<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, 1997
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 3,503,845
------------------------------------------- ----------------------------
(Class) (Outstanding at May 5, 1997)
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended March
31, 1997, 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,
----------- ------------
1997 1996
----------- ------------
<S> <C> <C>
(unaudited) (audited)
Assets
------
Real estate held for sale (net of accumulated depreciation
of $347 in 1997 and $397 in 1996) ....................... $ 4,431 $ 12,198
Less - allowance for estimated losses .................... (1,195) (1,529)
--------- ---------
3,236 10,669
Real estate held for investment (net of accumulated
depreciation of $43,354 in 1997 and $41,854 in 1996) .... 192,851 183,053
Investments in partnerships .............................. 7,329 4,739
Cash and cash equivalents................................. 4,692 3,862
Restricted cash .......................................... 4,108 2,850
Other assets, net ........................................ 7,310 6,168
--------- ---------
$ 219,526 $ 211,341
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes, debentures, and interest payable .................. $ 144,742 $ 134,270
Other liabilities ........................................ 6,124 8,008
--------- ---------
150,866 142,278
Commitments and contingencies.............................
Shareholders' equity
Shares of beneficial interest, no par value; authorized
shares, unlimited; shares outstanding, 3,523,268 in 1997
and 3,523,729 in 1996 (after deducting 769,494 shares
in 1997 and 767,294 shares in 1996 held in treasury) ... 10,578 10,579
Paid-in capital ......................................... 277,796 277,795
Accumulated distributions in excess of
accumulated earnings ................................... (219,714) (219,311)
--------- ---------
68,660 69,063
--------- ---------
$ 219,526 $ 211,341
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 3
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Income
Rentals ..................................................... $ 11,955 $ 11,698
Interest .................................................... 67 142
Equity in income of partnerships ............................ 158 180
--------- ---------
12,180 12,020
Expenses
Property operations ......................................... 6,674 6,859
Interest .................................................... 2,747 3,183
Depreciation ................................................ 1,500 1,298
Advisory fees ............................................... 376 247
General and administrative .................................. 542 461
--------- ---------
11,839 12,048
--------- ---------
Income (loss) before gain on sale of real estate and insurance
settlement .................................................. 341 (28)
Gain on sale of real estate .................................. - 224
Gain on insurance settlement ................................. - 451
--------- ---------
Net income ................................................... $ 341 $ 647
========= =========
Earnings per share
Net income ................................................... $ .10 $ .17
========= =========
Weighted average shares of beneficial interest used in
computing earnings per share ................................ 3,523,610 3,742,476
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 4
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
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, December 31, 1996 .. 3,523,729 $ 10,579 $277,795 $ (219,311) $ 69,063
Repurchase of shares
of beneficial interest ..... (2,200) (7) (20) - (27)
Cash distributions
($0.20 per share) .......... - - - (717) (717)
Share distributions ......... 1,739 6 21 (27) -
Net income .................. - - - 341 341
---------- ---------- -------- ---------- ----------
Balance, March 31, 1997
(unaudited) ................ 3,523,268 $ 10,578 $277,796 $ (219,714) $ 68,660
========== ========== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE> 5
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected ....................................... $11,768 $11,995
Interest collected ...................................... 70 137
Interest paid ........................................... (2,405) (2,964)
Payments for property operations ........................ (8,334) (7,487)
General and administrative expenses paid ................ (731) (514)
Advisory fees paid to affiliate ......................... (556) (407)
Deferred borrowing costs paid ........................... (415) (357)
------- -------
Net cash provided by (used in) operating activities ... (603) 403
Cash Flows from Investing Activities
Acquisition of real estate .............................. (414) -
Real estate improvements ................................ (3,373) (2,393)
Notes receivable collections ............................ 8 26
Additional note receivable collateral ................... - 100
Earnest money deposit paid .............................. (116) -
Loan and advances to partnership ........................ (2,251) -
Distribution from partnership's investing activities .... - 6,105
Net <contributions to> distributions from partnerships .. (182) 304
------- -------
Net cash provided by (used in) investing activities ... (6,328) 4,142
Cash Flows from Financing Activities
Borrowings from financial institutions .................. 19,350 -
Payments of mortgage notes payable ...................... (8,998) (1,820)
Margin account repayments, net .......................... (1,527) (859)
Repayment of advances from affiliates, net .............. - (519)
