<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, 1998
-------------
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 3,780,665
- ------------------------------------------- -------------------------------
(Class) (Outstanding at August 7, 1998)
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended June 30,
1998, have not been audited by independent certified public accountants, but, in
the opinion of 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)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
--------- ------------
1998 1997
--------- ---------
<S> <C> <C>
Assets
Real estate held for sale (net of accumulated depreciation
of $15,055 in 1998 and $593 in 1997) ................... $ 61,636 $ 5,123
Less - allowance for estimated losses ..................... (1,194) (1,194)
--------- ---------
60,442 3,929
Real estate held for investment (net of accumulated
depreciation of $34,503 in 1998 and $45,440 in 1997) ... 185,765 230,007
Investments in and advances to partnerships ............... 23,694 13,839
Cash and cash equivalents ................................. 6,366 4,262
Restricted cash ........................................... 6,844 4,300
Other assets, net ......................................... 10,241 9,303
--------- ---------
$ 293,352 $ 265,640
========= =========
Liabilities and Shareholders' Equity
Liabilities
Notes and interest payable ................................ $ 210,826 $ 184,126
Other liabilities (including $1,316 due to affiliates) .... 12,994 10,423
--------- ---------
223,820 194,549
Commitments and contingencies..............................
Shareholders' equity
Shares of beneficial interest, no par value; authorized
shares, unlimited; shares outstanding, 3,794,044 in 1998
and 3,812,404 in 1997 (after deducting 953,506 in
1998 and 896,962 in 1997 held in treasury) .............. 11,392 11,446
Paid-in capital ........................................... 281,192 281,638
Accumulated distributions in excess of
accumulated earnings .................................... (223,007) (222,126)
Accumulated other comprehensive income .................... (45) 133
--------- ---------
69,532 71,091
--------- ---------
$ 293,352 $ 265,640
========= =========
</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 For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue
Rentals ................................ $ 13,924 $ 12,218 $ 27,785 $ 24,173
Interest ............................... 222 90 437 157
Equity in income of partnerships ....... 194 198 374 356
-------- -------- -------- --------
14,340 12,506 28,596 24,686
Expenses
Property operations .................... 7,703 6,778 15,109 13,452
Interest ............................... 3,894 2,994 7,626 5,741
Depreciation ........................... 1,671 1,593 3,771 3,093
Advisory fee to affiliate .............. 304 301 736 677
General and administrative ............. 551 475 1,123 1,017
-------- -------- -------- --------
14,123 12,141 28,365 23,980
-------- -------- -------- --------
Income before gain on sale of real
estate, gain on sale of investments,
and extraordinary loss ................ 217 365 231 706
Gain on sale of real estate .............. 1,275 1,576 1,275 1,576
Gain on sale of investments .............. -- -- 117 --
-------- -------- -------- --------
Income from continuing operations ........ 1,492 1,941 1,623 2,282
Extraordinary loss on early
extinguishment of debt................. (68) -- (330) --
-------- -------- -------- --------
Net income ............................... $ 1,424 $ 1,941 $ 1,293 $ 2,282
======== ======== ======== ========
Other comprehensive income:
Unrealized gains (losses) on
marketable equity securities ........ (28) 434 (61) 434
Realized gains on marketable
equity securities ................... -- -- (117) --
-------- -------- -------- --------
Net income (loss) recognized in
other comprehensive income ............ (28) 434 (178) 434
-------- -------- -------- --------
Comprehensive income ..................... $ 1,396 $ 2,375 $ 1,115 $ 2,716
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
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NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Earnings per share
Income from continuing operations ....... $ .39 $ .50 $ .42 $ .59
Extraordinary loss ...................... (.02) -- (.08) --
------------- ------------- ------------- -------------
Net income .............................. $ .37 $ .50 $ .34 $ .59
============= ============= ============= =============
Weighted average shares of
beneficial interest used in
computing earnings per share .......... 3,809,872 3,872,590 3,826,585 3,881,871
============= ============= ============= =============
Earnings per share - assuming dilution
Income from continuing operations ....... $ .39 $ .50 $ .42 $ .58
Extraordinary loss ...................... (.02) -- (.09) --
------------- ------------- ------------- -------------
Net income .............................. $ .37 $ .50 $ .33 $ .58
============= ============= ============= =============
Weighted average shares of beneficial
interest used in computing earnings
per share - assuming dilution ......... 3,873,845 3,915,137 3,884,665 3,918,768
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
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NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Shares of Distributions Accumulated
Beneficial Interest in Excess of Other
-------------------------- Paid-in Accumulated Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997 .................... 3,812,404 $ 11,446 $ 281,638 $ (222,126) $ 133 $ 71,091
Repurchase of shares
of beneficial interest .. (56,544) (169) (939) -- -- (1,108)
Cash distributions
($0.40 per share) ....... -- -- -- (1,566) -- (1,566)
Share distributions ....... 32,238 97 511 (608) -- --
Share options exercised ... 5,946 18 (18) -- -- --
Net loss recognized in
