<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, 1996
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . to . . . . . . . . .
Commission File Number 0-9211
NATIONAL INCOME REALTY TRUST
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2537061
- -------------------------------------------- ----------------------------
(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
--- ---
Shares of Beneficial Interest, No par value 3,463,544
- ------------------------------------------- ----------------------------
(Class) (Outstanding at May 6, 1996)
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended March
31, 1996, have not been audited by independent certified public accountants,
but, in the opinion of the management of National Income Realty Trust (the
"Trust"), 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.
NATIONAL INCOME REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
---------------- -----------------
1996 1995
---------------- -----------------
(unaudited) (audited)
<S> <C> <C>
Assets
------
Real estate
Held for investment (net of accumulated depreciation
of $37,778 in 1996 and $44,750 in 1995) . . . . . . . . . . $ 166,906 $ 189,086
Held for sale (net of accumulated depreciation
of $8,666 in 1996 and $397 in 1995) . . . . . . . . . . . . 35,291 6,589
---------------- ----------------
202,197 195,675
Notes and interest receivable
Performing . . . . . . . . . . . . . . . . . . . . . . . . . . 3,086 11,685
Nonperforming, nonaccruing . . . . . . . . . . . . . . . . . . . 977 977
---------------- ----------------
4,063 12,662
Less - allowance for estimated losses . . . . . . . . . . . . . . (3,274) (6,274)
---------------- ----------------
789 6,388
Investments in partnerships . . . . . . . . . . . . . . . . . . . 5,226 10,780
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 2,867 1,674
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . 2,008 2,329
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 4,953 5,192
---------------- ----------------
$ 218,040 $ 222,038
================ ================
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 3
NATIONAL INCOME REALTY TRUST
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
------------------ ------------------
1996 1995
------------------ ------------------
(unaudited) (audited)
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes, debentures, and interest payable . . . . . . . . . . . . . $ 141,795 $ 144,497
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 5,785 7,914
---------------- ----------------
147,580 152,411
Commitments and contingencies . . . . . . . . . . . . . . . . . .
Shareholders' equity
Shares of beneficial interest, no par value; authorized
shares, unlimited; 3,475,490 shares outstanding in 1996
and 3,390,727 shares outstanding in 1995 (after
deducting 460,357 shares in 1996 and 450,857 shares
in 1995 held in treasury) . . . . . . . . . . . . . . . . . . . 10,435 10,181
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 277,368 276,716
Accumulated distributions in excess of
accumulated earnings . . . . . . . . . . . . . . . . . . . . . (217,343) (217,270)
---------------- ----------------
70,460 69,627
---------------- ----------------
$ 218,040 $ 222,038
================ ================
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 4
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Income
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,698 $ 10,488
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 300
Equity in income of partnerships . . . . . . . . . . . . . . . . . 180 190
------------ --------------
12,020 10,978
Expenses
Property operations . . . . . . . . . . . . . . . . . . . . . . . 6,859 6,031
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,183 3,071
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,298 1,444
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . 247 296
General and administrative . . . . . . . . . . . . . . . . . . . . 461 473
------------ --------------
12,048 11,315
------------ --------------
(Loss) before gain on sales of investments and real estate
and insurance settlement . . . . . . . . . . . . . . . . . . . . . (28) (337)
Gain on sale of investments . . . . . . . . . . . . . . . . . . . . - 412
Gain on sale of real estate . . . . . . . . . . . . . . . . . . . . 224 -
Gain on insurance settlement . . . . . . . . . . . . . . . . . . . 451 -
------------ --------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 647 $ 75
============ ==============
Earnings per share
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .19 $ .02
============ ==============
Weighted average shares of beneficial interest used in
computing earnings per share . . . . . . . . . . . . . . . . . . . 3,416,809 3,489,214
============ ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE> 5
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Shares of Distributions
Beneficial Interest in Excess of