Replacement escrow (deposits) receipts, net ............. (332) 635
Repurchase of shares of beneficial interest ............. (27) (110)
Distributions to shareholders ........................... (705) (679)
------- -------
Net cash provided by (used in) financing activities ... 7,761 (3,352)
------- -------
Net increase in cash and cash equivalents ................ 830 1,193
Cash and cash equivalents, beginning of period ........... 3,862 1,674
------- -------
Cash and cash equivalents, end of period ................. $ 4,692 $ 2,867
======= =======
</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 (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1997 1996
-------- ---------
<S> <C> <C>
Reconciliation of net income to net cash
provided by (used in) operating activities:
Net income ............................................... $ 341 $ 647
Gain on insurance settlement ............................. - (451)
Gain on sale of real estate .............................. - (224)
Depreciation and amortization ............................ 1,677 1,577
Equity in <income> of partnerships ....................... (158) (180)
Changes in other assets and liabilities, net of effects of
noncash investing and financing activities
Decrease in interest receivable ...................... 3 -
<Increase> in other assets ........................... (1,871) (569)
<Decrease> in other liabilities ...................... (804) (423)
Increase in interest payable ......................... 209 26
------- -------
Net cash provided by (used in) operating activities .... $ (603) $ 403
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the
purchase or foreclosure of real estate:
Real estate ............................................ $ 2,098 $ 5,568
Notes and interest receivable .......................... - (8,568)
Allowance for estimated losses ......................... - 3,000
Other assets ........................................... (22) -
Notes and interest payable ............................. (1,641) -
Other liabilities ...................................... (21) -
------- -------
Cash paid .......................................... $ 414 $ -
======= =======
Real estate written off pursuant to condemnation .......... $ 2,209 $ -
Note and accrued interest receivable written off .......... $ 977 $ -
Note payable written off pursuant to the condemnation of
the collateral property .................................. $ 1,725 $ -
Allowances for estimated losses charged off in connection
with the write-off of real estate and note receivable .... $ 1,462 $ -
Conversion of convertible subordinated debenture .......... $ - $ 1,000
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE> 7
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, 1997,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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, 1996. Dollar amounts in tables are
in thousands. Certain 1996 balances have been reclassified to conform to the
1997 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, 1997 and 1996. 1996 share and per share data have been
restated to give effect to the 10% share distribution paid to shareholders in
September 1996.
Effective January 1, 1997, the Trust implemented prospectively a change in
accounting estimate whereby capital expenditures for carpet; appliance; and
heating, ventilation, and air conditioning (HVAC) replacements are capitalized
rather than expensed. The Trust believes that capitalizing these expenditures
and depreciating them over lives ranging from three to five years more
appropriately reflects the timing of the economic benefits to be received from
these expenditures. Additionally, the Trust believes this treatment is
consistent with policies currently being used by other real estate investment
trusts. For the quarter ended March 31, 1997, the effect of this change in
accounting estimate was to decrease property operating expenses by $223,000.
Had the Trust implemented this change on January 1, 1996, property operating
expenses for the quarter ended March 31, 1996, would have been reduced by
$188,000. The decrease in property operating expenses correlates to an increase
in funds from operations, on which the advisory fee is based. Accordingly, this
change will result in higher advisory fees to Tarragon Realty Advisors, Inc.
("Tarragon"), the Trust's advisor.
NOTE 2. NOTES AND INTEREST RECEIVABLE
In March 1997, the Trust wrote off a note receivable with a balance of
$977,000, including accrued interest, secured by an apartment complex in Paris,
Texas, which had matured in 1988. The Trust had fully-reserved the loan in
previous years. Consequently, no loss was recognized in connection with the
write-off.
NOTE 3. REAL ESTATE AND DEPRECIATION
In January 1997, after an evaluation of its real estate portfolio, the Trust
reclassified Jackson Square Shopping Center from real estate held for sale to
real estate held for investment. As the estimated fair value of the property
exceeded its carrying value, no loss was recognized upon the reclassification.
In November 1995, the City of Indianapolis (the "City") initiated condemnation
proceedings against the Trust's K-Mart Shopping Center, acquired through a deed
in lieu of foreclosure in December 1994. The shopping center was vacant at the
time the Trust acquired it, although 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 March 1996, the Trust ceased payments on the $1.7 million
non-recourse mortgage note secured by the shopping center. In January 1997,
the Trust wrote off the property and related debt, as the mortgage is now
secured by the condemnation award. No loss was recognized in excess of amounts
previously provided.