other comprehensive
income .................. -- -- -- -- (178) (178)
Net income ................ -- -- -- 1,293 -- 1,293
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1998 .... 3,794,044 $ 11,392 $ 281,192 $ (223,007) $ (45) $ 69,532
========== ========== ========== ========== ========== ==========
</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,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected ..................................... $ 27,598 $ 23,808
Interest collected .................................... 101 163
Interest paid ......................................... (7,164) (5,190)
Payments for property operations ...................... (15,883) (15,093)
General and administrative expenses paid .............. (1,161) (1,104)
Advisory fee paid to affiliate ........................ (658) (786)
Organizational costs paid ............................. (153) --
Deferred financing costs paid ......................... (1,415) (1,385)
-------- --------
Net cash provided by operating activities .......... 1,265 413
Cash Flows from Investing Activities
Acquisition of real estate ............................ (3,807) (9,630)
Proceeds from the sale of real estate ................. 972 2,854
Real estate improvements .............................. (6,251) (10,620)
Earnest money deposits paid ........................... (403) (150)
Note receivable collections ........................... 127 166
Investments in marketable equity securities ........... (81) (2,214)
Proceeds from sale of marketable equity securities .... 417 --
Net contributions and advances to partnerships ........ (12,732) (3,615)
-------- --------
Net cash (used in) investing activities ............ (21,758) (23,209)
Cash Flows from Financing Activities
Proceeds from borrowings .............................. 37,892 32,750
Payments of mortgage notes payable .................... (17,429) (9,653)
Margin account borrowings, net ........................ 843 933
Advances from affiliates, net ......................... 1,316 --
Replacement escrow deposits, net ...................... (791) (92)
Distribution from partnership's financing activities .. 3,758 --
Repurchase of shares of beneficial interest ........... (1,108) (528)
Distributions to shareholders ......................... (1,884) (1,387)
-------- --------
Net cash provided by financing activities .......... 22,597 22,023
-------- --------
Net increase (decrease) in cash and cash equivalents .... 2,104 (773)
Cash and cash equivalents, beginning of period .......... 4,262 3,862
-------- --------
Cash and cash equivalents, end of period ................ $ 6,366 $ 3,089
======== ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
6
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NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income .................................................................... $ 1,293 $ 2,282
Extraordinary loss ............................................................ 330 --
Gain on sale of investments ................................................... (117) --
Gain on sale of real estate ................................................... (1,275) (1,576)
Depreciation and amortization ................................................. 4,270 3,459
Equity in income of partnerships .............................................. (374) (356)
Interest on advances to partnerships .......................................... (338) --
Changes in other assets and liabilities, net of effects of noncash investing
and financing activities:
Decrease in interest receivable ........................................... 1 5
(Increase) in other assets ................................................ (3,844) (3,626)
Increase (decrease) in other liabilities .................................. 1,244 (51)
Increase in interest payable .............................................. 75 276
-------- --------
Net cash provided by operating activities ......................................... $ 1,265 $ 413
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the purchase of real
estate:
Real estate ................................................................... $ 10,634 $ 16,633
Other assets .................................................................. 765 121
Notes and interest payable .................................................... (7,060) (6,699)
Other liabilities ............................................................. (532) (425)
-------- --------
Cash paid ................................................................. $ 3,807 $ 9,630
======== ========
Assets disposed of and liabilities released in connection with the sale of real
estate:
Real estate ................................................................... $ 677 $ 3,028
Other assets .................................................................. 71 89
Notes and interest payable .................................................... (1,046) (1,758)
Other liabilities ............................................................. (5) (81)
Gain on sale .................................................................. 1,275 1,576
-------- --------
Cash received ............................................................. $ 972 $ 2,854
======== ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
7
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NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------
1998 1997
---- ----
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(Continued):
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
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
8
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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, 1998, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997. Dollar amounts in tables are in
thousands. Certain 1997 balances have been reclassified to conform to the 1998
presentation.
