<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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.)
1775 Broadway, 23rd Floor, New York, NY 10019
---------------------------------------------------
(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 par value 6,899,793
---------------------------- ---------------------------------
(Class) (Outstanding at November 1, 2000)
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended
September 30, 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>
September 30, December 31,
------------ ------------
2000 1999
------------ ------------
<S> <C> <C>
Assets
Real estate held for sale (net of accumulated depreciation of
$22,712 in 2000 and $25,282 in 1999) ........................... $ 96,512 $ 52,885
Less - allowance for estimated losses ............................ (1,156) (1,156)
------------ ------------
95,356 51,729
Real estate held for investment (net of accumulated
depreciation of $46,938 in 2000 and $36,143 in 1999) ........... 366,682 253,595
Investments in and advances to partnerships ...................... 24,380 48,834
Cash and cash equivalents ........................................ 2,446 3,951
Restricted cash .................................................. 9,658 6,538
Other assets, net ................................................ 17,724 14,418
------------ ------------
$ 516,246 $ 379,065
============ ============
Liabilities and Stockholders' Equity
Liabilities
Notes, debentures, and interest payable (including $7,909
in 2000 and $5,108 in 1999 due to affiliates) .................. $ 416,493 $ 287,767
Other liabilities ................................................ 17,904 18,305
------------ ------------
434,397 306,072
Commitments and contingencies ....................................
Minority interest ................................................ 5,179 --
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000;
shares outstanding, 6,934,218 in 2000 and 7,993,999 in 1999
(after deducting 3,373,651 shares in 2000 and 2,891,713
shares in 1999 held in treasury) ............................... 69 80
Special stock, $.01 par value; authorized shares,
7,500,000; shares outstanding, none ........................... -- --
Preferred stock, $.01 par value; authorized shares, 2,500,000;
shares outstanding, 591,134 in 2000; liquidation preference,
$7,094 or $12 per share ....................................... 6 --
Paid-in capital .................................................. 294,690 299,528
Accumulated dividends in excess of accumulated earnings .......... (218,095) (226,575)
Accumulated other comprehensive income (loss) .................... -- (40)
------------ ------------
76,670 72,993
------------ ------------
$ 516,246 $ 379,065
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
2
<PAGE> 3
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Rentals .................................... $ 22,784 $ 18,293 $ 65,876 $ 54,672
Condominium unit sales ..................... 1,124 -- 1,124 --
Interest ................................... 40 454 187 896
Management fees ............................ 87 130 285 370
Equity in income
(loss) of partnerships .................. 16,342 (79) 16,103 (560)
------------ ------------ ------------ ------------
40,377 18,798 83,575 55,378
Expenses
Property operations ........................ 11,886 10,010 33,518 28,158
Costs of condominium unit sales ............ 760 -- 760 --
Interest (including $131 in the three
month period and $287 in the nine
month period ended September 30,
2000, to affiliates) .................... 7,814 5,476 22,500 15,992
Depreciation ............................... 3,694 2,684 10,544 8,010
Amortization of goodwill ................... 126 133 380 381
General and administrative
Corporate ............................... 1,708 1,215 4,557 3,936
Property ................................ 945 966 2,936 2,825
------------ ------------ ------------ ------------
26,933 20,484 75,195 59,302
------------ ------------ ------------ ------------
Income (loss) before minority interest
in income of consolidated
partnership, gain on sale of real
estate, loss on sale of investments,
gain on insurance settlement,
litigation settlement, and
extraordinary items ........................ 13,444 (1,686) 8,380 (3,924)
Minority interest in income of
consolidated partnership ................... (96) -- (258) --
Gain on sale of real estate .................. 2,506 4,310 2,884 8,571
Loss on sale of investments .................. (307) -- (261) --
Gain on insurance settlement ................. 373 -- 373 231
Litigation settlement ........................ -- -- -- (350)
------------ ------------ ------------ ------------
Income from continuing operations ............ 15,920 2,624 11,118 4,528
Extraordinary items .......................... (1,561) -- (2,400) (248)
------------ ------------ ------------ ------------
Net income ................................... 14,359 2,624 8,718 4,280
Dividends on cumulative preferred
stock ...................................... (178) -- (238) --
------------ ------------ ------------ ------------
Net income available to common
stockholders ............................... $ 14,181 $ 2,624 $ 8,480 $ 4,280
============ ============ ============ ============
</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 Nine Months
Ended September 30, Ended September 30,
-------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Other comprehensive income (loss):
Net income ................................. $ 14,359 $ 2,624 $ 8,718 $ 4,280
Unrealized net gains (losses) on
marketable equity securities .......... 5 (13) (22) (1)
Realized losses on marketable
equity securities ..................... 108 -- 62 --
----------- ----------- ----------- -------------
Net income (loss) recognized in other
comprehensive income (loss) .............. 113 (13) 40 (1)
----------- ----------- ----------- -------------
Comprehensive income ....................... $ 14,472 $ 2,611 $ 8,758 $ 4,279
=========== =========== =========== =============
Earnings per common share
Income from continuing operations
available to common stockholders ......... $ 2.25 $ .32 $ 1.45 $ .55
