<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, 2000
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.)
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
--- ---
Common Stock, $.01 per value 7,732,087
---------------------------- ----------------------------
(Class) (Outstanding at May 8, 2000)
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended March
31, 2000, have not been audited by independent certified public accountants,
but, in our opinion, 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,
---------- ------------
2000 1999
---------- ------------
Assets
<S> <C> <C>
Real estate held for sale (net of accumulated depreciation of
$22,950 in 2000 and $25,282 in 1999) ...................... $ 80,932 $ 52,885
Less - allowance for estimated losses ....................... (1,156) (1,156)
--------- ---------
79,776 51,729
Real estate held for investment (net of accumulated
depreciation of $41,362 in 2000 and $36,143 in 1999) ...... 365,115 253,595
Investments in and advances to partnerships ................. 30,388 48,834
Cash and cash equivalents ................................... 2,843 3,951
Restricted cash ............................................. 6,684 6,538
Other assets, net ........................................... 14,054 14,418
--------- ---------
$ 498,860 $ 379,065
========= =========
Liabilities and Stockholders' Equity
Liabilities
Notes, debentures, and interest payable (including $3,113
in 2000 and $5,108 in 1999 due to affiliates) ............. $ 410,930 $ 287,767
Other liabilities ........................................... 13,604 18,305
--------- ---------
424,534 306,072
Commitments and contingencies
Minority interest ........................................... 5,064 --
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000
shares outstanding, 7,909,120 in 2000 and 7,993,999 in 1999
(after deducting 2,983,113 shares in 2000 and 2,891,713
shares in 1999 held in treasury) .......................... 79 80
Special stock, $.01 par value; authorized shares,
10,000,000; shares outstanding, none ...................... -- --
Paid-in capital ............................................. 298,620 299,528
Accumulated dividends in excess of accumulated earnings ..... (229,360) (226,575)
Accumulated other comprehensive income (loss) ................. (77) (40)
--------- ---------
69,262 72,993
--------- ---------
$ 498,860 $ 379,065
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
2
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TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue
Rentals .................................................................. $ 20,721 $ 18,223
Interest ................................................................. 97 37
Management fees .......................................................... 99 119
Equity in (loss) of partnerships ......................................... (559) (507)
----------- -----------
20,358 17,872
Expenses
Property operations ...................................................... 10,524 9,186
Interest (including $59 to affiliates in 2000)............................ 6,866 5,143
Depreciation ............................................................. 3,140 2,494
General and administrative
Corporate .............................................................. 1,638 1,452
Property ............................................................... 1,015 1,054
----------- -----------
23,183 19,329
----------- -----------
(Loss) before minority interest in income of consolidated
partnership, gain on sale of real estate, gain on sale
of investments, and extraordinary items .................................. (2,825) (1,457)
Minority interest in income of consolidated partnership ..................... (64) --
Gain on sale of real estate ................................................. 97 338
Gain on sale of investments ................................................. 20 --
----------- -----------
(Loss) from continuing operations ........................................... (2,772) (1,119)
Extraordinary items ......................................................... (13) (4)
----------- -----------
Net (loss) .................................................................. $ (2,785) $ (1,123)
=========== ===========
Other comprehensive income (loss):
Unrealized gains (losses) on marketable equity securities ................ (17) 3
Realized gains on marketable equity securities ........................... (20) --
----------- -----------
Net income (loss) recognized in other comprehensive income
(loss) ................................................................... (37) 3
----------- -----------
Comprehensive (loss) ........................................................ $ (2,822) $ (1,120)
=========== ===========
Earnings per share - basic and diluted
(Loss) from continuing operations ........................................... $ (.35) $ (.13)
Extraordinary items ......................................................... -- --
----------- -----------
Net (loss) .................................................................. $ (.35) $ (.13)
=========== ===========
Weighted average shares of common stock
used in computing earnings per share ..................................... 7,973,779 8,420,740
=========== ===========
Weighted average shares of common stock used in
computing earnings per share - assuming dilution ......................... 7,973,779 8,420,740
=========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
3
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TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Dividends Accumulated
Common Stock in Excess of Other
--------------------- Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Earnings Income (Loss) Equity
--------- ------ --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999..... 7,993,999 $ 80 $ 299,528 $ (226,575) $ (40) $ 72,993
Repurchase of shares
of common stock.............. (91,400) (1) (948) -- -- (949)
