<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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)
<TABLE>
<S> <C>
California 94-2537061
- --------------------------------------------- ---------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
</TABLE>
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 3,436,400
- ------------------------------------------- -------------------------------
(Class) (Outstanding at August 5, 1996)
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements 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
results of operations, consolidated financial position, 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>
June 30, December 31,
------------------- ------------------
1996 1995
------------------- ------------------
(unaudited) (audited)
<S> <C> <C>
Assets
------
Real estate
Held for investment (net of accumulated depreciation
of $39,124 in 1996 and $44,750 in 1995) . . . . . . . . . . $ 176,891 $ 189,086
Held for sale (net of accumulated depreciation
of $8,666 in 1996 and $397 in 1995) . . . . . . . . . . . . 35,447 6,589
---------------- ----------------
212,338 195,675
Notes and interest receivable
Performing . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700 11,685
Nonperforming, nonaccruing . . . . . . . . . . . . . . . . . . . 977 977
---------------- ----------------
3,677 12,662
Less - allowance for estimated losses . . . . . . . . . . . . . . (3,274) (6,274)
---------------- ----------------
403 6,388
Investments in partnerships . . . . . . . . . . . . . . . . . . . 4,245 10,780
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 1,315 1,674
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . 5,760 2,329
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 5,308 5,192
---------------- ----------------
$ 229,369 $ 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>
June 30, December 31,
------------------- -------------------
1996 1995
------------------- -------------------
(unaudited) (audited)
Liabilities and Shareholders' Equity
------------------------------------
<S> <C> <C>
Liabilities
Notes, debentures, and interest payable . . . . . . . . . . . . . $ 151,578 $ 144,497
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 7,727 7,914
---------------- ----------------
159,305 152,411
Commitments and contingencies . . . . . . . . . . . . . . . . . .
Shareholders' equity
Shares of beneficial interest, no par value; authorized
shares, unlimited; 3,448,286 shares outstanding in 1996
and 3,390,727 shares outstanding in 1995 (after
deducting 487,912 shares in 1996 and 450,857 shares
in 1995 held in treasury) . . . . . . . . . . . . . . . . . . . 10,354 10,181
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 277,071 276,716
Accumulated distributions in excess of
accumulated earnings . . . . . . . . . . . . . . . . . . . . . (217,361) (217,270)
---------------- ----------------
70,064 69,627
---------------- ----------------
$ 229,369 $ 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 data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------------ --------------------------------
1996 1995 1996 1995
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue
Rentals . . . . . . . . . . . . . . . . $ 12,015 $ 10,744 $ 23,713 $ 21,232
Interest . . . . . . . . . . . . . . . 218 316 360 616
Equity in income of partnerships . . . . 1,000 157 1,180 347
--------------- -------------- -------------- --------------
13,233 11,217 25,253 22,195
Expenses
Property operations . . . . . . . . . . 6,954 6,241 13,813 12,252
Interest . . . . . . . . . . . . . . . . 3,139 3,159 6,322 6,251
Depreciation . . . . . . . . . . . . . . 1,345 1,553 2,643 2,995
Advisory fees to affiliate . . . . . . . 289 228 536 524
General and administrative . . . . . . . 605 448 1,066 920
Provision for losses . . . . . . . . . . - (425) - (425)
--------------- -------------- -------------- --------------
12,332 11,204 24,380 22,517
--------------- -------------- -------------- --------------
Income (loss) before gain on sale of
investments, gain (loss) on sale of real
estate, and gain on insurance settlement 901 13 873 (322)
Gain on sale of investments . . . . . . . . - - - 412
Gain (loss) on sale of real estate . . . . (213) 110 11 110
Gain on insurance settlement . . . . . . . - - 451 -
--------------- -------------- -------------- --------------
Net income . . . . . . . . . . . . . . . . $ 688 $ 123 $ 1,335 $ 200