7
<PAGE> 8
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. REAL ESTATE AND DEPRECIATION (Continued)
In February 1997, the Trust purchased Morningside Apartments, a 112-unit
property located in Jacksonville, Florida. The purchase price was $2.1
million, $1.6 million of which was financed through the assumption of an
existing mortgage loan secured by the property. In connection with the
transaction, the Trust paid Tarragon an acquisition fee of $20,550.
NOTE 4. INVESTMENTS IN PARTNERSHIPS
Investments in partnerships, accounted for under the equity method, consisted
of the following at March 31, 1997:
<TABLE>
<S> <C>
Income Special Associates ("ISA") .. $1,495
801 Pennsylvania Avenue ............ 2,917
RI Windsor, Ltd. ................... 2,438
Sacramento Nine ("SAC 9") .......... 479
English Village .................... -
------
$7,329
======
</TABLE>
In January 1997, in exchange for a capital contribution of $200,000, which was
matched by the other partners, the Trust received a 1% general partner interest
and a 49% limited partner interest in RI Windsor, Ltd., a limited partnership
formed to construct a 324-unit luxury apartment complex to be known as The
Mayfaire at Windsor Parke in Jacksonville, Florida, at an estimated cost of
$19.0 million. The property is expected to be completed in the fourth quarter
of 1997. The partnership has obtained an $18.0 million construction loan to
finance the construction. The Trust also loaned the partnership $2.0 million
which is to be repaid from construction loan proceeds following completion.
Until lease-up of the property, the construction loan is guaranteed by the
other general partner. As the Trust holds a non-controlling interest, it
accounts for its investment in the partnership using the equity method.
The proceeds for the Trust's loan and capital contribution to the partnership
were obtained from a $2.2 million loan secured by 352,000 of the Trust's shares
of beneficial interest. The lender has no voting rights with these shares, and
all distributions paid on the shares are used to reduce the loan balance.
Therefore, these shares are not included with outstanding shares in the
accompanying March 31, 1997, Consolidated Balance Sheet and the Consolidated
Statement of Shareholders' Equity for the three months ended March 31, 1997.
The loan matures in January 2000; however, the Trust intends to repay the loan
prior to December 1997 with proceeds received from the partnership's
construction loan.
The following information summarizes the results of operations of these
partnerships for the three months ended March 31, 1997:
<TABLE>
<S> <C>
Rentals ............................ $1,007
Property operations ................ (454)
Interest ........................... (135)
Depreciation ....................... (138)
------
Net income ......................... $ 280
======
</TABLE>
8
<PAGE> 9
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. NOTES, DEBENTURES, AND INTEREST PAYABLE
Pursuant to a Master Repurchase Agreement (the "Agreement") with an investment
bank entered into in April 1996, the Trust purchased the $3.1 million Fannie
Mae mortgage backed security ("Fannie Mae Certificate") issued by the lender in
connection with the financing of Forest Oaks at a 1/2% discount in June 1996
and 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 at a 2.7% discount in July 1996. The investment
bank purchased the Fannie Mae Certificate and the GNMA Certificate from the
Trust for 92% of the aggregate value, or $17.9 million, and the Trust agreed to
repurchase the Certificates from the investment bank one month later at the
same price plus interest at the London Interbank Offered Rate ("LIBOR") plus
1/2% per annum. As provided for in the Agreement, the Trust and the investment
bank extended the repurchase date monthly. The December 1996 purchase price
and, consequently, the January 1997 repurchase price were increased to 95% of
the aggregate value of the Certificates, or $19.3 million, and the interest
rate associated with the repurchase agreement was reduced to LIBOR plus 1/4%
per annum. In January 1997, the Trust entered into a similar repurchase
transaction with a government sponsored enterprise which purchased the
Certificates for 97% of their aggregate value, or $19.3 million, and the Trust
agreed to repurchase them in February 1997 for the same price plus interest at
5.4% per annum. The repurchase date has been extended to May 1997, and the
current repurchase price is $19.7 million. The repurchase transaction has
resulted in effective interest rates as of March 31, 1997, on the Forest Oaks
and Heather Hills financings of 6.9% and 6.5%, respectively.