Stock options exercised........ 6,521 -- 40 -- -- 40
Net (loss) recognized in
other comprehensive
income (loss)................ -- -- -- -- (37) (37)
Net (loss)..................... -- -- -- (2,785) -- (2,785)
--------- ----- --------- ---------- ------- --------
Balance, March 31, 2000....... 7,909,120 $ 79 $ 298,620 $ (229,360) $ (77) $ 69,262
========= ===== ========= ========== ======= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
4
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TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected ...................................... $ 21,319 $ 18,591
Interest collected ..................................... 97 31
Interest paid .......................................... (6,784) (4,684)
Payments for property operations ....................... (11,674) (10,297)
General and administrative expenses paid ............... (2,319) (2,857)
Deferred borrowing costs paid .......................... (125) (204)
-------- --------
Net cash provided by operating activities ........... 514 580
Cash Flows from Investing Activities
Acquisition of real estate ............................. (725) --
Proceeds from sale of real estate ...................... 3,785 557
Real estate improvements ............................... (9,826) (2,126)
Note receivable collections ............................ 14 63
Earnest money deposits (paid) refunded, net ............ 25 (152)
Net contributions and advances to partnerships ......... (3,154) (3,327)
Proceeds from the sale of marketable equity securities.. 202 --
-------- --------
Net cash (used in) investing activities ............. (9,679) (4,985)
Cash Flows from Financing Activities
Proceeds from borrowings ............................... 16,188 10,130
Payments of mortgage notes payable ..................... (3,353) (4,957)
Advances (repayment of advances) from affiliates, net... (2,003) 1,118
Margin account repayments, net ......................... (727) (714)
Replacement escrow deposits, net ....................... (41) (5)
Repurchase of shares of common stock ................... (949) (976)
Proceeds from the exercise of stock options ............ 40 52
Dividends to stockholders .............................. (1,098) (920)
-------- --------
Net cash provided by financing activities ........... 8,057 3,728
-------- --------
Net (decrease) in cash and cash equivalents .............. (1,108) (677)
Cash and cash equivalents, beginning of period ........... 3,951 2,442
-------- --------
Cash and cash equivalents, end of period ................. $ 2,843 $ 1,765
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
5
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TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------------
2000 1999
---------- --------
<S> <C> <C>
Reconciliation of net (loss) to net cash
provided by operating activities:
Net (loss).......................................................... $ (2,785) $ (1,123)
Extraordinary items................................................. 13 4
Gain on sale of investments......................................... (20) --
Gain on sale of real estate ........................................ (97) (338)
Minority interest in income of consolidated partnership............. 64 --
Depreciation and amortization....................................... 3,909 3,114
Equity in loss of partnerships...................................... 559 507
Interest on advances to partnerships................................ (37) --
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................................ 36 1
(Increase) decrease in other assets............................ 1,192 (623)
(Decrease) in other liabilities................................ (1,913) (1,074)
Increase (decrease) in interest payable........................ (407) 75
---------- --------
Net cash provided by operating activities............................. $ 514 $ 580
========== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the
purchase of real estate:
Real estate...................................................... $ 140,876 $ --
Restricted cash.................................................. 609 --
Investments in and advances to partnerships...................... (21,089) --
Other assets..................................................... 1,295 --
Notes and interest payable....................................... (114,742) --
Other liabilities................................................ (1,224) --
Minority interest................................................ (5,000) --
----------
Cash paid.................................................... $ 725 $ --
========== ========
Assets disposed of and liabilities released in connection
with the sale of real estate:
Real estate...................................................... $ 6,229 $ 199
Other assets..................................................... (2) --
Notes and interest payable....................................... (2,497) --
Other liabilities................................................ (42) 20
Gain on sale..................................................... 97 338
---------- --------
Cash received................................................ $ 3,785 $ 557
========== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
6
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TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the three month period ended March 31, 2000,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the Consolidated
Financial Statements and Notes included in our Annual Report on Form 10-K for
the year ended December 31, 1999. Dollar amounts in tables are in thousands.
NOTE 2. REAL ESTATE
In January 2000, we sold three of the four buildings (representing
approximately two-thirds of the net carrying value) of Rancho Sorrento Office
Park for $6.5 million, receiving $3.8 million of net cash proceeds after the
payoff of the mortgage and other closing costs. We recognized a $38,000 gain in
connection with this transaction.