=============== ============== ============== ==============
Earnings per share
Net income . . . . . . . . . . . . . . . . $ .20 $ .04 $ .39 $ .06
=============== ============== ============== ==============
Weighted average shares of
beneficial interest used in
computing earnings per share . . . . . . 3,463,011 3,457,809 3,440,058 3,473,572
=============== ============== ============== ==============
</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
(audited) . . . . . . . . . . 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 . . . . (37,000) (111) (383) - (494)
Cash distributions
($0.40 per share) . . . . . . - - - (1,404) (1,404)
Share distributions . . . . . . . 1,483 5 17 (22) -
Net income . . . . . . . . . . . - - - 1,335 1,335
--------- ---------- ---------- ------------ -------------
Balance, June 30, 1996
(unaudited) . . . . . . . . . 3,448,286 $ 10,354 $ 277,071 $ (217,361) $ 70,064
========= ========== ========== ============ =============
</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 Six Months
Ended June 30,
--------------------------------
1996 1995
----------- ------------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected . . . . . . . . . . . . . . . . . . . . . . . $ 24,149 $ 21,126
Interest collected . . . . . . . . . . . . . . . . . . . . . . 307 584
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . (6,258) (6,131)
Payments for property operations . . . . . . . . . . . . . . . (14,614) (11,496)
General and administrative expenses paid . . . . . . . . . . . (1,124) (891)
Advisory fees paid to affiliate . . . . . . . . . . . . . . . . (627) (622)
Deferred borrowing costs paid . . . . . . . . . . . . . . . . . (1,550) (500)
----------- ------------
Net cash provided by operating activities . . . . . . . . . 283 2,070
Cash Flows from Investing Activities
Acquisition of real estate . . . . . . . . . . . . . . . . . . (3,099) (2,332)
Real estate improvements . . . . . . . . . . . . . . . . . . . (4,108) (3,084)
Proceeds from sale of real estate . . . . . . . . . . . . . . . - 329
Note receivable collections . . . . . . . . . . . . . . . . . . 461 10
Cash collateral received . . . . . . . . . . . . . . . . . . . 101 -
Acquisition of economic interest in office building . . . . . . - (462)
Distribution from a partnership's investing activities . . . . 6,810 -
Distribution of a partnership's insurance
settlement proceeds . . . . . . . . . . . . . . . . . . . . 759 -
Net distributions from partnerships . . . . . . . . . . . . . . 608 559
Proceeds from sale of investments . . . . . . . . . . . . . . . - 593
----------- ------------
Net cash provided by (used in) investing activities . . . . 1,532 (4,387)
Cash Flows from Financing Activities
Borrowings from financial institutions . . . . . . . . . . . . 24,688 8,800
Payments of mortgage notes payable . . . . . . . . . . . . . . (22,640) (6,251)
Margin account (deposits) borrowings, net . . . . . . . . . . . (1,202) 188
Repayment of advances from affiliates, net . . . . . . . . . . (514) -
Replacement escrow deposits, net . . . . . . . . . . . . . . . (657) (325)
Repurchase of shares of beneficial interest . . . . . . . . . . (494) (1,031)
Distributions to shareholders . . . . . . . . . . . . . . . . . (1,355) (614)
----------- ------------
Net cash (used in) provided by financing activities . . . . (2,174) 767
----------- ------------
Net (decrease) in cash and cash equivalents . . . . . . . . . . . (359) (1,550)
Cash and cash equivalents, beginning of period . . . . . . . . . 1,674 3,484
----------- ------------
Cash and cash equivalents, end of period . . . . . . . . . . . . $ 1,315 $ 1,934
=========== ============
</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 Six Months
Ended June 30,
------------------------------------
1996 1995
-------------- ---------------
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,335 $ 200
Gain on insurance settlement . . . . . . . . . . . . . . . . (451) -
Gain on sale of real estate . . . . . . . . . . . . . . . . (11) (110)
Gain on sale of investments . . . . . . . . . . . . . . . . - (412)
Provision for losses . . . . . . . . . . . . . . . . . . . . - (425)
Depreciation and amortization . . . . . . . . . . . . . . . 3,192 3,286
Equity in income of partnerships . . . . . . . . . . . . . . (1,180) (347)
Changes in other assets and liabilities, net of effects
of noncash investing and financing activities . . . . . .