The Trust is exposed to a demand for additional collateral or, in the
alternative, credit loss in the event the interest rate associated with the
repurchase transaction fluctuates in a manner that is unfavorable to the
Trust's interest in the Certificates. However, the Trust intends to either pay
off the mortgage or modify the mortgage to increase the interest rate prior to
any significant credit loss.
In February 1997, the Trust closed separate mortgage loans, secured by
Pinecrest Apartments and Rancho Sorrento Office Building, totaling $17.2
million. After the payoff of the $8.2 million existing mortgage secured by
Pinecrest, establishing escrows for taxes, insurance, and repairs, and closing
costs, the Trust received net cash proceeds of $7.7 million. In connection
with these transactions, the Trust paid Tarragon mortgage brokerage commissions
totaling $172,000.
NOTE 6. 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 7. 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.
9
<PAGE> 10
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, 1997, the Trust's real
estate portfolio included 58 properties, seven 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, 13 shopping
centers, three 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 $4.7 million at March 31, 1997, compared
with $3.9 million at December 31, 1996. 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.
During the first quarter of 1997, the Trust acquired a 112-unit apartment
property for $2.1 million and a 50% interest in a partnership which is
constructing a 324-unit apartment property for $200,000. The Trust also
advanced the partnership $2.2 million which was obtained through a loan which
matures in January 2000.
The Trust made real estate improvements totaling $3.4 million to its properties
during the first quarter of 1997, including $1.2 million on the construction of
The Vistas at Lake Worth, which is in redevelopment and should be completed in
the fourth quarter of 1997. Projected construction costs for The Vistas are
$7.8 million for the remainder of 1997. The Trust anticipates expenditures for
capital improvements on its other properties during the remainder of 1997 to
total approximately $5.8 million.
During the first quarter of 1997, the Trust obtained first mortgage financing
totaling $17.2 million and received net cash proceeds of $7.7 million after the
payoff of existing debt of $8.2 million, funding escrows, and paying associated
closing costs. The Trust made other principal payments totaling $796,000
during the three months ended March 31, 1997. Principal payments of $10.8
million, including balloon payments of $9.2 million, are due during the
remainder of 1997. The Trust intends to either pay off the maturing mortgages
or extend the due
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
dates while seeking to obtain long term refinancing. While management is
confident of its ability to acquire financing as needed, there is no assurance
that the Trust will continue to be successful in its efforts in this regard.
During the three months ended March 31, 1997, the Trust repurchased 2,200 of
its shares of beneficial interest at a total cost of $27,000. During 1996, the
Board authorized the Trust to repurchase up to an additional 281,592 shares of
beneficial interest, of which 170,091 had been purchased as of March 31, 1997.
Cash distributions to shareholders totaling $717,000, or $0.20 per share, were
declared by the Board in the first quarter of 1997. The Trust has paid regular
quarterly cash distributions since September 1993.
Results of Operations
The Trust reported net income of $341,000 for the three months ended March 31,
1997, compared to $647,000 for the three months ended March 31, 1996. The
components of the change in results from operations are discussed in the
following paragraphs.
Multifamily Properties
The Trust's multifamily portfolio, which accounted for 76% of the Trust's
real estate and included 7,190 operating units at March 31, 1997, reported
an increase in net rental income (rental revenue less property operating
expenses) of $750,000, or 21%, for the three months ended March 31, 1997,
compared to the corresponding period in 1996. $200,000 of this increase
resulted from properties acquired in 1996 and 1997. The remainder of the
increase comes from higher rents for multifamily properties held in both
years. Overall, both physical and economic occupancy levels have remained
relatively stable for multifamily properties held in both years.
Commercial Properties
The Trust's commercial portfolio included 1.6 million square feet at March
31, 1997. The sale of Century Centre II Office Building in September 1996
resulted in a decrease in net rental income of $418,000 for the quarter.
Commercial properties held in both years reported an overall increase in net
rental income of $102,000 principally due to lower economic vacancies.
Overall, both rental rates and physical occupancy for properties held in
both years were higher than reported in 1996.
Interest revenue decreased from $142,000 for the three months ended March 31,
1996, to $67,000 for the corresponding period in 1997. This decrease resulted
primarily from the payoff of the Sherwood Trust mortgage note receivable in
November 1996. The Trust does not anticipate making new mortgage loans in the
future except in connection with the sale of real estate. Therefore, as
existing loans are paid off, interest revenue is expected to continue to
decline.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Interest expense decreased from $3.2 million for the three months ended March
31, 1996, to $2.7 million for the three months ended March 31, 1997, due to the
sale of Century Centre II and the lower rates produced by the repurchase
transaction discussed in NOTE 5. "NOTES, DEBENTURES, AND INTEREST PAYABLE" in
the Notes to Consolidated Financial Statements.
