated depreciation ....... (1,448) (376) (981) (586) (3,920) (548) (7,859)
Other assets ................... 1,696 290 1,087 102 1,316 1,276 5,767
Notes and interest payable ..... (55,858) (13,597) (26,050) (15,962) (39,316) (41,059) (191,842)
Other liabilities .............. (3,566) (4,059) (1,403) (3,986) (3,329) (13,824) (30,167)
--------- --------- --------- --------- --------- --------- ---------
Partners' capital (deficit) .... $ 13,887 $ (1,559) $ 5,415 $ (1,741) $ 9,556 $ (586) $ 24,972
========= ========= ========= ========= ========= ========= =========
The Company's proportionate
share of capital (deficit) .. $ 13,887 $ (1,254) $ 5,415 $ (870) $ 1,153 $ (90) $ 18,241
Advances ....................... 768 3,571 185 3,690 2,600 12,340 23,154
--------- --------- --------- --------- --------- --------- ---------
Investments in and advances to
partnerships ................ $ 14,655 $ 2,317 $ 5,600 $ 2,820 $ 3,753 $ 12,250 $ 41,395
========= ========= ========= ========= ========= ========= =========
Six months ended June 30, 1999
Rental revenue ................. $ 5,805 $ 870 $ 2,253 $ 1,121 $ 4,535 $ 1,696 $ 16,280
Property operating expenses .... (3,129) (452) (1,221) (549) (2,138) (846) (8,335)
Interest expense ............... (1,890) (602) (1,005) (802) (1,376) (1,029) (6,704)
Depreciation expense ........... (773) (180) (367) (199) (701) (321) (2,541)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) .............. $ 13 $ (364) $ (340) $ (429) $ 320 $ (500) $ (1,300)
========= ========= ========= ========= ========= ========= =========
Equity in income (loss) of
partnerships ................ $ 13 $ (161) $ (340) $ (157) $ 332 $ (168) $ (481)
========= ========= ========= ========= ========= ========= =========
</TABLE>
"Other Operating" includes 801 Pennsylvania Avenue, Antelope Pines, Larchmont,
Sacramento Nine, and Woodcreek Garden. "Construction/Lease-Up" includes Orange
National, RI Panama City, Tarragon Huntsville, Tarragon Savannah, and Tarragon
Stoneybrook.
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 six months of 1999,
unrealized gains of $ 11,000 were incurred.
NOTE 5. NOTES AND INTEREST PAYABLE
During the first six months of 1999, the Company closed separate mortgage loans
secured by five properties totaling $16.5 million. After the payoff of $5.5
million in existing debt, establishing escrows for taxes, insurance, and
repairs, and closing costs, the Company received net cash proceeds of $10.3
million.
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, a portion of which were pledged by
the Friedman family and the remainder of which are treasury shares. The Company
is currently replacing the shares pledged by the Friedman family as an
accomodation to the Company with treasury shares
10
<PAGE> 11
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. NOTES AND INTEREST PAYABLE (Continued)
purchased under its share repurchase program. 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 with the
same lender, 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.
In May 1999, the Company obtained a $650,000 line of credit facility secured by
a 2.474 acre tract of land in Dallas, Texas, known as Lake Highlands land and
treasury stock valued at no less than $650,000. Advances under the line of
credit bear interest at prime. Payment terms include monthly interest only,
with the principal due at its maturity of May 2000. The Company received
$614,000 in net cash proceeds at closing of this transaction. This loan is
guaranteed by Mr. Friedman.
Also during the first six months of 1999, the Company made $1.5 million of net
repayments of advances on its line of credit from affiliates of Mr. Friedman.
Advances under the two year line of credit arrangement, totaling $4.5 million
as of June 30, 1999, bear interest at LIBOR plus 1% per annum and are payable
in January 2001.