---------------------- Paid-in Accumulated Shareholders'
Shares Amount Capital Earnings Equity
--------- --------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 . . . 3,390,727 $ 10,181 $ 276,716 $ (217,270) $ 69,627
Conversion of convertible
subordinated debenture . . . 93,076 279 721 - 1,000
Repurchase of shares
of beneficial interest . . . (9,500) (29) (81) - (110)
Cash distributions
($0.20 per share) . . . . . . - - - (704) (704)
Share distributions . . . . . . 1,187 4 12 (16) -
Net income . . . . . . . . . . - - - 647 647
--------- ---------- ---------- ----------- --------------
Balance, March 31, 1996
(unaudited) . . . . . . . . . 3,475,490 $ 10,435 $ 277,368 $ (217,343) $ 70,460
========= ========== ========== =========== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE> 6
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected . . . . . . . . . . . . . . . . . . . . . . . $ 11,995 $ 10,537
Interest collected . . . . . . . . . . . . . . . . . . . . . . 137 287
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . (2,964) (3,018)
Payments for property operations . . . . . . . . . . . . . . . (7,487) (6,540)
General and administrative expenses paid . . . . . . . . . . . (514) (606)
Advisory fees paid to affiliate . . . . . . . . . . . . . . . . (407) (271)
Deferred borrowing costs paid . . . . . . . . . . . . . . . . . (357) (345)
------------ -----------
Net cash provided by operating activities . . . . . . . . . 403 44
Cash Flows from Investing Activities
Acquisition of real estate . . . . . . . . . . . . . . . . . . - (380)
Real estate improvements . . . . . . . . . . . . . . . . . . . (2,393) (875)
Notes receivable collections . . . . . . . . . . . . . . . . . 26 5
Additional note receivable collateral . . . . . . . . . . . . 100 -
Distribution from partnership's investing activities . . . . . 6,105 -
Net distributions from partnerships . . . . . . . . . . . . . . 304 263
Proceeds from sale of investments . . . . . . . . . . . . . . . - 593
------------ -----------
Net cash provided by (used in) investing activities . . . . 4,142 (394)
Cash Flows from Financing Activities
Borrowings from financial institutions . . . . . . . . . . . . - 5,800
Payments of mortgage notes payable . . . . . . . . . . . . . . (1,820) (4,383)
Margin account (repayments) borrowings . . . . . . . . . . . . (859) 320
Repayment of advances from affiliates, net . . . . . . . . . . (519) -
Replacement escrow receipts, net . . . . . . . . . . . . . . . 635 2
Repurchase of shares of beneficial interest . . . . . . . . . . (110) (445)
Distributions to shareholders . . . . . . . . . . . . . . . . . (679) -
------------ -----------
Net cash (used in) provided by financing activities . . . . (3,352) 1,294
------------ -----------
Net increase in cash and cash equivalents . . . . . . . . . . . . 1,193 944
Cash and cash equivalents, beginning of period . . . . . . . . . 1,674 3,484
------------ -----------
Cash and cash equivalents, end of period . . . . . . . . . . . . $ 2,867 $ 4,428
============ ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE> 7
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 647 $ 75
Gain on insurance settlement . . . . . . . . . . . . . . . . . (451) -
Gain on sale of real estate . . . . . . . . . . . . . . . . . . (224) -
Gain on sale of investments . . . . . . . . . . . . . . . . . . - (412)
Depreciation and amortization . . . . . . . . . . . . . . . . . 1,577 1,584
Equity in (income) of partnerships . . . . . . . . . . . . . . (180) (190)
Changes in other assets and liabilities, net of effects of
noncash investing and financing activities
(Increase) in interest receivable . . . . . . . . . . . . - (13)
(Increase) in other assets . . . . . . . . . . . . . . . (569) (488)
(Decrease) in other liabilities . . . . . . . . . . . . . (423) (479)
Increase (decrease) in interest payable . . . . . . . . . 26 (33)
------------ --------------
Net cash provided by operating activities . . . . . . . . . $ 403 $ 44
============ ==============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES FOR THE
THREE MONTHS ENDED MARCH 31, 1996:
Changes in assets and liabilities in connection with the foreclosure of real
estate
<TABLE>
<S> <C>
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,568
Notes and interest receivable . . . . . . . . . . . . . . . . . (8,568)
Allowance for estimated losses . . . . . . . . . . . . . . . . 3,000
--------------
Net change . . . . . . . . . . . . . . . . . . . . . . . . . $ -
==============
Conversion of convertible subordinated debenture . . . . . . . . $ 1,000
==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
<PAGE> 8
NATIONAL INCOME REALTY TRUST
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, 1996,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Trust's Annual Report on
Form 10-K for the year ended December 31, 1995 ("1995 Form 10-K"). Dollar
amounts in tables are in thousands. Certain 1995 balances have been
reclassified to conform to the 1996 presentation.