In February 2000, we sold a portion of our property in Charlotte, North
Carolina, remaining after the May 1999 sale of the K-Mart building. We gave the
buyer a $140,000 mortgage and received the balance of the $175,000 sale price
in cash. We recognized a gain of $59,000 on the sale.
Also in February 2000, we purchased our partner's interest in National Omni
Associates, L.P., for $875,000. The operations of 5600 Collins Avenue, the
partnership's sole property, are now consolidated. We began the condominium
conversion of this property during 1999, and it is classified as held for sale
in the accompanying March 31, 2000, Consolidated Balance Sheet. As of May 10,
2000, we had entered into contracts and reservations for the sale of over half
of the units at this project.
Additionally, in February 2000, Tarragon acquired the interests of Robert C.
Rohdie and his affiliates in ten apartment communities recently completed or
currently under construction, as well as in all joint venture development
projects still in the planning stages, for a total value of up to $10 million.
Mr. Rohdie, Tarragon's joint venture partner in the development of these
projects, contributed his equity interests to an operating partnership formed
by Tarragon, in exchange for a preferred interest in the operating partnership
which gives him a guaranteed fixed return of $200,000 for the first two years,
increasing by $40,000 per year for the next five years, plus an annual amount
equal to the dividends payable on 98,160 shares of Tarragon common stock.
In addition, upon completion and lease up of each of the five identified
apartment communities presently under construction or in advanced stages of
development planning, Mr. Rohdie will receive an increase in his guaranteed
fixed return based on the previously agreed value of his equity in the
completed property. After one year, Mr. Rohdie has the right to convert his
preferred interest in the operating partnership into 98,160 shares of our
common stock and preferred stock with a face value of up to $8 million and a
dividend equal to his guaranteed fixed return from the operating partnership.
If we do not have preferred stock at the time of the conversion, or at our
discretion, we may pay the cash value of Mr. Rohdie's preferred interest over
three years. Because Tarragon controls the new operating partnership, its
operations are now consolidated.
7
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TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 2. REAL ESTATE (Continued)
Mr. Rohdie's preferred interest in the operating partnership has been initially
valued at $5 million (based on the value of five of the ten properties that
have been completed). Once the remaining five properties are completed and
leased up, Mr. Rohdie will receive an additional preferred interest in the
operating partnership to be valued at up to $5 million. Mr. Rohdie's interest in
the operating partnership is presented as a minority interest in the
accompanying March 31, 2000, Consolidated Balance Sheet.
This transaction was recorded using the purchase method of accounting. The
value of Mr. Rohdie's preferred interest in the operating partnership was
allocated to the completed assets of the operating partnership based on
relative fair values. The guaranteed fixed return payable to Mr. Rohdie has
been recorded based on an annual effective yield of 8.67% and is presented as
minority interest in income of consolidated partnership in the accompanying
Consolidated Statement of Operations for the three months ended March 31, 2000.
In connection with this transaction, Tarragon formed a new development
subsidiary to expand our real estate development and renovation program. Mr.
Rohdie joined Tarragon as President and Chief Executive Officer of Tarragon
Development Corporation and as a member of our Board of Directors effective
February 7, 2000.
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Investments in and advances to partnerships, accounted for using the equity
method, consisted of the following at March 31, 2000:
<TABLE>
<S> <C>
801 Pennsylvania Avenue............................... $ 22
Ansonia Apartments, L.P. ............................. 20,664
Antelope Pines Estates, L.P. ......................... 604
Calistoga Ranch Owners, L.L.C. ....................... 400
Larchmont Associates, L.P. ........................... 2,037
Merritt 8 Acquisitions, L.L.C. ....................... 2,360
Merritt Stratford, L.L.C. ............................ 516
Sacramento Nine....................................... 1,155
Stone Creek Associates I, L.L.C. ..................... 1,509
Woodcreek Garden Apartments, L.P. .................... 1,121
---------
$ 30,388
=========
</TABLE>
In January 2000, we acquired a 50% interest in Merritt Stratford with a cash
investment of $516,000. In January 2000, Merritt Stratford purchased for future
development a 19 acre parcel of land in Merritt 8 Corporate Park in Stratford,
Connecticut, adjacent to the property owned by Merritt 8 Acquisitions.