On January 1, 1998, the Trust adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires the reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income.
Accumulated other comprehensive income presented in the accompanying June 30,
1998, Consolidated Balance Sheet and Consolidated Statement of Shareholders'
Equity for the six months ended June 30, 1998, represents unrealized holding
losses on marketable equity securities.
NOTE 2. REAL ESTATE
In April 1998, the Trust sold Mountain View Shopping Center in Las Vegas,
Nevada, for $2 million, receiving net cash proceeds of $972,000 (after the
payoff of the $1 million mortgage and closing costs) and recognizing a gain on
the sale of $1.3 million.
Also in April 1998, the Trust purchased a 43-acre tract of land adjacent to The
Vistas at Lake Worth in Fort Worth, Texas, for $714,000. The Trust intends to
construct an apartment community to be known as The Observatory on this land.
The Trust paid Tarragon Realty Advisors, Inc. ("Tarragon"), the Trust's advisor
since April 1, 1994, an acquisition fee of $7,000 in connection with this
transaction.
In May 1998, the Trust purchased a 33-acre tract of land in Frisco, Texas, for
$4.5 million, $3 million of which was financed with a mortgage that matures in
March 1999. The Trust plans to build a luxury apartment community on this land.
The Trust paid Tarragon a $45,000 acquisition fee and a $30,000 financing fee in
connection with this transaction.
In June 1998, the Trust acquired three apartment properties with a total of 446
apartments for an aggregate purchase price of $5.4 million, $4 million of which
was financed through the assumption of existing government-subsidized, low
interest mortgages. The properties include Desert Winds and Silver Creek each
with 152 units located in Jacksonville, Florida, and Palm Grove with 142 units
located in Orlando, Florida. In connection with these acquisitions, the Trust
paid Tarragon acquisition fees totaling $18,753.
In the second quarter of 1998, the Trust identified 12 multifamily properties
with an aggregate 3,406 units and aggregate net carrying value of $56.8 million
that it would pursue marketing for a possible bulk sale and, accordingly,
reclassified these properties to real estate held for sale. Because the
estimated fair values of these properties exceeded their carrying values, no
loss was recognized upon their reclassification to real estate held for sale.
The Trust ceased depreciating these properties in April 1998.
9
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NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Investments in and advances to partnerships, accounted for using the equity
method, consisted of the following at June 30, 1998:
<TABLE>
<S> <C>
Sacramento Nine......................................................... $ 403
Ansonia Apartments, L.P. ("Ansonia").................................... 4,898
Danforth National Apartments, Ltd. ("Danforth")......................... 3,796
801 Pennsylvania Avenue................................................. --
National Omni Associates, L.P. ("Omni")................................. 4,959
Orange National Partners, Ltd. ("Orange")............................... 2,735
RI Windsor, Ltd. ("Windsor")............................................ 2,715
RI Panama City, Ltd. ("Panama City").................................... 1,593
Tarragon Savannah, L.P. ("Savannah").................................... 2,595
---------------
$ 23,694
===============
</TABLE>
In December 1997, the Trust contributed $721,000 to Omni in exchange for a 55%
general partner interest in this partnership. In 1998, the Trust contributed an
additional $4.4 million to Omni, which purchased 5600 Collins Avenue, a
289-unit, high rise apartment building in Miami Beach, Florida, for $32 million
in February 1998. $26 million of the purchase price was financed through first
and second lien mortgages. In connection with this transaction, Omni paid
Tarragon a $150,000 acquisition fee. In accordance with the partnership
agreement, the Trust is to receive a preferred return of 10% compounded monthly
on its contributions. Through December 31, 2001, the Trust will receive 78% of
the partnership's cash distributions from operating net cash flow, as defined in
the partnership agreement, until the preferred return has been paid and the
Trust's contributions have been repaid. The Trust will receive 55% of subsequent
cash distributions from the partnership. Any of the preferred return not paid as
of December 31, 2001, is to be paid out of disposition net cash flow, as defined
in the partnership agreement.