Extraordinary items ........................ (.22) -- (.32) (.03)
----------- ----------- ----------- -------------
Net income available to common
stockholders ............................ $ 2.03 $ .32 $ 1.13 $ .52
=========== =========== =========== =============
Weighted average shares of
common stock used in computing
earnings per common share ................ 6,978,562 8,124,346 7,493,425 8,276,338
=========== =========== =========== =============
Earnings per common share -
assuming dilution
Income from continuing operations
available to common stockholders ......... $ 2.23 $ .32 $ 1.44 $ .54
Extraordinary items ........................ (.22) -- (.32) (.03)
----------- ----------- ----------- -------------
Net income available to common
stockholders ............................. $ 2.01 $ .32 $ 1.12 $ .51
=========== =========== =========== =============
Weighted average shares of common
stock used in computing earnings per
common share - assuming dilution ......... 7,060,341 8,217,969 7,577,381 8,381,739
=========== =========== =========== =============
</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
Preferred Stock Common Stock in Excess of
------------------------ ------------------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Earnings
---------- ---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 ........ -- $ -- 7,993,999 $ 80 $ 299,528 $ (226,575)
Exchange of preferred stock
for common stock ................ 596,836 6 (596,836) (6) -- --
Repurchase of shares
of common stock ................. -- -- (481,938) (5) (4,920) --
Retirement of preferred
stock ........................... (5,702) -- -- -- (58) --
Stock options exercised ........... -- -- 18,993 -- 140 --
Dividends on cumulative
preferred stock ................. -- -- -- -- -- (238)
Net income recognized in
other comprehensive
income (loss) ................... -- -- -- -- -- --
Net income ........................ -- -- -- -- -- 8,718
---------- ---------- ---------- ---------- ---------- --------------
Balance, September 30, 2000 ....... 591,134 $ 6 6,934,218 $ 69 $ 294,690 $ (218,095)
========== ========== ========== ========== ========== ==============
<CAPTION>
Accumulated
Other
Comprehensive Stockholders'
Income(Loss) Equity
-------------- --------------
<S> <C> <C>
Balance, December 31, 1999 ........ $ (40) $ 72,993
Exchange of preferred stock
for common stock ................ -- --
Repurchase of shares
of common stock ................. -- (4,925)
Retirement of preferred
stock ........................... -- (58)
Stock options exercised ........... -- 140
Dividends on cumulative
preferred stock ................. -- (238)
Net income recognized in
other comprehensive
income (loss) ................... 40 40
Net income ........................ -- 8,718
-------------- --------------
Balance, September 30, 2000 ....... $ -- $ 76,670
============== ==============
</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 Nine Months
Ended September 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected ......................................... $ 65,972 $ 54,732
Condominium unit sales collected .......................... 1,079 --
Interest collected ........................................ 153 141
Interest paid (including $253 to affiliates in 2000) ...... (22,157) (14,796)
Payments for property operations .......................... (34,198) (26,731)
Condominium development costs paid ........................ (5,259) --
General and administrative expenses paid
Corporate .............................................. (3,740) (4,300)
Property ............................................... (2,979) (3,052)
Deferred borrowing costs paid ............................. (2,005) (697)
------------- -------------
Net cash provided by (used in) operating activities .... (3,134) 5,297
Cash Flows from Investing Activities
Acquisition of real estate ................................ (7,306) (1,674)
Proceeds from the sale of real estate ..................... 5,667 8,577
Real estate improvements .................................. (34,624) (13,149)
Earnest money deposits paid, net .......................... (486) (65)
Note receivable collections ............................... 384 129
Proceeds from sale of marketable equity securities ........ 488 --
Net contributions and advances to partnerships ............ (6,451) (11,648)
Distribution to minority partner of consolidated
partnership.............................................. (79) --
------------- -------------
Net cash (used in) investing activities ................ (42,407) (17,830)
Cash Flows from Financing Activities
Proceeds from borrowings .................................. 103,786 32,188
Payments of mortgage notes payable ........................ (85,668) (14,197)
Advances from affiliates, net ............................. 2,767 816
Margin account repayments, net ............................ (1,296) (1,473)
Replacement escrow receipts, net .......................... 546 338
Distributions from partnerships' financing activities ..... 29,854 4,843
Repurchase of shares of common stock ...................... (4,925) (4,537)
Retirement of preferred stock ............................. (58) --
Proceeds from the exercise of stock options ............... 140 109
Dividends to common stockholders .......................... (1,110) (2,666)
------------- -------------
Net cash provided by financing activities .............. 44,036 15,421
------------- -------------
Net increase (decrease) in cash and cash equivalents ........ (1,505) 2,888
Cash and cash equivalents, beginning of period .............. 3,951 2,442
------------- -------------
Cash and cash equivalents, end of period .................... $ 2,446 $ 5,330
============= =============
</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 Nine Months
Ended September 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Reconciliation of net income to net cash provided by (used in) operating
activities:
Net income ...................................................................... $ 8,718 $ 4,280
Write-off of deferred borrowing costs in connection with