8
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TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
Below are summarized financial data for Ansonia and other partnerships still
owned as of and for the three months ended March 31, 2000, and summarized
operating data of the partnerships that we acquired in 2000 for the period
prior to their acquisition (unaudited):
<TABLE>
<CAPTION>
March 31, 2000
Acquired All
Ansonia Other Partnerships Partnerships
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Real estate $ 97,430 $ 91,403 $ -- $ 188,833
Accumulated depreciation (3,291) (3,492) -- (6,783)
Other assets 2,635 4,553 -- 7,188
Notes and interest payable (74,632) (75,521) -- (150,153)
Other liabilities (5,360) (4,582) -- (9,942)
--------- --------- ------- ---------
Partners' capital $ 16,782 $ 12,361 $ -- $ 29,143
========= ========= ======= =========
Our proportionate share of capital $ 16,782 $ 4,191 $ -- $ 20,973
Advances 3,882 5,533 -- 9,415
--------- --------- ------- ---------
Investments in and advances to
Partnerships $ 20,664 $ 9,724 $ -- $ 30,388
========= ========= ======= =========
Three months ended March 31, 2000
Rental revenue $ 4,358 $ 3,467 $ 1,288 $ 9,113
Property operating expenses (2,460) (1,611) (593) (4,664)
Interest expense (1,597) (1,090) (772) (3,459)
Depreciation expense (748) (520) (291) (1,559)
--------- --------- ------- ---------
Net income (loss) $ (447) $ 246 $ (368) $ (569)
========= ========= ======= =========
Equity in income (loss) of
Partnerships $ (447) $ 146 $ (258) $ (559)
========= ========= ======= =========
</TABLE>
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 2000, unrealized
losses of $23,000 and unrealized gains of $6,000 were recorded. Also during the
first quarter of 2000, we sold investments in securities with a cost basis of
$182,000 for $202,000, realizing gains totaling $20,000.
9
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TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. NOTES AND INTEREST PAYABLE
In February 2000, the mortgage secured by liens on both the retail and office
portions of Emerson Center was modified and extended. The mortgage was
increased from $6.9 million to $7.9 million, and maturity date was extended to
February 2003. At closing of this transaction, Tarragon received net cash
proceeds of $900,000 after closing costs.
In March 2000, we obtained new financing of $1.7 million secured by Southern
Elms Apartments, receiving net cash proceeds of $402,000 after the payoff of
the $1.3 million existing mortgage.
Also in March 2000, we obtained a $4 million loan that bears interest at prime
plus 1% and matures in October 2000. The loan is secured by liens on two
properties and assignment of certain stock and partnership interests. We intend
to repay the loan with proceeds to be obtained from permanent mortgage
financing prior to its maturity.
Also during the first quarter of 2000, we repaid $2 million of advances from
affiliates of William S. Friedman, our President and Chief Executive Officer
and a member of our Board of Directors, pursuant to a two year line of credit
arrangement. Advances under the line of credit, totaling $3.1 million as of
March 31, 2000, bear interest at LIBOR plus 1% per annum and are payable in
January 2001.
Extraordinary items presented in the Consolidated Statement of Operations for
the three months ended March 31, 2000, represent prepayment penalties in
connection with certain mortgage 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 month periods ended March 31,
2000 and 1999. The effect of stock options on weighted average shares of common
stock outstanding - assuming dilution for the three month periods ended March
31, 2000 and 1999, is not reflected because their effect is anti-dilutive due
to net losses in both years.
NOTE 7. INCOME TAXES
In February 2000, we filed a revocation of REIT election with the Internal
Revenue Service, terminating our status as a REIT effective December 1, 1999
(the beginning of the 2000 tax year). The results of our operations are now
subject to income taxes. No current or deferred income tax expense has been
recognized in the first quarter of 2000 resulting from the change in tax status
due to the application of net operating loss carryforwards.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Tarragon is a party to various claims and routine litigation arising in the
ordinary course of business. We do not believe that the results of such claims
and litigation, individually or in the aggregate, will have a material adverse
effect on our business, financial position, or results of operations.
10
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TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 9. EXCHANGE OFFER
On March 22, 2000, Tarragon announced an offer to exchange one share of 10%
Cumulative Preferred Stock for each share of common stock held by its
stockholders, up to a maximum of 2,000,000 shares. This exchange offer has been
extended and is scheduled to expire at 5:00 p.m., New York City time, on May
30, 2000, unless further extended.