Advisory fees to Tarragon Realty Advisors, Inc. ("Tarragon"), increased from
$247,000 for the three months ended March 31, 1996, to $376,000 for the three
months ended March 31, 1997. The Tarragon 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 Trust's funds
from operations increased 47% for the first quarter of 1997 compared to the
corresponding period in 1996. See "Funds from Operations" below.
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.
Funds from Operations
Funds from operations ("FFO") for the three month periods ended March 31, 1997
and 1996, are as follows (unaudited) (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------
1997 1996
------ ------
<S> <C> <C>
Net income ........................................... $ 341 $ 647
Gain on insurance settlement ......................... - (451)
Gain on sale of real estate .......................... - (224)
Depreciation and amortization of real estate assets .. 1,546 1,298
Depreciation and amortization of real estate assets of
partnerships ....................................... 86 70
------ ------
Funds from operations ................................ $1,973 $1,340
====== ======
Funds from operations per share ...................... $ .56 $ .36
====== ======
</TABLE>
Industry analysts generally consider FFO an appropriate measure of the
performance of an equity real estate investment trust. FFO, as defined by the
National Association of Real Estate Investment Trusts, is net income as
determined in accordance with generally accepted accounting principles,
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization of real estate assets uniquely significant to the
real estate industry, and after adjustments for unconsolidated partnerships and
joint ventures. The Trust believes that in order to facilitate a clear
understanding of its operating results, FFO should be examined in conjunction
with net income as presented herein. FFO does not represent cash generated
from operating activities in accordance with generally accepted accounting
principles and is not necessarily
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Funds from Operations (Continued)
indicative of cash available to fund cash needs and cash distributions. FFO
should not be considered as an alternative to net income as an indication of
the Trust's performance or as an alternative to cash flow as a measure of
liquidity. Effective January 1, 1997, the Trust modified its calculation of
FFO to include the add back of amortization of leasing commissions associated
with its commercial properties. The Trust believes that this calculation of
FFO is consistent with other real estate investment trusts. If the Trust had
calculated FFO in the same manner for the three months ended March 31, 1996,
FFO would have been $78,000 higher for that period.
Implementation of Change in Accounting Estimate
Effective January 1, 1997, the Trust implemented prospectively a change in
accounting estimate whereby capital expenditures for carpet; appliance; and
heating, ventilation, and air conditioning (HVAC) replacements are capitalized
rather than expensed. The Trust believes that capitalizing these expenditures
and depreciating them over lives ranging from three to five years more
appropriately reflects the timing of the economic benefits to be received from
these expenditures. Additionally, the Trust believes this treatment is
consistent with policies currently being used by other real estate investment
trusts. For the quarter ended March 31, 1997, the effect of this change in
accounting estimate was to decrease property operating expenses by $223,000.
Had the Trust implemented this change on January 1, 1996, property operating
expenses for the quarter ended March 31, 1996, would have been reduced by
$188,000. The decrease in property operating expenses correlates to an increase
in funds from operations, on which the advisory fee is based. Accordingly, this
change will result in higher advisory fees to Tarragon, the Trust's advisor.
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 the lower of its cost or its estimated
fair value less costs to sell. In those instances in which estimates of fair
value less costs to sell of the 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.
13
<PAGE> 14
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 1996 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.
[This space intentionally left blank.]