refinancings ................................................................. 567 14
Extraordinary items of unconsolidated partnership ............................... 856 --
Litigation settlement ........................................................... -- 350
Gain on insurance settlement .................................................... (373) (231)
Loss on sale of investments ..................................................... 261 --
Gain on sale of real estate ..................................................... (2,884) (8,571)
Minority interest in income of consolidated partnership ......................... 258 --
Depreciation and amortization ................................................... 13,114 9,919
Equity in (income) loss of partnerships ......................................... (16,103) 560
Interest on advances to partnerships ............................................ (37) (755)
Noncash compensation related to stock options exercised ......................... -- 37
Increase in condominium development costs ....................................... (4,544) --
Changes in other assets and liabilities, net of effects of
noncash investing and financing activities:
Decrease in interest receivable .............................................. 2 1
(Increase) in other assets ................................................... (6,489) (4,618)
Increase in other liabilities ................................................ 3,600 4,103
Increase (decrease) in interest payable ...................................... (80) 208
------------ ------------
Net cash provided by (used in) operating activities ................................. $ (3,134) $ 5,297
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the purchase of real
estate:
Real estate ..................................................................... $ 147,260 $ 9,493
Restricted cash ................................................................. 609 --
Investments in and advances to partnerships ..................................... (21,089) --
Other assets .................................................................... 1,491 302
Notes and interest payable ...................................................... (114,743) (7,973)
Other liabilities ............................................................... (1,222) (148)
Minority interest ............................................................... (5,000) --
------------ ------------
Cash paid ..................................................................... $ 7,306 $ 1,674
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
7
<PAGE> 8
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES (Continued):
Assets disposed of and liabilities released in connection with the sale of
real estate:
Real estate ...................................................................... $ 9,414 $ 12,973
Allowance for estimated losses ................................................... -- (38)
Other assets ..................................................................... 154 309
Notes and interest payable ....................................................... (6,701) (12,872)
Other liabilities ................................................................ (84) (359)
Gain on sale ..................................................................... 2,884 8,571
Extraordinary loss on early extinguishment of debt ............................... -- (7)
------------ ------------
Cash received .................................................................. $ 5,667 $ 8,577
============ ============
Effect on assets and liabilities of the transfer of ownership of The Villages
at Gateway to a joint venture:
Real estate ...................................................................... $ (7,639) $ --
Investments in and advances to partnerships ...................................... 7,889 --
Other assets ..................................................................... (629) --
Other liabilities ................................................................ 379 --
------------ ------------
$ -- $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
8
<PAGE> 9
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the nine month period ended September 30,
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. Certain 1999 balances have been reclassified to conform to the 2000
presentation.
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 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. In May 2000, we sold an
additional portion of this property for $1.1 million. After closing costs, we
received net cash of $1 million and recognized a gain of $281,000.
During the first nine months of 2000, we began construction on three luxury
apartment communities in Florida. They include The Vintage at Lake Lotta with
199 units in Ocoee, Florida; The Vintage at Plantation Bay with 240 units in
Jacksonville, Florida; and The Vintage at Tampa Palms with 298 units in Tampa,
Florida. Total development costs for these three properties are projected to be
$16.6 million, $15.6 million, and $23.8 million. Construction loans of $14
million and $13.5 million have been obtained for The Vintage at Lake Lotta and
The Vintage at Plantation Bay. We plan to close a $19.8 million construction
loan for The Vintage at Tampa Palms in November 2000.
In September 2000, we sold Bryan Hill Apartments for $5.2 million, receiving net
cash proceeds of $844,000 after the payoff of the mortgage and closing costs. We
recognized a $2.5 million gain on this sale. We had acquired Bryan Hill in 1995
for $2.3 million and made $660,000 in capital improvements while we owned it.
In June 2000, we reclassified seven apartment properties with an aggregate 882
units and an aggregate net carrying value of $16.2 million to real estate held
for sale. These properties are currently under contract to sell to third party
purchasers or are being actively marketed for sale. We ceased depreciating these
properties in July 2000. Because the estimated fair values of these properties
less their estimated selling costs exceed their respective net carrying values,
no losses were recognized upon their reclassification to held for sale.