The exchange offer is directed to those holders of Tarragon common stock who
would prefer to hold a security with a fixed dividend yield and a fixed
liquidation preference in the event of redemption or other disposition of the
security. The exchange offer is not part of any plan to "go private" and not
the first in any series of transactions designed to have a resulting effect
upon the outstanding common stock. However, to the extent shares of common
stock are exchanged for shares of 10% Cumulative Preferred Stock pursuant to
the exchange offer, the number of shares of common stock outstanding in the
hands of the public stockholders will initially decrease. Assuming the maximum
of 2,000,000 shares of common stock are tendered pursuant to the exchange
offer, a minimum of 3,009,118 shares of common stock will continue to remain in
the hands of public stockholders. The exchange offer should not have an adverse
effect upon the listing of our common stock on the NASDAQ National Market.
The class of 10% Cumulative Preferred Stock will be designated to consist of
2,500,000 shares. The number of shares which may be issued pursuant to the
Exchange Offer is limited to 2,000,000 shares (subject to increase in certain
events), which would result in 500,000 shares being available in the event that
we elect to accept more than the maximum for exchange, for future distribution
in connection with the acquisition of assets, or for other uses, at the
discretion of our Board of Directors.
The 10% Cumulative Preferred Stock will pay a fixed dividend of $1.20 per year,
and has a liquidation value of $12 per share. It is a class of equity and is
junior in ranking in right of payment to our outstanding indebtedness, but is
senior to common stock. It ranks on a parity as to dividends and liquidation
with all other shares of special or preferred stock which we might issue.
Shares of 10% Cumulative Preferred Stock may be redeemed at Tarragon's option
at any time after June 30, 2003, at the liquidation value plus a premium of
$0.50 per share reducing by $0.10 per share each year thereafter. No mandatory
redemption or "sinking fund" is required. The 10% Cumulative Preferred Stock
has only the voting rights specifically required by law under the Nevada
General Corporation Law, and is not convertible into any other securities of
Tarragon.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Please read this discussion along with the Consolidated Financial Statements
and Notes included elsewhere in this report.
Liquidity and Capital Resources
Our principal sources of cash are property operations, borrowings, and proceeds
from the sale of properties. We believe these sources will continue to meet our
cash requirements, including debt service payments, property maintenance and
improvements, development costs on construction properties, projected purchases
of operating properties, dividends, and planned repurchases of common stock.
Although we expect these sources of cash to be more than sufficient to fund
planned uses of cash, we make no assurance that the expected sales and
refinancings of properties will be completed as planned.
Net cash from property operations (rentals collected less payments for property
operations) provided $9.6 million in the first quarter of 2000, up 16% over the
corresponding period in 1999 primarily due to the addition of ten properties to
the portfolio in connection with the acquisition of partnership interests.
In the first quarter of 2000, proceeds from borrowings generated $11.1 million
from the refinancing of mortgages on directly owned properties, construction
loan fundings, and net borrowings under line of credit facilities. Of the net
borrowings under line of credit facilities, we repaid $2 million of advances
from affiliates of William S. Friedman, President, Chief Executive Officer, and
a Director of Tarragon.
Principal payments on notes payable totaling $78.1 million come due during the
remainder of 2000, including $76.1 million of balloon payments. We intend to
either pay off the loans as they come due or extend the due dates while seeking
to obtain long term refinancing. Of the balloon payments due in 2000, $39.8
million represents amounts due under the $50 million revolving credit facility,
which has two six-month extension options. We estimate that refinancing of
directly owned properties will generate $20 million in net cash proceeds during
the remainder of 2000. We expect to receive more than $15 million in 2000 from
partnerships' financing activities. We believe we can arrange new financing as
needed but cannot assure that we will be successful in our efforts or that the
timing of new financing will coincide with the due dates of maturing loans.
In the first quarter of 2000, net cash proceeds from the sale of real estate
totaled $3.8 million. We sold portions of two properties with an aggregate net
carrying amount of $6.2 million and paid off a mortgage of $2.5 million. We
estimate proceeds from the sale of real estate will provide an additional $18
million during 2000.
In the first quarter of 2000, we paid interest on notes and debentures payable
of $6.8 million, up 45% over the corresponding period in 1999 predominantly due
to the addition of ten properties to the portfolio in connection with the
acquisition of partnership interests in February 2000 and to the increase in
mortgage debt related to refinancings.
Since the beginning of 1997, Tarragon and Robert C. Rohdie formed nine
partnerships to build and own luxury apartment communities in Florida, Georgia,
and Alabama. Tarragon's aggregate contributions and advances through January
2000 of $18.5 million, $370,000 of which were made during the first quarter of
2000, provided substantially all of the development costs not covered by
construction loans. In February 2000, Tarragon effectively acquired Mr.