(Increase) in interest receivable . . . . . . . . . . . . (46) (32)
(Increase) in other assets . . . . . . . . . . . . . . . (2,242) (944)
(Decrease) increase in other liabilities . . . . . . . . (1) 899
(Decrease) in interest payable . . . . . . . . . . . . . (313) (45)
-------------- ---------------
Net cash provided by operating activities . . . . . . . . . . . . $ 283 $ 2,070
============== ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the
acquisition or foreclosure of real estate
Real estate . . . . . . . . . . . . . . . . . . . . . . . . $ 14,954 $ 7,973
Notes and interest receivable . . . . . . . . . . . . . . . (8,568) -
Allowance for estimated losses . . . . . . . . . . . . . . . 3,000 -
Other assets . . . . . . . . . . . . . . . . . . . . . . . . (56) 214
Notes and interest payable . . . . . . . . . . . . . . . . . (6,157) (5,743)
Other liabilities . . . . . . . . . . . . . . . . . . . . . (74) (112)
-------------- ---------------
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . $ 3,099 $ 2,332
============== ===============
Conversion of convertible subordinated debenture . . . . . . . . $ 1,000 $ -
Note payable related to acquisition of economic interest
in office building . . . . . . . . . . . . . . . . . . . . . . $ - $ 2,500
Note payable released in connection with litigation
settlement . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 1,020
</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 six month period ended June 30, 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. 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 and six month periods
ended June 30, 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. REAL ESTATE
Pursuant to the Trust's adoption of Statement of Financial Accounting Standards
No. 121- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" effective January 1, 1996, the Trust ceased
depreciation of its properties held for sale, including Century Centre II
Office Building, a property with a $23.1 million carrying value at the time the
Trust reclassified it from real estate held for investment to real estate held
for sale in January 1996.
In November 1995, the City of Indianapolis (the "City") initiated condemnation
proceedings against the Trust's K-Mart Shopping Center, acquired in December
1994 through a deed in lieu of foreclosure. The shopping center was vacant at
the time the Trust acquired it, although it was leased to K-Mart under a net
lease expiring in 1999. The lease was assigned by K-Mart to the City in
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.
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 Realty Advisors, Inc.
("Tarragon"), the Trust's advisor, an acquisition fee of $24,900.
In June 1996, the Trust consummated the acquisition of Heron Cove Apartments, a
352-unit community located in Jacksonville, Florida. A portion of the $6.8
million purchase price was financed via the assumption of a $5.1 million
mortgage loan secured by a first lien on the property. Simultaneously with the
closing, the Trust paid $329,000 of the balance of the mortgage loan, reducing
the outstanding balance to $4.8 million. The mortgage loan bears interest at a
variable rate, initially 8.225% per annum, is payable in monthly installments
of principal
8
<PAGE> 9
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 2. REAL ESTATE (Continued)
and interest, initially $37,506, and matures in December 1999. The remainder
of the purchase price, along with closing costs and prorations, was paid in
cash from the Trust's general working capital. The Trust paid Tarragon an
acquisition fee of $66,005 for services provided in connection with the
transaction. Also in connection with this transaction, the seller paid Mr.
Bruce A. Schnitz, Chief Operating Officer of the Trust, a commission of $82,563
pursuant to a brokerage agreement entered into prior to his having any
affiliation with Tarragon or the Trust.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In October 1995, the Trust and the borrower on 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.
NOTE 4. INVESTMENTS IN PARTNERSHIPS
Investments in partnerships, accounted for under the equity method, consisted
of the following at June 30, 1996:
<TABLE>
<S> <C>
Income Special Associates ("ISA") . . . . . . . $ 1,457
801 Pennsylvania Avenue . . . . . . . . . . . . 2,788
Sacramento Nine . . . . . . . . . . . . . . . . -
English Village . . . . . . . . . . . . . . . . -
----------
$ 4,245
==========
</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 an effective 100% interest in Indcon, L.P.
("Indcon"), which owned five unencumbered industrial warehouses at June 30,
1996. During the first six months of 1996, Indcon sold 27 warehouses for $41.2
million, receiving net cash proceeds of $16.8 million after the payoff of the
existing $23.5 million mortgage loan and closing costs. The Trust received
$6.7 million for its proportionate share of the sale proceeds and an additional
$130,000 representing an allowance for brokerage commissions which the Trust
retained and which offset the Trust's share of Indcon's loss on the sale,
resulting in a net gain on the sale of $11,000.
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, of which the Trust's proportionate
share was $451,000. Indcon does not anticipate rebuilding the property.