9
<PAGE> 10
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. CONDOMINIUM UNIT SALES
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 September 30, 2000, Consolidated Balance Sheet. As of
October 31, 2000, we had entered into contracts and reservations for the sale of
over 66% of the apartments at this property for a total of $39.4 million. During
the third quarter of 2000, we sold eight condominium units for an aggregate sale
price of $1.1 million and recognized a net profit of $364,000, or 32% of the
gross sale revenue. After closing costs and release payments on the mortgage, we
received net cash proceeds of $415,000.
NOTE 4. ACQUISITION OF JOINT VENTURE INTERESTS
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.
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
September 30, 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 Statements of
Operations for the three and nine month periods ended September 30, 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.
10
<PAGE> 11
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Investments in and advances to partnerships, accounted for using the equity
method, consisted of the following at September 30, 2000:
<TABLE>
<S> <C>
801 Pennsylvania Avenue .............................. $ 22
Ansonia Apartments, L.P. ............................. 14,898
Antelope Pines Estates, L.P. ......................... 407
Calistoga Ranch Owners, L.L.C. ....................... 400
Devonshire Apartment Owners, L.L.C. .................. --
Larchmont Associates, L.P. ........................... 2,117
Merritt 8 Acquisitions, L.L.C. ....................... 2,321
Merritt Stratford, L.L.C. ............................ 517
Sacramento Nine ...................................... 964
Stone Creek Associates I, L.L.C. ..................... 1,697
Woodcreek Garden Apartments, L.P. .................... 1,037
-------
$24,380
=======
</TABLE>
In January 2000, we acquired a 50% interest in Merritt Stratford with a cash
investment of $517,000, and 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.
In June 2000, Ansonia refinanced Lakeview Apartments with a new $2.9 million
mortgage. After the payoff of the prior mortgage and closing costs, Ansonia
received net cash proceeds of $381,000, all of which were distributed to
Tarragon. In July 2000, Ansonia refinanced two of its apartment communities,
Parkview and Sagamore Hills, with new mortgages totaling $14.3 million. After
the payoff of the prior mortgages and paying closing costs, Ansonia received net
cash proceeds of $2.6 million. Ansonia used $700,000 to pay down the mortgage
secured by one of its other properties, Nutmeg Woods, and distributed the
remaining $1.9 million to Tarragon. In August 2000, Ansonia refinanced three of
its properties, Groton Towers, Nutmeg Woods, and Woodcliff Estates, with new
mortgages totaling $38.2 million. After the payoff of the existing mortgages and
paying closing costs, Ansonia received net cash proceeds of $4.2 million, all of
which were distributed to Tarragon. For the nine months ended September 30,
2000, Tarragon recognized its proportionate share of Ansonia's extraordinary
expenses of $856,000 representing the write-off of deferred borrowing costs and
exit fees or prepayment penalties in connection with these refinancings.
In July 2000, we transferred ownership of The Villages at Gateway, formerly
known as Devonshire Apartments, a 768 unit apartment community in Denver,
Colorado, to Devonshire Apartment Owners, L.L.C., a joint venture with Al
Fenstermacher. Mr. Fenstermacher is president of Pacific West Management, a
management company that provides property management services to certain of
Tarragon's apartment communities. The joint venture obtained a new $24 million
fixed rate nonrecourse loan collateralized by a mortgage on the property and
distributed net proceeds from the financing of $23.3 million to Tarragon. In
accordance with the Operating Agreement of Devonshire, Pacific West Management
has been appointed as the property manager of The Villages at Gateway and will
oversee the day-to-day operations and management of Devonshire. Tarragon is not
required to fund any future cash flow deficits of the joint venture. Tarragon
has a preference to receive the first $8.6 million, plus a preferred return of
12% per annum, of available cash from Devonshire. The $8.6
11
<PAGE> 12
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
million will be increased by any additional contributions Tarragon may make to
Devonshire. After the preference and preferred return have been paid to
Tarragon, available cash of Devonshire will be distributed 90% to Tarragon and
10% to Mr. Fenstermacher. Because Tarragon transferred operational control of
the property to Mr. Fenstermacher, Tarragon accounts for its investment in this
joint venture using the equity method. In accordance with the Accounting
Principles Board's Opinion No. 18, "The Equity Method of Accounting," Tarragon
has recognized $16.3 million in income related to the distribution received from
Devonshire and reported its net investment in the joint venture as zero because
Tarragon has not guaranteed Devonshire's obligations, nor is it otherwise
committed to provide further financial support.