Rohdie's interests in these partnerships. The properties owned by these
partnerships were contributed to a new operating partnership that Tarragon
controls, and Mr. Rohdie received a preferred
12
<PAGE> 13
interest in this partnership valued at up to $10 million. These properties have
been consolidated since February 2000.
In 1997, Tarragon formed National Omni Associates, L.P., which purchased a
289-unit high rise apartment building in Miami Beach, Florida, for $32 million
in February 1998. In 1999, we implemented a condominium conversion program for
this property. We have begun to offer the condominium units for sale and have
accepted contracts and non-binding reservations for the sale of more than half
of the units. Based on such contracts and reservations, we expect to receive
more than $10 million in net cash proceeds from sales in 2000. We invested $7.6
million ($380,000 in the first quarter of 2000) in this partnership. In
February 2000, we bought out our partner in National Omni for $875,000, and
this property has been consolidated since February 2000.
In the first quarter of 2000, Tarragon made capital improvements to its directly
owned real estate of $9.8 million, $8.8 million of which was spent on
construction at four development properties and $624,000 of which was spent on
the condominium conversion of 5600 Collins Avenue. We expect to spend
approximately $38 million on construction of eight apartment communities in
various stages of development during the remainder of 2000, of which $25.5
million will be funded by construction loans. We plan to spend $1 million during
the remainder of 2000 on improvements to 5600 Collins Avenue. We plan to invest
approximately $9 million in capital improvements to our directly owned operating
properties during the remainder of 2000.
We anticipate using cash of $10 million in 2000 for the acquisition of real
estate.
In 1997, Tarragon formed Ansonia Apartments, L.P., with Richard Frary, Joel
Mael, Robert Rothenberg, and Saul Spitz. Since then, Ansonia has purchased 16
apartment properties with an aggregate 2,580 units and a 160,000 square foot
historic mill for conversion to residential lofts, all located in Connecticut.
The cash required to purchase the properties was provided by Tarragon in the
form of capital contributions that earn a preferred return and have priority
over distributions to the partners. We have also made interest-bearing advances
to Ansonia for major renovations to four of its properties. Our contributions
and advances to date total $18.9 million, $354,000 of which were made during
the first quarter of 2000. We expect to fund an additional $4.6 million to
Ansonia during the remainder of 2000.
During the first quarter of 2000, Tarragon advanced funds totaling almost $2
million to two new partnerships, one of which purchased an operating apartment
complex in Sacramento, California, and one of which purchased land for future
development in Stratford, Connecticut.
The Board of Directors has authorized a stock repurchase program. We will
continue to repurchase shares of our common stock as long as we believe the
fair market value of our net assets per share is substantially greater than the
market price of our stock. During the first quarter of 2000, Tarragon
repurchased 91,400 shares of its common stock in open market transactions at a
cost of $949,000. As of March 31, 2000, there were 963,403 shares authorized
for repurchase, and we plan to spend $4 million during the remainder of 2000 on
share repurchases.
Results of Operations
The significant components of the $1.7 million decrease in net operating
results between 1999 and 2000 are discussed in the following paragraphs.
The properties acquired directly in 1999 and 2000 reduced net operating results
$300,000. This amount is comprised of increases in net rental income of $1.8
million, interest expense of $1.5 million, and depreciation of $615,000. An
increase in net rental income (rental revenue less property operating expenses)
of $1.6 million
13
<PAGE> 14
came from multifamily properties acquired in 2000. At March 31, 2000,
Tarragon's directly owned multifamily properties accounted for 88% of its real
estate and included 10,920 operating apartment units. One commercial property
acquired in 1999 contributed $204,000 to the increase in net rental income. At
March 31, 2000, Tarragon owned commercial properties with an aggregate 1.8
million square feet.
For properties held in both years, net rental income was relatively stable.
Increased rental revenue from increased rental rates at certain properties was
partially offset by increased vacancy losses due to lower overall occupancy.
For properties held in both years, interest expense increased $500,000 due to
long term and interim mortgage financing and advances under line of credit
facilities which increased indebtedness by $23.7 million since March 31, 1999.