Extraordinary items in the Consolidated Statements of Operations for the three
and six month periods ended June 30, 1999, represent extraordinary losses on
early extinguishment of debt of $244,000 and $248,000, respectively, related to
prepayment penalties and the write-off of deferred financing expenses in
connection with certain of the 1999 refinancings.
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 and six month periods ended
June 30, 1999 and 1998.
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 For the Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding ....... 8,287,186 7,584,872 8,353,594 7,617,799
Stock options .................... 107,605 126,026 109,187 114,418
--------- --------- --------- ---------
Weighted average shares of
common stock outstanding -
assuming dilution .............. 8,394,791 7,710,898 8,462,781 7,732,217
========= ========= ========= =========
</TABLE>
11
<PAGE> 12
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 7. GAIN ON INSURANCE SETTLEMENT
In December 1998, fire destroyed one building with eight units at Lake Point
Apartments, a 540-unit property in Memphis, Tennessee. The Company has reached a
settlement with the insurance company for $458,000 and has decided not to
rebuild the eight-unit building. After costs of demolition, adjuster fees, and
other costs, as well as the write-off of a portion of the property's carrying
value, the Company recognized a gain on the insurance settlement of $231,000.
NOTE 8. LITIGATION SETTLEMENT
In July 1999, after the reversal of a favorable lower court decision, the
Company settled an uninsured liability claim for $350,000.
NOTE 9. 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 10. 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.]
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes thereto.
Introduction
Tarragon Realty Investors, Inc., is a Nevada corporation incorporated on April
2, 1997. It 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.
On November 24, 1998, NIRT 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 AND SIX MONTH PERIODS ENDED JUNE 30,
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 June 30, 1999, the Company's directly-owned real estate portfolio was
comprised of 76 properties (16 held for sale) located throughout the United
States, with concentrations in the Southeast and Southwest. These properties
include 50 apartment complexes, 13 shopping centers, five office buildings, one
office park, 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 June 30, 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 the fourth quarter of 1999, and three
office buildings.
With the exception of nine properties, all of the Company's directly-owned real
estate 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.
13
<PAGE> 14
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
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 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 were $4.8 million at June 30, 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.
During the first six months of 1999, the Company sold three properties and
portions of two shopping centers, receiving aggregate net cash proceeds of $6.5
million.
The Company purchased a 138,574 square foot office building in May 1999 for
$9.5 million, $8 million of which was financed with a mortgage.
The Company invested $5.1 million in capital improvements to its properties
during the first half of 1999, including $2.3 million of construction costs
for The Vintage at Legacy Lakes. The Company expects to spend $20.4 million on
construction of this property during the remainder of 1999 and 2000, $19.7
million of
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
which should be funded by the construction loan. The Company anticipates
spending an additional $5 million for capital improvements to its other
properties during the remainder of 1999.
During the first six months of 1999, the Company made net contributions and
advances totaling $6 million to partnerships accounted for using the equity
method. $4.5 million went to Tarragon Stoneybrook Apartments, L.L.C., which is
constructing a 396-unit luxury apartment community in Orlando, Florida. The
Company plans to fund an additional $1.1 million of development costs, and a
construction loan is expected to fund the remaining costs. The Company made
advances of $1.3 million to Ansonia Apartments, L.P., for major renovations to
four of its properties. The Company expects to fund an additional $300,000 for
these capital improvements during the remainder of 1999.
The Company received $1.8 million from Tarragon Savannah, L.P., in May 1999 in
connection with the permanent financing of the Links at Georgetown, its sole
property. This distribution represented repayment of the bulk of the Company's
advances to the partnership and all accrued interest thereon.
During the first six months of 1999, the Company obtained mortgage financing
totaling $16.5 million and received net cash proceeds of $10.3 million after
the payoff of existing debt of $5.5 million, funding escrows, and paying
associated closing costs. The Company also closed two line of credit facilities
during this period totaling $6.7 million, receiving net cash proceeds of $2.8
million after the payoff of existing loans totaling $3.7 million and paying the
associated closing costs. The Company made other principal payments totaling $1
million during this period. Principal payments of $18.6 million, including
balloon payments of $17.1 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 six months ended June 30, 1999, the Company made $1.5 million in net
repayments of advances on its line of credit from affiliates of William S.