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 17, 1997, at the annual meeting of shareholders, the shareholders of
the Trust (i) elected eight Trustees of the Trust, (ii) approved the Trust's
Advisory Agreement with Tarragon Realty Advisors, Inc. ("Tarragon"), (iii)
approved an amendment to subpart (1) of Section 3.2 of the Declaration of Trust
to clarify authorization for the Trust to own securities of other entities and
have wholly-owned subsidiaries, (iv) approved an amendment to the Trust's
Declaration of Trust to specifically authorize the acquisition of the Trust's
own securities, (v) approved a proposal to repeal and delete subpart (d) of
Section 5.3 of the Trust's Declaration of Trust which restricted the Trust's
issuance of certain securities, (vi) approved a proposal to repeal and delete
subpart (e) of Section 5.3 of the Trust's Declaration of Trust which limited
the Trust's ability to invest in certain unimproved, non-income producing
property, (vii) approved a proposal to repeal and delete subpart (g) of Section
5.3 of the Trust's Declaration of Trust which limited the period of time the
Trust may hold its investments in equity securities, and (viii) approved a
proposal to repeal and delete subpart (o) of Section 5.3 of the Trust's
Declaration of Trust which prohibited the Trust from investing any of the
assets of the Trust in single-family homes. Proxies for such annual meeting
were solicited pursuant to Regulation 14A under the Securities Exchange Act of
1934 (the "1934 Act"), and there was no solicitation in opposition to the
nominees for Trustee. Following is a brief description of each matter
considered at the annual meeting of shareholders and the number of votes cast
for, against, or withheld, as well as the number of abstentions and broker
non-votes as to each such matter, including a separate tabulation with respect
to each nominee for election as a Trustee.
<TABLE>
<CAPTION>
Matter Voted Upon Shares Voting
--------------------------------- ------------------------------------
(1) Election of Trustees
Shares Authority
Name Voted for Withheld
--------------------------------- ------------- -------------
<S> <C> <C>
Irving E. Cohen 2,691,045 52,476
William S. Friedman 2,678,360 65,161
Sally Hernandez-Pinero 2,693,539 49,982
Dan L. Johnston 2,692,529 50,992
Lance Liebman 2,694,309 49,212
L. G. Schafran 2,694,559 48,962
Raymond V. J. Schrag 2,693,010 50,511
Carl B. Weisbrod 2,692,601 50,920
</TABLE>
<TABLE>
<CAPTION>
Votes Cast
------------------------------------
For Against Abstention
---------- ---------- ----------
<S> <C> <C> <C>
(2) Approval of the Trust's Advisory
Agreement with Tarragon 2,070,228 56,274 50,311
</TABLE>
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Continued)
<TABLE>
<CAPTION>
Votes Cast
------------------------------------
For Against Abstention
---------- ---------- ----------
<S> <C> <C> <C>
(3) Approval to amend subpart (1)
of Section 3.2 of the
Declaration of Trust 2,096,663 66,612 52,081
(4) Approval to amend the Trust's
Declaration of Trust to
specifically authorize the
acquisition of the Trust's
own securities 2,073,965 54,847 48,001
(5) Approval to repeal and delete
subpart (d) of Section 5.3 of
the Trust's Declaration
of Trust 2,033,555 86,758 56,500
(6) Approval to repeal and delete
subpart (e) of Section 5.3 of
the Trust's Declaration
of Trust 2,020,678 103,971 52,164
(7) Approval to repeal and delete
subpart (g) of Section 5.3 of
the Trust's Declaration
of Trust 2,058,818 72,838 50,157
(8) Approval to repeal and delete
subpart (o) of Section 5.3 of
the Trust's Declaration
of Trust 2,066,488 95,343 53,525
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 3.0 Amendment No. 4 to the Amended and Restated Declaration of
Trust
Exhibit 27.0 Financial Data Schedule
(b) Reports on Form 8-K as follows:
None
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 15, 1997 By:/s/ William S. Friedman
--------------- ----------------------------
William S. Friedman
President, Chief Executive
Officer, and Trustee
Date: May 15, 1997 By:/s/ Robert C. Irvine
---------------- ----------------------------
Robert C. Irvine
Executive Vice President and
Chief Financial Officer
Date: May 15, 1997 By:/s/ Erin D. Davis
---------------- ----------------------------
Erin D. Davis
Vice President and
Chief Accounting Officer
17
<PAGE> 18
NATIONAL INCOME REALTY TRUST
INDEX TO EXHIBITS
EXHIBIT 3.0 Amendment No. 4 to the Amended and
Restated Declaration of Trust Page 19
EXHIBIT 27.0 Financial Data Schedule Page 25
18
<PAGE> 1
EXHIBIT 3.0
WHEN RECORDED, RETURN TO: 31248-01000:022497:SCM:2
AMENDMENT NO. 4
TO THE
AMENDED AND RESTATED DECLARATION OF TRUST
OF
NATIONAL INCOME REALTY TRUST
(formerly CONSOLIDATED CAPITAL INCOME TRUST)
--------------------------------
The Amended and Restated Declaration of Trust dated June 15, 1987 for