Equity in (loss) of partnerships increased $52,000 between 1999 and 2000. A
decrease in net operating results of approximately $400,000 relates to Ansonia
Apartments, L.P., in which Tarragon holds a 70% noncontrolling interest. Six
properties acquired by Ansonia in 1999 and for which operations have not yet
stabilized reported losses in the first quarter of 2000. Additionally, Ansonia
recorded higher depreciation in 2000 due to capital improvements made to
certain of its properties during 1999. The offsetting improvement in earnings
primarily resulted from the acquisition of additional interests in ten
partnerships in February 2000. The ten properties of these partnerships are now
consolidated whereas they were accounted for using the equity method during
1999. Most of these properties were in lease-up or under development and
reported operating losses in 1999.
Funds from Operations
Please read the following information along with the Consolidated Financial
Statements and Notes included elsewhere in this report and with the discussion
above in "Liquidity and Capital Resources" and "Results of Operations."
Funds from operations (or FFO) for the three month periods ended March 31, 2000
and 1999, are as follows (unaudited) (dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------
2000 1999
------- -------
<S> <C> <C>
Net (loss) ........................................... $(2,785) $(1,123)
Extraordinary items .................................. 13 4
Gain on sale of real estate .......................... (97) (338)
Depreciation and amortization of real estate assets .. 3,268 2,554
Depreciation and amortization of real estate assets of
partnerships ...................................... 1,162 843
------- -------
Funds from operations ................................ $ 1,561 $ 1,940
======= =======
</TABLE>
Tarragon considers FFO to be an appropriate measure of the performance of a
real estate company. FFO, as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), equals net income (loss), computed in accordance
with generally accepted accounting principles ("GAAP"), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization of real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships
and joint ventures are calculated to reflect FFO on the same basis. The
amortization of deferred financing costs is not added back to net income (loss)
in our calculation, consistent with our historical method of calculating
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<PAGE> 15
FFO. In October 1999, NAREIT clarified the definition of FFO. According to this
clarification, nonrecurring items that are not defined as extraordinary under
GAAP will be included in FFO. Extraordinary items and gains and losses from
sales of depreciable operating property will continue to be excluded from FFO.
The clarification of FFO was effective January 1, 2000. We have reported FFO
using the clarification beginning in the first quarter of 2000. We believe that
FFO is useful to investors as a measure of the performance of a real estate
company because, along with cash flows from operating activities, investing
activities, and financing activities, it provides investors an understanding of
our ability to incur and service debt and to make capital expenditures. We also
believe that a clear understanding of our operating results is best gained by
examining FFO along with net income (loss) as shown in the Consolidated
Financial Statements and Notes. FFO does not represent cash generated from
operating activities in accordance with GAAP, and is not an alternative to net
income as an indication of our operating performance or to cash flow as a
measure of liquidity, nor is it necessarily indicative of cash available to
fund cash needs and cash dividends. Our calculation of FFO may be different
from the methods used by other companies and, therefore, may not be comparable
to other companies.
Allowance for Estimated Losses and Provisions for Losses
Tarragon periodically reviews the carrying values of properties held for sale.
Generally accepted accounting principles require the carrying value of a
property held for sale not to exceed the lower of its cost or its estimated
fair value less costs to sell. In instances where a property's estimated fair
value less costs to sell is less than its carrying value at the time of
evaluation, we provide an allowance for loss by making a charge against
operations. Our review of properties held for sale generally includes selective
site inspections, comparing the property's current rents to market rents,
reviewing the property's expenses and maintenance requirements, discussions
with the property manager, and a review of the surrounding area. We may make
adjustments to estimated fair value based on future reviews.
Tarragon also evaluates its properties held for investment for impairment
whenever events or changes in circumstances indicate that a property's carrying
value may not be recoverable. This evaluation generally consists of reviewing
the property's cash flow and current and projected market conditions, as well
as changes in general and local economic conditions. If we conclude that a
property has been impaired, we reduce its carrying value by making a charge
against current earnings in the amount by which the carrying value of the
property exceeds its estimated fair value.
Environmental Matters
Under federal, state, and local environmental laws, ordinances, and
regulations, Tarragon may be liable for removal or remediation costs, as well
as other costs (such as fines or injuries to persons and property) where our
employees may have arranged for removal, disposal, or treatment of hazardous or
toxic substances. In addition, environmental laws impose liability for release
of asbestos-containing materials into the air, and third parties can seek
recovery from Tarragon for personal injury associated with those materials. We
are not aware of any liability relating to these matters that would have a
material adverse effect on our business, financial position, or results of
operations.