Earnings per share have been computed based on the weighted average number of
shares of beneficial interest outstanding for the three month periods ended
March 31, 1996 and 1995. Share and per share data have been restated to give
effect to the 10% share distribution paid to shareholders in September 1995.
NOTE 2. NOTES AND INTEREST RECEIVABLE
In October 1995, the Trust and the borrower of an $8.6 million first mortgage
receivable, which matured in December 1995, negotiated a settlement of the
outstanding balance whereby the borrower agreed to relinquish the collateral
property, a 342,000 square foot shopping center in Jackson, Mississippi,
through a deed in lieu of foreclosure. The Trust took possession of the
property in January 1996. As the estimated fair value of the property exceeded
the Trust's net carrying value of the mortgage loan, the Trust recognized no
loss in excess of amounts previously provided.
In January 1996, the Trust agreed to a modification of the terms of a $1.6
million first mortgage note, secured by 4.5 acres of land and improvements, a
177,397 square foot shopping center, in Dallas, Texas. Pursuant to the
modification, the borrower delivered to the Trust $100,000, which is to be held
on behalf of the borrower, as additional collateral securing payment of the
note, and the maturity date was extended from January 1996 to July 1996. The
additional collateral is included in other liabilities in the accompanying
March 31, 1996, balance sheet. The borrower is entitled to a further extension
of three months upon providing additional cash collateral of $100,000. The
modification resulted in no gain or loss to the Trust.
NOTE 3. REAL ESTATE AND DEPRECIATION
In January 1996, the Trust reclassified Century Centre II Office Building from
real estate held for investment to real estate held for sale. Accordingly,
under Statement of Financial Accounting Standards ("SFAS") No. 121- "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", which the Trust adopted effective January 1, 1996, no
depreciation was recorded during 1996 against this property or any other
properties currently classified as held for sale.
In November 1995, the City of Indianapolis (the "City") initiated condemnation
proceedings against the K-Mart Shopping Center, which the Trust acquired in
December 1994 through a deed in lieu of foreclosure of collateral securing a
mortgage note receivable. The shopping center was vacant upon acquisition by
the Trust; however, it was leased to K-Mart under a net lease expiring in 1999.
The lease was assigned by K-Mart to the City in
8
<PAGE> 9
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. REAL ESTATE AND DEPRECIATION (Continued)
September 1995. In February 1996, the City offered preliminary condemnation
proceeds of $1.6 million which the Trust rejected in light of appraisals
prepared for the City which exceed $2.0 million. In March 1996, the Trust
ceased payments on the $1.7 million mortgage note payable secured by the
shopping center. Management does not anticipate incurring a loss as a result
of the condemnation.
NOTE 4. INVESTMENTS IN PARTNERSHIPS
Investments in partnerships, accounted for under the equity method, consisted
of the following at March 31, 1996:
<TABLE>
<S> <C>
Income Special Associates ("ISA") . . . . . . . $ 3,226
801 Pennsylvania Avenue . . . . . . . . . . . . 2,850
Sacramento Nine ("SAC 9") . . . . . . . . . . . (151)
English Village . . . . . . . . . . . . . . . . (699)
---------
$ 5,226
=========
</TABLE>
The Trust and Continental Mortgage and Equity Trust are partners in ISA, a
general partnership in which the Trust has a 40% interest in earnings, losses,
and distributions. ISA in turn owns a 100% interest in Indcon, L.P.
("Indcon"), which owned seven unencumbered industrial warehouses at March 31,
1996.
During February and March 1996, Indcon sold 25 warehouses for $39.4 million,
receiving net cash proceeds of $15.0 million after the payoff of the existing
$23.5 million mortgage loan and closing costs. The Trust received $6.0 million
for its proportionate share of the cash proceeds and recognized a gain on
the sale of $97,000. In connection with the sale, the Trust also received cash
of $127,000 representing an allowance for brokerage commissions, which the
Trust retained and recorded as an addition to the gain on the sale.
In September 1995, one of Indcon's warehouses was destroyed in a fire. An
insurance settlement totaling $2.2 million was reached by the partnership in
March 1996 resulting in a $1.1 million gain. Indcon does not anticipate
rebuilding the property.