Friedman, President, Chief Executive Officer, and Director of the Company.
During the six months ended June 30, 1999, the Company repurchased 302,141 of
its shares of common stock at a total cost of $3.6 million. 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 376,601 had been
purchased as of June 30, 1999.
Cash dividends to shareholders totaling $1.7 million, or $0.21 per share, have
been declared by the Board in the first half of 1999. The Company has paid
regular quarterly cash distributions since September 1993.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations
The Company reported net income of $2.8 million and $1.7 million, respectively,
for the three and six month periods ended June 30, 1999, compared to net income
of $1.4 million and $1.3 million, respectively, for the three and six month
periods ended June 30, 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 $6.2 million and $12.7 million for the three and six month periods ended
June 30, 1998, to $9.2 million and $18.2 million for the corresponding periods
in 1999.
Multifamily Properties
The Company's directly owned multifamily portfolio, which accounted for 78%
of the Company's real estate and included 9,334 operating units at June 30,
1999, reported increases in net rental income of $2.3 million, or 44%, and
$4.3 million, or 41%, for the three and six month periods ended June 30,
1999, compared to the corresponding periods in 1998. Increases of $1 million
and $2.2 million resulted from properties acquired in 1998. Decreases of
$60,000 and $119,000 resulted from the properties sold in 1998 and 1999. The
remainder of the increases 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 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 June
30, 1999. The commercial properties reported overall increases in net rental
income of $656,000 and $1.3 million for the three and six month periods
ended June 30, 1999, compared to the corresponding periods in 1998. Increases
of $475,000 and $1 million resulted from properties acquired in 1998 and
1999. Decreases of $56,000 and $109,000 resulted from properties sold in
1998 and 1999. The remainder of the increases comes from decreased vacancy
and other rental losses for commercial properties held in both years.
Overall, physical occupancy levels have remained relatively stable for
commercial properties held in both years.
Equity in earnings of partnerships decreased $168,000 and $855,000 for the
three and six month periods ended June 30, 1999, compared to the corresponding
periods in 1998. For the quarter, a decrease of $606,000 resulted from income
recorded in the second quarter of 1998 related to the refinancing of 801
Pennsylvania Avenue. This income represented interest on the Company's advances
plus the Company's 50% participation in the excess financing proceeds. This
decrease is partially offset by a $410,000 increase related to four properties
in lease-up during 1998 and 1999. For the six months ended June 30, 1999,
compared to the corresponding period in 1998, a decrease of $873,000 resulted
from income recorded during the six months ended June 30, 1998, related to the
refinancing of 801 Pennsylvania Avenue, as described above.
Interest expense increased $1.5 million and $2.9 million for the three and six
month periods ended June 30, 1999, compared to the corresponding periods in
1998. Increases of $719,000 and $1.4 million resulted from the 1998 and 1999
property acquisitions. In addition, long term and interim mortgage financing,
including advances under line of credit facilities, obtained on properties held
since December 31, 1997, increased
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
mortgage loans by $43.8 million and the related interest expense by $510,000
and $1.3 million for the same periods. Decreases of $55,000 and $121,000 in
interest expense resulted from properties sold in 1998 and 1999.
Depreciation expense increased $1.2 million and $1.6 million for the three and
six month periods ended June 30, 1999, compared to the corresponding periods in
1998. $510,000 of both increases resulted from the reclassification of four
properties from held for sale to held for investment effective June 30, 1999.
The remaining increases are primarily due to the properties acquired in 1998
and 1999.