Tax Matters
Until November 30, 1999, we elected and, in our opinion, qualified to be taxed
as a Real Estate Investment Trust, as that term is defined in 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 stockholders. We have terminated our status
as a REIT effective as of December 1, 1999, the beginning of our 2000 tax year,
15
<PAGE> 16
but we do not expect this to impact our current policy of paying annual
dividends to common stockholders in an amount not greater than 50% of funds
from operations.
Risks Associated with Forward-Looking Statements Included in this Form 10-Q
In addition to historical information, this Form 10-Q contains forward-looking
statements. Forward-looking statements are expressions of our current beliefs
and expectations, based on information currently available to us, estimates and
projections about our industry, and certain assumptions made by our management.
These statements are not historical facts. We use words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions to identify our forward-looking statements.
Because we are unable to control or predict many of the factors that will
determine our future performance and financial results, including future
economic, competitive, and market conditions, our forward-looking statements
are not guarantees of future performance. They are subject to risks,
uncertainties, and errors in assumptions that could cause our actual results to
differ materially from those reflected in our forward-looking statements. We
believe that the assumptions underlying our forward-looking statements are
reasonable. However, you should not place undue reliance on these
forward-looking statements. They only reflect our view and expectations as of
the date of this Form 10-Q. We undertake no obligation to publicly update or
revise any forward-looking statement in light of new information, future
events, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Tarragon is exposed to market risk from changes in interest rates that may
adversely affect our financial position, results of operations, and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage
exposures through our regular operating and financing activities. We do not use
financial instruments for trading or other speculative purposes.
At March 31, 2000, Tarragon had approximately $150 million of variable rate
debt. The primary base rate is the 30-day LIBOR. Using this balance of debt, if
LIBOR or any other indexes on which the rates are based increased by 100 basis
points (1%), our pre-tax earnings and cash flows would decrease by
approximately $1.5 million. On the other hand, if interest rates decreased by
100 basis points, our pre-tax earnings and cash flows would increase by
approximately $1.5 million.
At March 31, 2000, unconsolidated partnerships had approximately $75.8 million
of variable rate debt. A 100 basis point increase in the index on which the
rates are based would reduce our pre-tax earnings by approximately $641,000
(based on our interests in the partnerships). A 100 basis point decrease in the
index on which the rates are based would increase our pre-tax earnings by
approximately $641,000. Assuming these partnerships distribute all of their
available cash to the partners, our cash flow would be changed by these same
amounts.
Tarragon has entered into reverse repurchase agreements with an investment bank
for three mortgage-backed securities (or MBSs) secured separately by mortgages
on three of our properties. If market interest rates increase, the value of the
MBSs generally decreases, which would require us to deposit more funds with the
investment bank (assuming no change in margin requirements). Decreases in
market interest rates generally increase the value of the MBSs and allow the
release to us of margin funds held by the investment bank (again assuming no
change in margin requirements). The repurchase price of the MBSs bears interest
at a variable rate based on LIBOR. An increase in interest rates of 100 basis
points would result in a decrease of $204,000 in our pre-tax earnings and a
decrease of $1.2 million in our cash flow. A 100 basis point decrease in
interest rates would result in an increase of $205,000 in our pre-tax earnings
and an increase of $1.1 million in our cash flow.
16
<PAGE> 17
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.
17
<PAGE> 18
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 12, 2000 By: /s/ William S. Friedman
-------------- ----------------------------------------
William S. Friedman
President, Chief Executive
Officer, and Director
Date: May 12, 2000 By: /s/ Erin D. Davis
-------------- ----------------------------------------
Erin D. Davis
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
18
<PAGE> 19
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
EXHIBIT 27.0 Financial Data Schedule
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,843
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (1,156)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 510,359
<DEPRECIATION> (64,312)
<TOTAL-ASSETS> 498,860
<CURRENT-LIABILITIES> 0
<BONDS> 410,930
0
0
<COMMON> 79
<OTHER-SE> 69,183
<TOTAL-LIABILITY-AND-EQUITY> 498,860
<SALES> 0
<TOTAL-REVENUES> 20,358
<CGS> 0
<TOTAL-COSTS> 10,524
<OTHER-EXPENSES> 3,140
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,866
<INCOME-PRETAX> (2,772)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,772)
<DISCONTINUED> 0
<EXTRAORDINARY> (13)
<CHANGES> 0
<NET-INCOME> (2,785)
<EPS-BASIC> (.35)
<EPS-DILUTED> (.35)
</TABLE>