In April 1998, the Trust made a capital contribution of $200,000 and received a
1% general partner interest and a 49% limited partner interest in Orange, a
limited partnership formed to construct a 328-unit luxury apartment complex to
be known as The Vineyards at Eagle Harbour in Orange Park, Florida, at an
estimated cost of $20 million. The property is expected to be completed in the
third quarter of 1999. The partnership has obtained a $15.8 million loan to
finance construction. The Trust also advanced the partnership $2.5 million which
is to be repaid following completion and lease-up of the property. Until
lease-up of the property, the construction loan is guaranteed by the other
general partner. As the Trust holds a non-controlling interest in the
partnership, it accounts for its investment in the partnership using the equity
method.
Also in April 1998, Ansonia, in which the Trust holds a 70% non-controlling
general partner interest, purchased Lakeview Apartments, an 88-unit complex in
Waterbury, Connecticut, for $3 million. $2.4 million of the purchase price was
financed through a new first mortgage. Ansonia paid Tarragon a financing fee of
$24,200 in connection with this transaction.
In June 1998, new first mortgage financing in the amount of $4.2 million secured
by 801 Pennsylvania Avenue was obtained. The Trust received $3.8 million of the
financing proceeds, $3.5 million of which represented the Trust's original
investment, subsequent advances, and accrued interest, and $267,000 of which
represented the Trust's 50% participation in excess proceeds.
10
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NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
The following information summarizes the results of operations for these
partnerships for the six months ended June 30, 1998 (unaudited):
<TABLE>
<S> <C>
Rental revenue......................................................... $ 4,322
Property operating expenses............................................ (2,111)
Interest expense....................................................... (2,143)
Depreciation expense................................................... (714)
----------------
Net loss............................................................... $ (646)
================
</TABLE>
The above summarized financial information includes no operations for Savannah,
which owns a 250-unit apartment property under construction. Operations for
Windsor, Panama City, and Danforth are reflected in the above summarized results
of operations. Construction of Windsor's sole property, The Mayfaire at Windsor
Parke, a 324-unit property in Jacksonville, Florida, was substantially complete
at March 31, 1998, and the property is in lease-up. Panama City's sole property,
Harbour Green, a 200-unit property in Panama City, Florida, began lease-up in
January of 1998, and construction was substantially completed in April 1998.
Danforth's sole property, the Club at Danforth, a 288-unit apartment property in
Jacksonville, Florida, began lease-up in April 1998, and construction is
expected to be complete in the third quarter of 1998.
NOTE 4. INVESTMENTS IN MARKETABLE EQUITY SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," investments in marketable equity securities are carried at
fair value. These investments are included in "Other assets" in the accompanying
Consolidated Balance Sheets. These investments are considered available for
sale, and unrealized holding gains and losses are included in other
comprehensive income. During the first six months of 1998, unrealized losses of
$61,000 were incurred, and investments with a cost basis of $300,000 (determined
by the average cost method) were sold for $417,000, resulting in realized gains
of $117,000.
NOTE 5. NOTES AND INTEREST PAYABLE
In June 1996, the Trust purchased the $3.1 million Fannie Mae mortgage backed
security ("Fannie Mae MBS") issued by the lender in connection with the
financing of Forest Oaks Apartments at a 1/2% discount and simultaneously
entered into a reverse repurchase agreement with an investment bank. The
investment bank purchased the Fannie Mae MBS from the Trust for 92% of its
value, and the Trust agreed to repurchase the MBS 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. In July 1996, the Trust purchased the $16.7
million Government National Mortgage Association mortgage backed security ("GNMA
MBS") issued by the lender in connection with the financing of Heather Hills
Apartments at a 2.7% discount and added this MBS to the reverse repurchase
transaction with the investment bank. As provided for in the agreement, the
Trust and the investment bank extended the repurchase date monthly, and the
repurchase price fluctuated with changes in the values of the MBSs. In January
1997, the Trust entered into a similar repurchase transaction with a government
sponsored enterprise which purchased the MBSs for 97% of their aggregate value,
and the Trust agreed to repurchase them one month later at the same price plus
interest at 5.4% per annum. The Trust and the
11
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NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. NOTES AND INTEREST PAYABLE (Continued)
government sponsored enterprise extended the repurchase date monthly,
establishing a new repurchase price each time. In November 1997, the Trust
purchased the $2.7 million Fannie Mae MBS issued by the lender in connection
with the financing of Cross Creek Apartments at face value and added this MBS to
the reverse repurchase transaction. In July 1998, the Trust renewed the reverse
repurchase agreement with the investment bank. Currently, the repurchase date is
September 1998, the repurchase price is $22.9 million, and the interest rate is
LIBOR less 3 5/8 %. The reverse repurchase transaction has resulted in effective
interest rates as of June 30, 1998, on the Forest Oaks, Heather Hills, and Cross
Creek financings of 6.96%, 6.11%, and 7.44%, 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 MBSs. However, the Trust intends to either pay off the mortgages
or modify the mortgages to increase the interest rates prior to any significant
credit loss.