Below are summarized financial data for Ansonia and other partnerships still
owned as of and for the nine months ended September 30, 2000, and summarized
operating data of the partnerships in which we acquired Mr. Rohdie's interests
in 2000 for the period prior to their acquisition (unaudited):
<TABLE>
<CAPTION>
September 30, 2000
Partnerships
with All
Ansonia Other Mr. Rohdie Partnerships
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Real estate .................................. $ 99,781 $ 101,937 $ -- $ 201,718
Accumulated depreciation ..................... (4,412) (6,086) -- (10,498)
Other assets, net ............................ 5,572 4,622 -- 10,194
Notes and interest payable ................... (83,915) (98,232) -- (182,147)
Other liabilities ............................ (2,476) (4,825) -- (7,301)
------------- ------------- ------------- -------------
Partners' capital (deficit) .................. $ 14,550 $ (2,584) $ -- $ 11,966
============= ============= ============= =============
Our proportionate share of partners'
capital (deficit) .......................... $ 14,550 $ 2,309 $ -- $ 16,859
Advances ..................................... 348 7,173 -- 7,521
------------- ------------- ------------- -------------
Investments in and advances
to partnerships ............................ $ 14,898 $ 9,482 $ -- $ 24,380
============= ============= ============= =============
Nine months ended September 30, 2000
Rental revenue ............................... $ 13,671 $ 11,098 $ 1,288 $ 26,057
Property operating expenses .................. (7,365) (4,811) (593) (12,769)
Interest expense ............................. (4,947) (3,416) (772) (9,135)
Depreciation expense ......................... (1,869) (1,674) (291) (3,834)
------------- ------------- ------------- -------------
Income (loss) before extraordinary
items ...................................... (510) 1,197 (368) 319
Extraordinary items .......................... (856) -- -- (856)
------------- ------------- ------------- -------------
Net income (loss) ............................ $ (1,366) $ 1,197 $ (368) $ (537)
============= ============= ============= =============
Equity in income (loss) of
partnerships ............................... $ (510) $ 16,871 $ (258) $ 16,103
============= ============= ============= =============
</TABLE>
Equity in income of partnerships for "other" partnerships is $16.9 million while
aggregate net income for these partnerships was only $1.2 million because of
$16.3 million of distributions received from Devonshire Apartment Owners in
excess of our investment in this entity as described above.
12
<PAGE> 13
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. INVESTMENTS IN MARKETABLE EQUITY SECURITIES
Investments in marketable equity securities consist of securities of
unaffiliated real estate companies and are available for sale. In accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the investments are carried
at fair value and are included in "Other assets" in the accompanying December
31, 1999, Consolidated Balance Sheet. Unrealized holding gains and losses are
included in other comprehensive income (loss). As of September 30, 2000, we had
disposed of all of such investments.
Unrealized holding gains and losses, securities sold, and realized losses on
the sale of marketable equity securities were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 2000
------------------- -------------------
<S> <C> <C>
Unrealized holding gains .......................................... $ 7 $ 13
Unrealized holding losses ......................................... (2) (35)
Marketable equity securities sold ................................. 103 488
Cost basis of marketable equity securities sold ................... 211 550
Realized losses on the sale of marketable equity securities ....... (108) (62)
</TABLE>
NOTE 7. NOTES, DEBENTURES, 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 the maturity date was extended to
February 2003. At closing of this transaction, Tarragon received net cash
proceeds of $900,000 after closing costs.
In June 2000, we obtained a $31 million loan secured by a mortgage on 5600
Collins. Net proceeds from this loan will be used to finance the condominium
conversion. At closing, $28 million of this loan was funded, and, after the
payoff of the existing mortgages totaling $26.1 million, establishing required
escrows, and paying closing costs, we received net cash proceeds of $1.2
million. The remaining $3 million of this loan represents a reserve for interest
and renovations. $1.8 million of this amount was funded during the third quarter
of 2000.
In July 2000, we paid off a $19.4 million mortgage secured by The Villages at
Gateway using proceeds distributed by the joint venture that now owns this
property.
During the first nine months of 2000, we obtained fixed rate permanent mortgage
financing from Fannie Mae and Freddie Mac totaling $42.9 million on nine
properties. After the payoff of the existing mortgages totaling $30 million,
establishing required escrows, and paying closing costs, we received aggregate
net cash proceeds of $10.6 million.
During the first nine months of 2000, we received net advances from affiliates
of William S. Friedman, our President and Chief Executive Officer and a member
of our Board of Directors, totaling $2.8 million pursuant to a two year line of
credit arrangement. Advances under the line of credit, totaling $7.9 million as
of September 30, 2000, bear interest at LIBOR plus 1% per annum and are payable
in January 2001.