NATIONAL INCOME REALTY TRUST (formerly Consolidated Capital Income Trust),
recorded on July 29, 1987 as Instrument No. 87-212433 in the Alameda County,
California Records, as amended by Amendment No. 1 effective June 22, 1989,
recorded July 13, 1989 as Instrument No. 89-188235 in the Alameda County,
California Records, as further amended by Amendment No. 2 effective March 22,
1990, recorded on April 11, 1990, as Instrument No. 90-098391 in the Alameda
County, California Records, as further amended by Amendment No. 3 effective
June 3, 1992, recorded June 29, 1992 as Instrument No. 92-210806 in the Alameda
County, California Records (collectively, the "Declaration of Trust"), is
hereby further amended as follows, such amendments having been approved by
shareholders holding a majority of the outstanding Shares of Beneficial
Interest entitled to vote thereon at a meeting held on March 20, 1997:
Subpart (l) of Section 3.2 of the Declaration of Trust is amended to
read in its entirety hereafter as follows:
"(l) to enter into joint ventures, general or limited
partnerships, and any other lawful combinations or associations,
create, acquire or invest in any business entity (including a
corporation whether or not a wholly-owned subsidiary or REMIC), and to
purchase, receive, subscribe for, or otherwise acquire, own, hold,
vote, use, employ, mortgage, lend, pledge, sell or otherwise dispose
of, and otherwise use and deal in and with, securities, shares or
other interests in, or obligations of, domestic or foreign
corporations, associations, partnerships, limited liability companies,
other real estate investment trusts, or individuals, direct or
indirect obligations of the United States or of any other government,
state, territory, government district, or municipality, or any
instrumentality thereof, and to be an organizer, partner, member,
associate, equity owner, equity participant or manager of any
partnership, joint venture, limited liability company or other
enterprise, and to the extent permitted in any other jurisdiction, to
be an incorporator of any other corporation of any type or kind."
-1-
<PAGE> 2
The following provisions are added to Section 3.2 as additional
subparts (w) through (y), with the existing last subpart to be re-numbered (z)
as follows:
"(w) to purchase or otherwise acquire its own bonds,
debentures, certificates, or other evidences of indebtedness or
obligations for its own Shares and hold those acquired Shares as
Treasury Shares or cancel or otherwise dispose of those acquired
Shares and to redeem or purchase Shares made redeemable by the
provisions of this Declaration, if any.
"(x) to engage in any and all activities that are mandated,
authorized or permitted by sections of the Internal Revenue Code of
1986, as amended, or any successor statute, that relate to or govern
real estate investment trusts or the regulations adopted under that
law.
"(y) whether included in the foregoing or not, to have and
exercise all powers necessary or appropriate to effect any or all of
the purposes for which this Trust is organized.
"(z) (renumbered from [w]) to do all other such acts and
things as are incident to the foregoing, and to exercise all powers
which are necessary or useful to carry on the business of the Trust;
to promote any of the purposes for which the Trust is formed, and to
carry out the provisions of this Declaration."
Subpart (d) of Section 5.3 is repealed and deleted and replaced with
the following language:
"(d) deleted;"
Subpart (e) of Section 5.3 is repealed and deleted and replaced with
the following language:
"(e) deleted;"
Subpart (g) of Section 5.3 is repealed and deleted and replaced with
the following language:
"(g) deleted;"
Subpart (o) of Section 5.3 is repealed and deleted and replaced with
the following language:
"(o) deleted;"
-2-
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 4
as of March 20, 1997, in one or more counterparts, each of which shall be
deemed an original and all of which, together, constitute but one and the same
instrument.
/s/ IRVING E. COHEN
--------------------------------------
Irving E. Cohen, Trustee
/s/ WILLIAM S. FRIEDMAN
--------------------------------------
William S. Friedman, Trustee
/s/ SALLY HERNANDEZ-PINERO
--------------------------------------
Sally Hernandez-Pinero, Trustee
/s/ DAN L. JOHNSTON
--------------------------------------
Dan L. Johnston, Trustee
/s/ LANCE LIEBMAN
--------------------------------------
Lance Liebman, Trustee
/s/ LAWRENCE G. SCHAFRAN
--------------------------------------
Lawrence G. Schafran, Trustee
/s/ RAYMOND V. J. SCHRAG
--------------------------------------
Raymond V. J. Schrag, Trustee
/s/ CARL B. WEISBROD
--------------------------------------
Carl B. Weisbrod, Trustee
THE STATE OF NEW YORK )
COUNTY OF NEW YORK )
The foregoing instrument was acknowledged before me on
March 20, 1997, by Irving E. Cohen.