The following information summarizes the results of operations of these
partnerships for the three months ended March 31, 1996:
<TABLE>
<S> <C>
Rentals . . . . . . . . . . . . . . . . . . . . $ 1,929
Property operations . . . . . . . . . . . . . . (731)
Interest . . . . . . . . . . . . . . . . . . . . (752)
Depreciation . . . . . . . . . . . . . . . . . . (124)
-----------
Income before gain on sale of real estate
and insurance settlement . . . . . . . . . . . 322
Gain on sale of real estate . . . . . . . . . . 242
Gain on insurance settlement . . . . . . . . . . 1,126
-----------
Net income . . . . . . . . . . . . . . . . $ 1,690
===========
</TABLE>
9
<PAGE> 10
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 4. INVESTMENTS IN PARTNERSHIPS (Continued)
In April 1996, Indcon sold two of the remaining warehouses for $1.8 million in
cash and distributed to the Trust $701,000, representing its share of the net
proceeds.
NOTE 5. NOTES, DEBENTURES, AND INTEREST PAYABLE
In December 1993, the Trust issued a $1.0 million convertible subordinated
debenture to Mr. John A. Doyle, Chief Financial Officer of the Trust, in
exchange for his participation interest in the profits of the Consolidated
Capital Properties II ("CCP II") assets, which the Trust acquired in November
1992. Mr. Doyle was granted this participation as consideration for his
services in connection with the CCP II acquisition. In February 1996, Mr.
Doyle converted the debenture into 93,076 shares of beneficial interest
("Shares") of the Trust.
In February 1996, the Trust paid in full the $1.1 million mortgage loan secured
by a first lien on Plaza Hills Apartments, which was scheduled to mature in
December 1996, with funds from the Trust's general working capital. In March
1996, the Trust extended the maturity date of the $2.0 million interim mortgage
loan secured by a first lien on Forest Oaks Apartments to June 1996.
NOTE 6. SHARE OPTIONS
In January 1996, pursuant to its Independent Trustee Share Option Plan, the
Trust issued options to each Independent Trustee to purchase up to 1,000 Shares
at an exercise price equal to the market price on the date of grant. The
options expire on the earlier of the first anniversary of the date on which a
Trustee ceases to be a Trustee of the Trust or ten years from the date of grant
("Termination Date") and are exercisable at any time between the date of grant
and the Termination Date.
Also in January 1996, pursuant to its Share Option and Incentive Plan (the
"Incentive Plan"), the Trust issued options covering 55,700 Shares to Trust
officers and key employees of the advisor. All options were issued with an
exercise price equal to the market price on the grant date, are exercisable
beginning one year after the date of grant, and expire in five years on
December 31, 2000. All options awarded pursuant to the Incentive Plan are
determined by the Option Committee, which is comprised of two Trustees,
including Messrs. William S. Friedman and Carl B. Weisbrod (Chairman of the
Board), and Mr. Doyle.
NOTE 7. INCOME TAXES
No provision has been made for federal income taxes because the Trust's
management believes the Trust has qualified as a Real Estate Investment Trust,
as defined under Sections 856 through 860 of the Internal Revenue Code of 1986,
as amended, and expects that it will continue to do so.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Trust is a party to various claims and routine litigation arising in the
ordinary course of business. Management of the Trust does not believe that the
results of these claims and litigation, individually or in the aggregate, will
have a material adverse effect on its business or financial position.
10
<PAGE> 11
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 9. SUBSEQUENT EVENTS
In April 1996, the Trust completed the refinancing of the mortgage debt secured
by Creekwood North Apartments. The $3.1 million new first mortgage loan bears
interest at 8.05% per annum, is payable in monthly installments of principal
and interest of $22,486, and matures in May 2006. The Trust paid a mortgage
brokerage commission of $30,500 to Tarragon Realty Advisors, Inc. ("Tarragon"),
and received net refinancing proceeds of $645,000 after the $2.1 million payoff
of the prior mortgage loan, which included $427,000 to the Trust in
satisfaction of its participation in the prior mortgage loan. The remainder of
the financing proceeds was used to fund escrows and pay the associated closing
costs.