13
<PAGE> 14
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)
Extraordinary items presented in the Consolidated Statements of Operations for
the three and nine month periods ended September 30, 2000, are primarily
prepayment penalties, exit fees, and the write-off of deferred borrowing costs
in connection with certain mortgage refinancings, including our proportionate
share of such items of partnerships and joint ventures for which we use equity
method accounting. Included in loss on sale of investments is a $199,000 loss
incurred upon the sale of two mortgage-backed securities collateralized
separately by the mortgages on Forest Oaks Apartments and Cross Creek
Apartments.
NOTE 8. GAIN ON INSURANCE SETTLEMENT
In April 2000, Tarragon joined in a class action lawsuit against Masonite
Corporation as a result of defective masonite hardboard siding installed at Bay
West Apartments. The claim settled in September 2000. Tarragon recognized a gain
of $373,000 on the insurance settlement. During 2000, we began replacing the
defective masonite hardboard siding at this property with vinyl siding at a
total expected cost of $650,000.
NOTE 9. EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the weighted average
number of shares of common stock outstanding for the three and nine month
periods ended September 30, 2000 and 1999. Following is a reconciliation of the
weighted average shares of common stock outstanding used in the computation of
earnings per common share and earnings per common share - assuming dilution. The
effect of outstanding stock options with exercise prices exceeding the average
market price of our common stock during the three and nine month periods ended
September 30, 2000 and 1999, is not reflected because their effect is
anti-dilutive.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------------- -----------------------------------------
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding ........... 6,978,562 8,124,346 7,493,425 8,276,338
Stock options ........................ 81,779 93,623 83,956 105,401
------------------- ------------------- ------------------- -------------------
Weighted average shares of
common stock outstanding -
assuming dilution .................. 7,060,341 8,217,969 7,577,381 8,381,739
=================== =================== =================== ===================
</TABLE>
14
<PAGE> 15
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 10. PREFERRED STOCK EXCHANGE OFFER
On May 30, 2000, Tarragon offered 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. The class of 10% Cumulative Preferred Stock is
designated to consist of 2,500,000 shares. The number of shares validly tendered
and accepted for exchange was 596,836. 1,903,164 shares are available for future
distribution in connection with the acquisition of assets, or for other uses, at
the discretion of our Board of Directors. On May 31, 2000, after Tarragon issued
596,836 shares of the 10% Cumulative Preferred Stock pursuant to the exchange
offer, there were 7,056,751 shares of common stock outstanding.
The 10% Cumulative Preferred Stock pays 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.
Dividends on the 10% Cumulative Preferred Stock are payable quarterly on the
last day of March, June, September, and December of each year on a cumulative
basis. The first quarterly dividend was paid on September 30, 2000.
NOTE 11. INCOME TAXES
In February 2000, we revoked our REIT election with the Internal Revenue
Service, terminating our status as a REIT effective December 1, 1999 (the
beginning of the tax year which ends November 30, 2000). The results of our
operations are now subject to income taxes. No current or deferred income tax
expense has been recognized for the three and nine month periods ended September
30, 2000, resulting from the change in tax status due to the expected
application of net operating loss carryforwards. At December 31, 1999, Tarragon
had federal net operating loss carryforwards (NOLs) of approximately $46.9
million. If not utilized, the NOLs will expire between years 2003 and 2019. The
future availability of the NOLs may be limited if Tarragon experiences an
ownership change of more than 50 percent, as defined by IRS regulations.
Tarragon's stock is publicly traded, and we cannot assure that future trading
will not result in an ownership change, as defined by IRS regulations, which
would limit availability of the NOLs. Due to these uncertainties regarding
possible utilization of the NOLs, as well as Tarragon's history of operating
losses, a valuation allowance was recorded to fully reserve the computed net
deferred tax assets.
15
<PAGE> 16
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 12. COMMITMENTS AND CONTINGENCIES
Robert Rothenberg, Eileen Swenson, and Saul Spitz joined Tarragon as executive
officers, and Mr. Rothenberg was appointed as a member of our Board of
Directors, in September 2000. Tarragon has come to an agreement in principle to
acquire the interests of Mr. Rothenberg, Ms. Swenson, and Mr. Spitz in Accord
Properties Associates, LLC, a Connecticut limited liability company which
currently acts as the property manager for Ansonia Apartments, L.P., in
Connecticut, for $300,000 in cash, 25,000 shares of Tarragon 10% Cumulative
Preferred Stock, valued at an additional $300,000, and options to acquire
180,000 shares of Tarragon Common Stock. A majority of our Independent Directors
has approved this arrangement, and the transaction contemplated is expected to
close in January 2001.
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
affect on our business, financial position, or results of operations.