9
<PAGE> 10
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 4. INVESTMENTS IN PARTNERSHIPS (Continued)
The following information summarizes the results of operations of these
partnerships for the six months ended June 30, 1996:
<TABLE>
<S> <C>
Rentals . . . . . . . . . . . . . . . . . . . . $ 3,049
Property operations . . . . . . . . . . . . . . (1,204)
Interest . . . . . . . . . . . . . . . . . . . . (986)
Depreciation . . . . . . . . . . . . . . . . . . (248)
-----------
Income before loss on sale of real estate
and gain on insurance settlement . . . . . . . 611
Loss on sale of real estate . . . . . . . . . . (290)
Gain on insurance settlement . . . . . . . . . . 1,126
-----------
Net income . . . . . . . . . . . . . . . . $ 1,447
===========
</TABLE>
NOTE 5. NOTES, DEBENTURES, AND INTEREST PAYABLE
In April 1996, the Trust completed the refinancing of the mortgage debt secured
by Creekwood North Apartments, located in Altamonte Springs, Florida. 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 received cash proceeds from the refinancing of $645,000
after the payoff of the $2.1 million prior first mortgage loan, which included
$427,000 to the Trust for its participation in the prior loan. The remainder
of the refinancing proceeds was used to fund closing costs and escrows for
property taxes and insurance and repairs. In connection with this transaction,
the Trust paid Tarragon a refinancing fee of $30,500.
In May 1996, the Trust obtained first mortgage financing secured by Forest Oaks
Apartments, located in Lexington, Kentucky, in the amount of $3.1 million. The
loan bears interest at 8.16% per annum, calls for monthly principal and
interest payments calculated on a 25-year amortization, and matures in June
2006. The Trust received net cash proceeds of $514,000 after the payoff of the
$2.0 million interim mortgage loan obtained in 1995 and paying closing costs
and funding required escrows for property taxes and insurance, repairs, and
replacements. The Trust paid Tarragon a refinancing fee of $30,750 for
services provided in connection with this financing.
Pursuant to a Master Repurchase Agreement (the "Agreement") with Bear, Stearns
& Co. Inc. ("Bear Stearns") entered into in April 1996, on June 28, 1996, the
Trust purchased at a 1/2% discount the $3.1 million Federal National Mortgage
Association mortgage backed security ("FNMA Certificate") issued by the lender
in connection with the financing of Forest Oaks Apartments described above.
Simultaneously, Bear Stearns purchased the FNMA Certificate from the Trust for
$2.8 million, and the Trust agreed to repurchase the FNMA Certificate from Bear
Stearns on July 29, 1996, at the same price plus interest at the London
Interbank Offered Rate ("LIBOR") plus 1/2% per annum. Under the terms of the
Agreement, the Trust and Bear Stearns may agree to extend the repurchase date
monthly.
10
<PAGE> 11
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)
In June 1996, the Trust refinanced the mortgage debt secured by Heather Hills
Apartments, located in Temple Hills, Maryland. The new $16.8 million first
mortgage loan bears interest at 7.875% per annum, is payable in monthly
installments of principal and interest of $118,055, and matures in January 2031.
At the closing of the transaction, the Trust paid $499,000, which, along with
the new loan proceeds, funded the payoff of the $15.9 million prior mortgage
loan, closing costs, and escrows for repairs, replacements, and mortgage
insurance.
Pursuant to the Agreement with Bear Stearns, in July 1996, the Trust purchased
at a 2.7% discount the $16.8 million Government National Mortgage Association
mortgage backed security ("GNMA Certificate") issued by the lender in
connection with the financing of Heather Hills Apartments described above.
Simultaneously, Bear Stearns purchased the GNMA Certificate from the Trust for
$15.0 million, and the Trust agreed to repurchase the GNMA Certificate from
Bear Stearns one month later at the same price plus interest at LIBOR plus 1/2%
per annum. In June 1996, the Trust established a $1.5 million interest-bearing
account with Bear Stearns to collateralize this repurchase transaction.
Also in June 1996, the Trust closed a $1.8 million mortgage loan secured by a
first lien on Plaza Hills Apartments, located in Kansas City, Missouri, and
received net cash proceeds of $1.7 million. The mortgage loan bears interest
at 8.35% per annum, is payable in monthly installments of principal and
interest of $14,098, and matures in July 2006. The remainder of the loan
proceeds was used to establish escrows for property taxes and insurance,
repairs, and replacements and to pay the associated closing costs. The $1.1
million prior loan secured by this property was paid in full in February 1996
with funds from the Trust's general working capital.
In December 1993, the Trust issued a $1.0 million convertible subordinated
debenture to Mr. John A. Doyle, Chief Financial Officer of the Trust until June
1996, 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.