Also in April 1996, the Trust purchased Woodbrier Apartments, a 128-unit
complex located in Oklahoma City, Oklahoma, at a total cost of $2.5 million,
the cash portion of which totaled $1.3 million. The remainder of the purchase
price was financed through the assumption of a $1.2 million first mortgage loan
that bears interest at 7.925% per annum, is payable in monthly installments of
principal and interest of $10,951, and matures in November 2003. In connection
with the acquisition, the Trust paid Tarragon a real estate brokerage
commission of $24,900.
[This space intentionally left blank.]
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
National Income Realty Trust (the "Trust") invests in real estate through
acquisitions, leases, and partnerships and, to a lesser extent, in mortgages
secured by real estate. The Trust was organized on October 31, 1978, and
commenced operations on March 27, 1979. At March 31, 1996, the Trust's real
estate portfolio included 58 properties, 10 of which were held for sale,
located throughout the United States, with concentrations in the Southeast and
Southwest. These properties consisted of 36 apartment complexes, 14 shopping
centers, 4 office buildings, three parcels of land, and one single-family
residence. All of the Trust's real estate, except for 16 properties, is
pledged to secure first mortgage notes payable. The Trust's current policy is
to make mortgage loans only in connection with, and to facilitate, the sale or
acquisition of real estate. Accordingly, as existing mortgage loans are paid
off, the Trust's portfolio of mortgage notes receivable is expected to decline.
The Trust's objective is to maximize the long term value of its real estate
portfolio with an emphasis on increasing operating income and future cash
distributions to shareholders. Management focuses on both the appreciation of
the existing real estate portfolio, through intensive management and capital
improvements, and enlarging the portfolio with highly selective and
opportunistic acquisitions concentrated on older, undermanaged, and
underperforming multifamily projects in geographic locations where the Trust
presently owns properties. In addition to raising capital through operating
income, the Trust intends to generate capital through mortgage refinancings and
selective disposition of certain assets.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $2.9 million at March 31, 1996, compared
with $1.7 million at December 31, 1995. The Trust's principal sources of cash
have been property operations, collections of mortgage notes receivable, and
external sources, such as property sales and refinancings, as more fully
discussed in the paragraphs below. The Trust expects these sources will
continue to be sufficient to meet projected cash requirements, including debt
service obligations, property maintenance and improvements, and continuation of
regular distributions.
Operating Activities
The Trust's cash flow from property operations (rentals collected less payments
for property operating expenses) increased from $4.0 million for the three
months ended March 31, 1995, to $4.5 million for the corresponding period in
1996, primarily due to the operations of the properties acquired by the Trust
during 1995 and 1996.
Investing Activities
The Trust made real estate improvements totaling $2.4 million to its properties
during the first quarter of 1996, including $1.3 million on the construction of
The Regent Apartments and The Vistas at Lake Worth, properties in redevelopment
which should be completed in the second quarter of 1996 and the fourth quarter
of 1997, respectively. Projected construction costs for these properties
aggregate $4.7 million for the remainder of 1996 and $3.0 million for 1997.
The Trust anticipates expenditures for capital improvement on its other
properties during the remainder of 1996 to total approximately $4.6 million.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Investing Activities (Continued)
The Trust and Continental Mortgage and Equity Trust ("CMET") are partners in
Income Special Associates ("ISA"), a general partnership in which the Trust has
a 40% interest in earnings, losses, and distributions. ISA in turn owns a 100%
interest in Indcon, L.P. ("Indcon"), which owned seven unencumbered industrial
warehouses at March 31, 1996. During the first quarter of 1996, Indcon sold 25
warehouses for $39.4 million, receiving net cash proceeds of $15.0 million,
after the payoff of the existing $23.5 million existing mortgage loan and
related sales closing costs. Indcon distributed $6.1 million to the Trust as
its proportionate share of the sales proceeds plus an allowance for brokerage
commissions.
Financing Activities
During the first quarter of 1996, the Trust extended or paid off mortgage
loans, scheduled to mature in 1996, totaling $3.1 million and made other
principal payments totaling $706,000. It is the Trust's intention to either
pay its mortgage loans when due or seek to extend the due dates while
attempting to obtain long term refinancing. However, while management is
confident of its ability to acquire refinancing as needed, there is no
assurance that the Trust will continue to be successful in its efforts in this
regard.