/s/ LAWRENCE S. HARTMAN
--------------------------------------
Notary Public, State of
--------------
My commission expires:
--------------------------------------
LAWRENCE S. HARTMAN
Notary Public, State of New York
No. 02HA5062161
Qualified in Kings County
Commission Expires June 24, 1998
-3-
<PAGE> 4
THE STATE OF NEW YORK )
)
COUNTY OF NEW YORK )
The foregoing instrument was acknowledged before me on March 20, 1997,
by William S. Friedman.
/s/ LAWRENCE S. HARTMAN
--------------------------------------
Notary Public, State of New York
My commission expires:
--------------------------------------
THE STATE OF NEW YORK ) LAWRENCE S. HARTMAN
) Notary Public, State of New York
COUNTY OF NEW YORK ) No. 02HA5062161
Qualified in Kings County
Commission Expires June 24, 1998
The foregoing instrument was acknowledged before me on March 20, 1997,
by Sally Hernandez-Pinero.
/s/ LAWRENCE S. HARTMAN
--------------------------------------
Notary Public, State of
--------------
My commission expires:
--------------------------------------
THE STATE OF NEW YORK ) LAWRENCE S. HARTMAN
) Notary Public, State of New York
COUNTY OF NEW YORK ) No. 02HA5062161
Qualified in Kings County
Commission Expires June 24, 1998
The foregoing instrument was acknowledged before me on March 20, 1997,
by Dan L. Johnston.
/s/ LAWRENCE S. HARTMAN
--------------------------------------
Notary Public, State of
--------------
My commission expires:
--------------------------------------
LAWRENCE S. HARTMAN
Notary Public, State of New York
No. 02HA5062161
Qualified in Kings County
Commission Expires June 24, 1998
-4-
<PAGE> 5
THE STATE OF NEW YORK )
)
COUNTY OF NEW YORK )
The foregoing instrument was acknowledged before me on March 20, 1997,
by Lance Liebman.
/s/ ALYSSA J. ZIMMERMAN BASSETT
--------------------------------------
Notary Public, State of New York
My commission expires:
--------------------------------------
ALYSSA J. ZIMMERMAN BASSETT
Notary Public, State of New York
No. 4980637
Qualified in New York County
Commission Expires April 22, 1997
THE STATE OF MARYLAND )
)
COUNTY OF HARVARD )
The foregoing instrument was acknowledged before me on March 28, 1997,
by Lawrence G. Schafran.
/s/ LINDA M. MASON
--------------------------------------
Notary Public, State of Maryland
My commission expires:
3/2/99
--------------------------------------
THE STATE OF NEW YORK )
)
COUNTY OF NEW YORK )
The foregoing instrument was acknowledged before me on March 28, 1997,
by Raymond V. J. Schrag.
/s/ ROBERTA YATES
--------------------------------------
Notary Public, State of
---------------
My commission expires:
--------------------------------------
ROBERTA YATES
NOTARY PUBLIC, STATE OF NEW YORK
No. 24-4661458
Qualified in Kings County
Term Expires 12/31/97
-5-
<PAGE> 6
THE STATE OF NEW YORK )
)
COUNTY OF NEW YORK )
The foregoing instrument was acknowledged before me on March 20, 1997,
by Carl B. Weisbrod.
/s/ LAWRENCE S. HARTMAN
---------------------------------------
Notary Public, State of
--------------
--------------------------------------
LAWRENCE S. HARTMAN
Notary Public, State of New York
No. 02HA5062161
Qualified in Kings County
Commission Expires June 24, 1998
-6-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,692
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (1,195)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 240,983
<DEPRECIATION> (43,701)
<TOTAL-ASSETS> 219,526
<CURRENT-LIABILITIES> 0
<BONDS> 144,742
0
0
<COMMON> 0
<OTHER-SE> 68,660
<TOTAL-LIABILITY-AND-EQUITY> 219,526
<SALES> 0
<TOTAL-REVENUES> 12,180
<CGS> 0
<TOTAL-COSTS> 6,674
<OTHER-EXPENSES> 1,876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,747
<INCOME-PRETAX> 341
<INCOME-TAX> 0
<INCOME-CONTINUING> 341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 341
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