NOTE 13. SUBSEQUENT EVENTS
In October 2000, we closed two new mortgage loans. One is a $3.4 million
mortgage secured by Stewart Square Shopping Center. After payoff of the existing
mortgage of $2.2 million, establishing required escrows, and paying closing
costs, we received $984,000 in net cash proceeds. The other is an $18.4 million
mortgage secured by The Vineyard at Eagle Harbor. After payoff of the existing
construction loan of $15.8 million, establishing required escrows, and paying
closing costs, we received net cash proceeds of $2.3 million.
Also in October 2000, we sold Fenway Hall Apartments for $2.2 million, receiving
net cash proceeds of $780,000 after the payoff of the mortgage and closing
costs. We will recognize a $500,000 gain on this sale.
During the months of October and November 2000, we sold an additional fifteen
condominium units at 5600 Collins. The aggregate sales price for these
transactions was $2.6 million. After closing costs and release payments on the
mortgage, we received net cash proceeds of $962,000.
16
<PAGE> 17
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 $32 million in the first nine months of 2000, up 13% 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 nine months of 2000, net proceeds from borrowings generated $39.8
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 received advances of
$2.8 million from affiliates of William S. Friedman, President, Chief Executive
Officer, and a Director of Tarragon.
Principal payments on notes payable collateralized by real estate totaling $34.3
million come due during the fourth quarter of 2000, including $33.5 million of
balloon payments. We intend to either pay off the loans or extend the due dates
while seeking to obtain long term refinancing. We estimate that refinancing of
directly owned properties will generate $14 million in net cash proceeds during
the remainder of 2000. 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 nine months of 2000, net cash proceeds from the sale of real estate
totaled $5.7 million. We sold one property and portions of two properties with
an aggregate net carrying amount of $9.4 million and paid off mortgages totaling
$6.7 million. We estimate proceeds from the sale of real estate (excluding the
5600 Collins condominium units discussed below) will provide an additional $14
million during the last quarter of 2000.
During the first nine months of 2000, we purchased land for two of our
development projects, The Vintage at Tampa Palms and The Vintage at Plantation
Bay, both in Florida, paying cash of $6.6 million.
In the first nine months of 2000, we paid interest on notes and debentures
payable of $22 million, up 50% 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 and other borrowings.
Beginning in 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 in 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 interest
in this partnership valued at up to $10 million. These properties have been
consolidated since February 2000.
17
<PAGE> 18
In 1997, Tarragon formed National Omni Associates, L.P., which purchased 5600
Collins Avenue, a 289-unit high rise apartment building in Miami Beach, Florida,
for $32 million in February 1998. We invested $7.6 million ($380,000 in January
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. During 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 66% of
the units. We received $415,000 in cash after $668,000 of release payments on
the mortgage and closing costs in the third quarter from sales of $1.1 million
and expect to receive $2.6 million in cash during the fourth quarter from sales
of $7.1 million. In the first nine months of 2000, Tarragon spent $5.3 million
on the condominium conversion of 5600 Collins Avenue. We plan to spend $4
million during the remainder of 2000 on improvements to 5600 Collins, all of
which will be funded by the mortgage loan's reserve for renovations or proceeds
from the sale of apartments.
In the third quarter of 2000, we entered into a joint venture, Devonshire
Apartment Owners, L.L.C., and transferred ownership of The Villages at Gateway,
formerly known as Devonshire Apartments, to this joint venture. Devonshire
obtained a new $24 million fixed rate, nonrecourse loan collateralized by a
mortgage on The Villages at Gateway and distributed net cash proceeds from this
financing of $23.3 million to Tarragon. Tarragon used $19.4 million of these
proceeds to pay off a prior loan collateralized by a mortgage on this property.
In the first nine months of 2000, Tarragon made capital improvements to its
directly owned real estate of $34.6 million, $22.4 million of which was spent on
construction at five apartment communities in various stages of development. We
expect to spend approximately $6 million on these five properties during the
remainder of 2000, all of which is expected to be funded by construction loans.
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 $22 million, $2 million of which were made during the
first nine months of 2000. We received distributions of $6.5 million from
Ansonia during the first nine months of 2000 from the refinancing of six of its
properties.
During the first nine months 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 office
development in Stratford, Connecticut, adjacent to our Merritt 8 Office Park. In
addition, Tarragon advanced $2.6 million in the first nine months of 2000 and an
additional $1.6 million in October 2000 to a new partnership for the purchase of
land in Fort Lauderdale, Florida, for a high-rise luxury condominium
development.
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 nine months of 2000, Tarragon
repurchased 481,938 shares of its common stock in open market transactions at a
cost of $4.9 million. As of September 30, 2000, there were 572,865 shares
authorized for repurchase, and we estimate that we will spend $600,000 during
the remainder of 2000 on share repurchases, subject to market conditions.