During the three months ended March 31, 1996, the Trust repurchased 9,500 of
its shares of beneficial interest at a total cost of $110,000. In May 1994,
the Trust's Board of Trustees (the "Board") authorized the Trust to repurchase
up to 300,000 shares of beneficial interest, of which 192,202 have been
purchased to date.
Cash distributions to shareholders totaling $704,000, or $0.20 per share, have
been declared by the Board, and $679,000 of this amount has been distributed
during 1996. The first quarter distribution represents the Trust's eleventh
cash distribution since the resumption of regular quarterly distributions in
September 1993.
Results of Operations
The Trust reported an increase in net income from $75,000 for the three months
ended March 31, 1995, to $647,000 for the three months ended March 31, 1996,
as more fully discussed in the following paragraphs.
Net rental income (rental revenue less property operating expenses) increased
from $4.5 million for the three months ended March 31, 1995, to $4.8 million
for the three months ended March 31, 1996.
Multifamily Properties
The Trust's multifamily portfolio, which accounted for 64% of the Trust's real
estate and included 6,294 operating units at March 31, 1996, reported an
increase in net rental income of $335,000, or 11%, for the three months ended
March 31, 1996, as compared to the corresponding period in 1995. Of this
increase, $238,000 is related to properties acquired in 1995. For multifamily
properties held in both years, net rental
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Continued)
Results of Operations (Continued)
Multifamily Properties (Continued)
income increased $97,000 due to increased rental revenue from higher rental
rates, which was partially offset by increased operating expenses and a greater
number of discounts and concessions granted due to the Trust's continued
efforts to improve physical occupancy rates. Overall, both physical and
economic occupancy levels have increased slightly for multifamily properties
held in both years.
Commercial Properties
The Trust's commercial portfolio included 1.9 million square feet at March 31,
1996. The Jackson Square Shopping Center, acquired through a deed in lieu of
foreclosure in January 1996, contributed an additional $66,000 to net rental
income, while the sale of the K-Mart Shopping Center in Kansas City, Missouri,
in July 1995 caused a $61,000 decrease in net rental income. Commercial
properties held in both years reported an overall increase in net rental income
of $31,000 principally due to lower economic vacancies and rental losses which
were partially offset by increased operating expenses related to continued
efforts to increase physical occupancy levels, which were slightly higher than
those reported in 1995.
Interest revenue decreased from $300,000 for the three months ended March 31,
1995, to $142,000 for the corresponding period in 1996. Of this decrease,
$97,000 resulted from the payoff of the Greentree mortgage note receivable in
September 1995, and $79,000 related to the Jackson Square mortgage loan which
was satisfied when the borrower relinquished the collateral property to the
Trust in January 1996.
Interest expense increased from $3.1 million for the three months ended March
31, 1995, to $3.2 million for the three months ended March 31, 1996. Of this
increase, $118,000 resulted from interest expense associated with mortgage
loans obtained or assumed in connection with 1995 property acquisitions. In
addition, long term and interim first mortgage financing obtained on existing
properties during 1995 increased mortgage loans by $5.3 million and the related
interest expense by $200,000. These increases were partially offset by
decreases totaling $153,000 due to the sale of the K-Mart Shopping Center in
Kansas City, Missouri, in July 1995; ceasing payments on the mortgage loan
secured by the K-Mart Shopping Center in Indianapolis, Indiana, in March 1996
pursuant to the condemnation action; and interest capitalized to the carrying
values of unencumbered development properties during 1996.
Depreciation expense decreased from $1.4 million for the first quarter of 1995
to $1.3 million for the corresponding period in 1996. Effective January 1,
1996, the Trust's adopted Statement of Financial Accounting Standards No. 121,
which required the Trust to cease depreciation of its assets held for sale,
resulting in a $230,000 decrease. This decrease was partially offset by a
$43,000 increase related to the depreciation of properties acquired in 1995 and
a $41,000 increase primarily related to the additional depreciation of capital
improvements made during 1995 and 1996 to the Trust's existing properties held
for investment.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Continued)
Results of Operations (Continued)
Advisory fees to Tarragon Realty Advisors, Inc. ("Tarragon"), decreased from
$296,000 for the three months ended March 31, 1995, to $247,000 for the three
months ended March 31, 1996. The initial Tarragon advisory agreement called
for a $100,000 base fee, which was eliminated in April 1995, and a monthly
incentive fee equal to 16% per annum of adjusted funds from operations, as
defined in the advisory agreement approved by the Board.