NOTE 6. MANAGEMENT FEES TO AFFILIATE
Beginning April 1, 1996, Tarragon Management, Inc. ("TMI"), a wholly-owned
subsidiary of Tarragon, assumed the property-level management of certain of the
Trust's multifamily properties. The Trust pays TMI a property management fee
equal to 4.5% of gross monthly rentals collected for the properties it manages.
11
<PAGE> 12
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 7. 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 Tarragon. 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 presently comprised of two
Trustees, Messrs. William S. Friedman and Carl B. Weisbrod (Chairman of the
Board).
NOTE 8. 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 9. 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.
[This space intentionally left blank.]
12
<PAGE> 13
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 June 30, 1996, the Trust's real
estate portfolio included 60 properties, 10 of which were held for sale,
located throughout the United States, with concentrations in the Southeast and
Southwest. These properties consisted of 38 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 15 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 $1.3 million at June 30, 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.
The Trust purchased two properties during the six months ended June 30, 1996,
for an aggregate purchase price of $9.4 million, a portion of which was
financed through the assumption of first mortgage loans totaling $6.0 million.
The Trust paid cash totaling $3.1 million at closing of these purchases.
The Trust paid for real estate improvements totaling $4.1 million to its
properties during the first half of 1996, including $2.1 million on the
construction of The Regent Apartments and The Vistas at Lake Worth, properties
in redevelopment which should be completed in the third quarter of 1996 and the
fourth quarter of 1997, respectively. Projected construction costs for these
properties aggregate $3.9 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 $3.7
million.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (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 an
effective 100% interest in Indcon, L.P. ("Indcon"), which owned five
unencumbered industrial warehouses at June 30, 1996. During the first half of
1996, Indcon sold 27 warehouses for $41.2 million, receiving net cash proceeds
of $16.8 million, after the payoff of the existing $23.5 million existing
mortgage loan and related closing costs. Indcon distributed $6.8 million to
the Trust as its proportionate share of the sales proceeds plus an allowance
for brokerage commissions.
During the first half of 1996, the Trust made principal payments totaling
$22.6 million, which included $5.2 million related to payoffs of mortgage loans
scheduled to mature in 1996. 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 six months ended June 30, 1996, the Trust repurchased 37,000 of its
shares of beneficial interest at a total cost of $494,000. 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 219,702 have been purchased
to date.
Cash distributions to shareholders totaling $1.4 million, or $0.40 per share,
have been declared by the Board and paid by the Trust during the six month
period ended June 30, 1996. The second quarter distribution represents the
Trust's twelfth cash distribution since the resumption of regular quarterly
distributions in September 1993.
Results of Operations
The Trust reported net income of $688,000 and $1.3 million, respectively, for
the three and six month periods ended June 30, 1996, as compared to net income
of $123,000 and $200,000, respectively, for the three and six month periods
ended June 30, 1995, as more fully discussed in the following paragraphs.
Net rental income (rental revenue less property operating expenses) increased
from $4.5 million and $9.0 million for the three and six month periods ended
June 30, 1995, to $5.1 million and $9.9 million for the corresponding periods
in 1996.
Multifamily Properties
The Trust's multifamily portfolio, which represented 66% of the Trust's real
estate and included 6,774 operating units at June 30, 1996, reported increases
in net rental income of $547,000, or 17%, and $868,000, or 14%, respectively,
for the three and six month periods ended June 30, 1996, as compared to the
corresponding periods in 1995. Of these increases, $198,000 and $442,000 are
related to properties acquired in 1995 and 1996. Multifamily properties held
in both years reported increases of $349,000 and $426,000 due to increased
rental revenue from higher rental rates, which was partially offset by
increased operating expenses related to the Trust's continued efforts to
improve its properties. Overall, both physical and economic occupancy levels
have increased slightly for multifamily properties held in both years.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Commercial Properties
The Trust's commercial portfolio included 1.9 million square feet at June 30,
1996. Increases in net rental income of $94,000 and $160,000, respectively,
resulted from the addition of Jackson Square Shopping Center, acquired through
a deed in lieu of foreclosure in January 1996. Decreases of $58,000 and
$119,000, respectively, resulted from the sale of K-Mart Shopping Center in
Kansas City, Missouri, in July 1995. Commercial properties held in both years
reported overall increases in net rental income of $80,000 and $111,000,
respectively, principally due to lower economic vacancies 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 $316,000 and $616,000 for the three and six
month periods ended June 30, 1995, to $218,000 and $360,000 for the
corresponding periods in 1996. Of these decreases, $172,000 and $348,000
resulted from the payoff of the Greentree mortgage note receivable in September
1995 and the acquisition of Jackson Square Shopping Center through deed in lieu
of foreclosure in January 1996.