18
<PAGE> 19
Results of Operations
The significant components of the changes in net operating results between the
three and nine month periods ended September 30, 1999 and 2000, are discussed in
the following paragraphs.
The properties acquired directly in 1999 and 2000 reduced net operating results
$323,000 and $1.1 million for the three and nine month periods ended September
30, 2000, compared to the corresponding periods in 1999. These amounts are
comprised of increases in net rental income (rental revenue less property
operating expenses) of $2.4 million and $6.7 million, increases in interest
expense of $1.8 million and $5.3 million, and increases in depreciation expense
of $965,000 and $2.5 million. Increases in net rental income of $2.5 million and
$6.4 million came from multifamily properties acquired in 2000. At September 30,
2000, Tarragon's directly owned multifamily properties accounted for 87% of its
real estate and included 10,412 operating apartment units. At September 30,
2000, Tarragon owned commercial properties with an aggregate 1.8 million square
feet.
For properties held in both years, net rental income decreased slightly.
Increased rental revenue from increased rental rates at certain properties was
offset by increased operating expenses, primarily cleaning and decorating,
repairs and maintenance, and replacements.
For properties held in both years, interest expense increased for the three and
nine month periods by $499,000 and $1.4 million due to long term and interim
mortgage financing and advances under line of credit facilities which have
increased indebtedness by $31 million since September 30, 1999.
Equity in income (loss) of partnerships increased $16.4 million and $16.7
million for the three and nine month periods. The improvement in earnings
resulted primarily from the transfer of ownership of The Villages at Gateway to
Devonshire Apartment Owners, L.L.C., in July 2000, which provided $16.3 million
for the three and nine month periods. This amount represents distribution of
financing proceeds in excess of our investment in the joint venture. Tarragon
has a noncontrolling interest in Devonshire and accounts for its investment
using the equity method. The acquisition of additional interests in nine
partnerships in February 2000 also contributed to the improvement in earnings.
The properties of these nine partnerships are now consolidated. 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,
resulting in increases in net operating results for the three and nine month
periods of $353,000 and $921,000. For the three and nine month periods,
decreases in net operating results of approximately $232,000 and $641,000 relate
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 for the three and nine month periods
ended September 30, 2000.
Decreases in interest revenue of $414,000 and $709,000 for the three and nine
month periods resulted primarily from the acquisition of Mr. Rohdie's interests
in ten properties in February 2000. Interest-bearing priority loans to the
partnerships that owned these properties were eliminated upon our consolidation
of these properties.
During the first nine months of 1999, we recognized gains totaling $8.6 million
relating to the sale of four properties and portions of two other properties.
During the first nine months of 2000, we recognized gains totaling $2.9 million
relating to the sale of one property and portions of two properties.
We recognized extraordinary expenses of $248,000 resulting from exit fees,
prepayment penalties, and the write-off of deferred financing expenses
associated with refinancings during the nine months ended September 30, 1999,
and $2.4 million during the nine months ended September 30, 2000.
19
<PAGE> 20
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 and nine month periods ended
September 30, 2000 and 1999, are as follows (unaudited) (dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income ..................................... $ 14,359 $ 2,624 $ 8,718 $ 4,280
Extraordinary items ............................ 1,561 -- 2,400 248
Litigation settlement .......................... -- -- -- 350
Gain on insurance settlement ................... (373) -- (373) (231)
Gain on sale of real estate and
condominium units ............................ (2,870) (4,310) (3,248) (8,571)
Depreciation and amortization of
real estate assets ........................... 3,837 2,700 11,002 8,131
Depreciation and amortization of
real estate assets of partnerships ........... 830 952 2,765 2,686
Distributions from partnerships in excess
of investments in the partnerships ........... (16,257) (9) (16,257) (9)
------------- ------------- ------------- -------------
Funds from operations .......................... $ 1,087 $ 1,957 $ 5,007 $ 6,884
============= ============= ============= =============
</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 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.
20
<PAGE> 21
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 affect 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.
21
<PAGE> 22
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 September 30, 2000, Tarragon had approximately $117 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
$1.2 million. On the other hand, if interest rates decreased by 100 basis
points, our pre-tax earnings and cash flows would increase by approximately $1.2
million.
At September 30, 2000, unconsolidated partnerships had approximately $29.2
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 $175,000
(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 $175,000. Assuming these partnerships distribute all of their
available cash to the partners, our cash flow would be changed by these same
amounts.
22
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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.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARRAGON REALTY INVESTORS, INC.
Date: November 14, 2000 By: /s/ William S. Friedman
--------------------------- ---------------------------------
William S. Friedman
President, Chief Executive
Officer, and Director
Date: November 14, 2000 By: /s/ Erin D. Davis
-------------------------- ---------------------------------
Erin D. Davis
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 25
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