During the first quarter of 1996, the Trust reported a $224,000 gain on the
sale of real estate related to the sale of the Indcon warehouses and a $451,000
gain due to Indcon's insurance settlement received as a result of the warehouse
fire in September 1995. During the first quarter of 1995, the Trust reported a
gain of $412,000 on the sale of shares of beneficial interest of CMET.
Allowance for Estimated Losses and Provisions for Losses
The Trust's management, on a quarterly basis, reviews the carrying values of
the Trust's mortgage loans and properties held for sale. Generally accepted
accounting principles require that the carrying value of a mortgage loan or a
property held for sale cannot exceed its cost or its estimated fair value. In
those instances in which estimates of fair value of the collateral securing the
Trust's mortgage loans or properties held for sale are less than the carrying
values thereof at the time of evaluation, an allowance for loss is provided by
a charge against operations. The evaluation of the carrying values of the
mortgage loans is based on management's review and evaluation of the collateral
properties securing the mortgage loans. The review of collateral properties
and properties held for sale generally includes selective site inspections, a
review of the property's current rents compared to market rents, a review of
the property's expenses, a review of maintenance requirements, discussions with
the property manager, and a review of the surrounding area. Future quarterly
reviews could cause the Trust's management to adjust current estimates of fair
value.
The Trust's management also evaluates the Trust's properties held for
investment for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. This evaluation
generally consists of a review of the property's cash flow and current and
projected market conditions, as well as any changes in general and local
economic conditions. If an impairment loss exists based on the results of this
review, a loss is recognized by a charge against current earnings and a
corresponding reduction in the respective asset's carrying value. The amount
of this impairment loss is equal to the amount by which the carrying value of
the property exceeds its estimated fair value.
Environmental Matters
Under various federal, state, and local environmental laws, ordinances, and
regulations, the Trust may be potentially liable for removal or remediation
costs (including governmental fines and injuries to persons and property), as
well as certain other potential costs relating to hazardous or toxic substances
where property-level managers have arranged for the removal, disposal, or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the Trust for personal injury
associated with such materials.
The Trust's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Trust's
business, assets, or results of operations.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Income Tax Aspects
As more fully discussed in the Trust's 1995 Form 10-K, the Trust has elected
and, in the opinion of the Trust's management, qualified to be taxed as a Real
Estate Investment Trust ("REIT"), as defined under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended, and, as such, will not be taxed
for federal income tax purposes on that portion of its taxable income which is
distributed to shareholders, provided that at least 95% of its REIT taxable
income is distributed.
----------------------------------------
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 as follows:
None
[This space intentionally left blank.]
16
<PAGE> 17
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.
NATIONAL INCOME REALTY TRUST
Date: May 17, 1996 By:/s/ William S. Friedman
--------------------------------- --------------------------------
William S. Friedman
President, Chief Executive
Officer, and Trustee
Date: May 17, 1996 By:/s/ John A. Doyle
--------------------------------- --------------------------------
John A. Doyle
Chief Financial Officer
Date: May 17, 1996 By:/s/ Katie Jackson
---------------------------------- --------------------------------
Katie Jackson
Senior Vice President and
Chief Accounting Officer
17
<PAGE> 18
NATIONAL INCOME REALTY TRUST
INDEX TO EXHIBITS
EXHIBIT 27.0 Financial Data Schedule Page 19
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,867
<SECURITIES> 0
<RECEIVABLES> 4,063
<ALLOWANCES> (3,274)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 248,641
<DEPRECIATION> (46,444)
<TOTAL-ASSETS> 218,040
<CURRENT-LIABILITIES> 0
<BONDS> 141,795
<COMMON> 0
0
0
<OTHER-SE> 70,460
<TOTAL-LIABILITY-AND-EQUITY> 218,040
<SALES> 0
<TOTAL-REVENUES> 12,020
<CGS> 0
<TOTAL-COSTS> 6,859
<OTHER-EXPENSES> 1,545
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,183
<INCOME-PRETAX> 647
<INCOME-TAX> 0
<INCOME-CONTINUING> 647
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 647
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