Equity in income of partnerships increased from $157,000 and $347,000,
respectively, for the three and six month periods ended June 30, 1995, to $1.0
million and $1.2 million, respectively, for the corresponding periods in 1996.
These increases were primarily due to distributions received from Sacramento
Nine, a tenancy-in-common in which the Trust holds a 70% undivided interest in
earnings, losses, and distributions, and English Village, a partnership in
which the Trust holds 1% general partner and 49% limited partner interests, in
excess of the Trust's investments in the partnerships.
Interest expense was $3.1 million and $6.3 million for the three and six month
periods ended June 30, 1996, as compared to $3.2 million and $6.3 million for
the three and six month periods ended June 30, 1995. Increases of $105,000 and
$223,000 resulted from interest expense associated with mortgage loans obtained
or assumed in connection with 1995 and 1996 property acquisitions. In
addition, long term and interim first mortgage financing obtained on existing
properties during 1995 and 1996 increased mortgage loans by $7.7 million and
the related interest expense by $158,000 and $367,000 for these periods. These
increases were partially offset by decreases totaling $175,000 and $327,000 due
to the sale of K-Mart Shopping Center in Kansas City, Missouri, in July 1995;
ceasing payments on the mortgage loan secured by 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 $1.6 million and $3.0 million for the three
and six month periods ended June 30, 1995 to $1.3 million and $2.6 million for
the corresponding periods 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 decreases
of $233,000 and $463,000.
15
<PAGE> 16
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"), were $289,000
and $536,000 for the three and six month periods ended June 30, 1996, as
compared to $228,000 and $524,000 for the corresponding periods in 1995. The
current advisory agreement calls for a monthly incentive fee equal to 16% per
annum of adjusted funds from operations, as defined in the advisory agreement
approved by the Board. The initial advisory agreement also called for a
$100,000 annual base fee, which was eliminated in April 1995.
During the first half of 1996, the Trust reported a gain of $11,000 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 half of 1995, the Trust reported a gain of
$412,000 on the sale of shares of beneficial interest of CMET and a $110,000
gain on the sale of a portion of Lake Highlands land.
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 the lower of 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.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Environmental Matters
Under various federal, state, and local environmental laws, ordinances, and
regulations, the Trust may be potentially liable for removal or remediation
costs, as well as certain other potential costs (including governmental fines
and injuries to persons and property) relating to hazardous or toxic substances
where property-level managers have arranged for the removal, disposal, or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the
air, and third parties may seek recovery from the 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.
Income Tax Aspects
As more fully discussed in the Trust's Annual Report on Form 10-K for the year
ended December 31, 1995, 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
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL INCOME REALTY TRUST
Date: August 14, 1996 By:/s/ William S. Friedman
------------------------- ---------------------------
William S. Friedman
President, Chief Executive
Officer, and Trustee
Date: August 14, 1996 By:/s/ Bruce A. Schnitz
------------------------- ---------------------------
Bruce A. Schnitz
Chief Operating Officer and
Principal Financial Officer
Date: August 14, 1996 By:/s/ Erin D. Davis
------------------------- ---------------------------
Erin D. Davis
Vice President and
Chief Accounting Officer
18
<PAGE> 19
NATIONAL INCOME REALTY TRUST
INDEX TO EXHIBITS
EXHIBIT 27.0 Financial Data Schedule Page 20
19
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,315
<SECURITIES> 0
<RECEIVABLES> 3,677
<ALLOWANCES> (3,274)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 260,128
<DEPRECIATION> (47,790)
<TOTAL-ASSETS> 229,369
<CURRENT-LIABILITIES> 0
<BONDS> 151,578
<COMMON> 0
0
0
<OTHER-SE> 70,064
<TOTAL-LIABILITY-AND-EQUITY> 229,369
<SALES> 0
<TOTAL-REVENUES> 25,253
<CGS> 0
<TOTAL-COSTS> 13,813
<OTHER-EXPENSES> 3,179
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,322
<INCOME-PRETAX> 1,335
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,335
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