As a result of the Company's acquisition of TRA in November 1998, the Company
no longer pays advisory fees. 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 $1.8 million and $3.7 million for
the three and six month periods ended June 30, 1999, compared to the
corresponding periods in 1998. Most of the increase is due to the Company
paying 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 six months of 1999, the Company recognized gains totaling $4.3
million relating to the sale of three properties and portions of two other
properties.
Also during the first six months of 1999, the Company recognized a gain on
insurance settlement of $231,000 and incurred a $350,000 litigation settlement.
During the first six months of 1998, the Company recognized gains totaling $1.3
million on the sale of one property and $117,000 on the sale of investments in
marketable equitable securities.
The Company recognized extraordinary expenses resulting from prepayment
penalties and the write-off of deferred financing expenses associated with
certain refinancings of $248,000 during the six months ended June 30, 1999, and
$330,000 during the six months ended June 30, 1998.
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."
[This space intentionally left blank.]
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Funds from Operations (Continued)
Funds from operations ("FFO") for the three and six month periods ended June
30, 1999 and 1998, are as follows (unaudited) (dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income ............................. $ 2,779 $ 1,424 $ 1,656 $ 1,293
Extraordinary items .................... 244 68 248 330
Litigation settlement .................. 350 -- 350 --
Gain on insurance settlement ........... (231) -- (231) --
Gain on sale of real estate ............ (3,923) (1,275) (4,261) (1,275)
Depreciation and amortization of
real estate assets ................... 2,877 1,712 5,431 3,871
Depreciation and amortization of
real estate assets of partnerships ... 891 275 1,734 433
Distributions from partnerships in
excess of the Company's investments
in the partnerships .................. -- (267) -- (267)
---------- ---------- ---------- ----------
Funds from operations .................. $ 2,987 $ 1,937 $ 4,927 $ 4,385
========== ========== ========== ==========
</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, 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 six months ended June 30, 1998, are gains totaling
$117,000 resulting from the Company's sale of investments in marketable equity
securities.
18
<PAGE> 19
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.
19
<PAGE> 20
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 September 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 $25,000 for replacing
noncompliant hardware and approximately $70,000 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 $20,000 for software conversion, including consulting fees, and
$5,000 for additional hardware.
Risks of Year 2000 Issues
Potential material risks related to the Year 2000 issue 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 the third quarter 1999.
20
<PAGE> 21
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 June 30, 1999, the Company had approximately $101.5 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 $1 million. Conversely,
if interest rates decreased by 100 basis points, the Company's earnings and
cash flows would increase by $1 million.
The estimated fair value of the Company's variable rate debt at June 30, 1999,
is $101.2 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 $206,000 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 $207,000 in the
Company's earnings and an increase of $1 million in the Company's cash flow.
21
<PAGE> 22
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.]
22
<PAGE> 23
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: August 16, 1999 By: /s/ William S. Friedman
---------------------- ----------------------------
William S. Friedman
President, Chief Executive
Officer, and Director
Date: August 16, 1999 By: /s/ Erin D. Davis
---------------------- ----------------------------
Erin D. Davis
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
<PAGE> 24
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
EXHIBIT 27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,826
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (1,194)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 352,857
<DEPRECIATION> (57,663)
<TOTAL-ASSETS> 363,552
<CURRENT-LIABILITIES> 0
<BONDS> 274,634
0
0
<COMMON> 82
<OTHER-SE> 73,124
<TOTAL-LIABILITY-AND-EQUITY> 363,552
<SALES> 0
<TOTAL-REVENUES> 36,580
<CGS> 0
<TOTAL-COSTS> 18,148
<OTHER-EXPENSES> 5,326
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<INTEREST-EXPENSE> 10,516
<INCOME-PRETAX> 1,904
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,904
<DISCONTINUED> 0
<EXTRAORDINARY> (248)
<CHANGES> 0
<NET-INCOME> 1,656
<EPS-BASIC> .20
<EPS-DILUTED> .20
</TABLE>