In May 1997, the Trust accepted a commitment from GMAC Commercial Mortgage
Corporation ("GMAC") for a $50 million revolving credit facility. Advances under
the facility are available to finance properties currently owned by the Trust as
well as new acquisitions. The outstanding balance is limited to the lesser of
75% of the value of the collateral properties or an amount supported by a debt
service coverage ratio of 1.25. The borrowing base may be increased by adding
new or existing properties to the collateral pool. Advances are limited to the
lesser of 75% of the appraised value of the property as stabilized or 80% of
total acquisition costs which include the purchase price of a newly acquired
property and the cost of improvements incurred between the date of acquisition
and the date that any mortgage secured by that property is recorded. A newly
acquired property is defined as a property owned by the Trust for less than one
year. The outstanding balance under the facility bears interest at the 30 day
LIBOR plus a variable spread of between 2% and 2.5% which is determined based on
the loan-to-value and debt service coverage maintained. Payment terms include
interest only monthly with the outstanding balance due at maturity, which is 36
months from the date of the first advance. The Trust may extend the maturity by
two six-month terms, but no new fundings may occur under the facility during any
extension period. The Trust has obtained fundings under this revolving credit
facility totaling $43.2 million, $42 million of which were obtained in 1997,
secured by first mortgages against nine Trust properties. The Trust received net
cash proceeds of $27.4 million ($26.3 million in 1997) from these fundings after
the payoff of existing mortgages of $13.5 million, establishing escrows for
taxes, insurance, and repairs, and paying the associated closing costs. In
connection with these fundings, the Trust paid Tarragon financing fees totaling
$432,000 ($420,000 in 1997).
In June 1998, the Trust entered into a $35 million revolving credit facility
with GMAC with substantially the same terms as the $50 million revolving credit
facility obtained in 1997. The outstanding balance under the facility bears
interest at the 30-day LIBOR plus 2%. Payment terms include interest only
monthly with the outstanding balance due at maturity, which is June 2001.
Similar to the $50 million facility, the maturity of the $35 million facility
may be extended by two six-month terms, but no new fundings may occur under the
facility during any extension period. In June 1998, the Trust obtained fundings
under this revolving credit facility of $9.5 million secured by first mortgages
on two properties. The Trust received net cash proceeds of $4 million from these
fundings after the payoff of existing mortgages totaling $5.1 million,
establishing escrows for taxes, insurance, and repairs, and paying the
associated closing costs. In connection with these fundings, the Trust paid
Tarragon financing fees totaling $95,000.
12
<PAGE> 13
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. NOTES AND INTEREST PAYABLE (Continued)
In April 1998, the Trust obtained interim financing secured by The Vistas at
Lake Worth of $9.5 million. After closing costs and establishing required
escrows, the Trust received net cash proceeds of $9.1 million. The Trust paid
Tarragon a financing fee of $95,000 in connection with this transaction.
During the first six months of 1998, the Trust obtained permanent financing from
a government sponsored enterprise at fixed rates between 6.71% and 6.96% secured
by four properties totaling $17.5 million. After the payoff of $11.4 million in
existing debt, establishing escrows for taxes, insurance, and repairs, and
closing costs, the Trust received net cash proceeds of $5 million. In connection
with these financings, the Trust paid Tarragon financing fees totaling $175,120.
NOTE 6. ADVANCES FROM AFFILIATES
Other liabilities at June 30, 1998, included $1.3 million advanced by Tarragon
during the first six months of 1998 in part to facilitate acquisitions by the
Trust and partnerships in which it holds interests. Such advances do not bear
interest and are payable on demand.
NOTE 7. EARNINGS PER SHARE
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, 1998 and 1997. 1997 share and per share data have been restated
to give effect to the 10% share distribution paid to shareholders in September
1997.
Following is a reconciliation of the weighted average shares of beneficial
interest outstanding used in the computation of earnings per share and earnings
per share - assuming dilution.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares of
beneficial interest outstanding .... 3,809,872 3,872,590 3,826,585 3,881,871
Share options ........................ 63,973 42,547 58,080 36,897
--------- --------- --------- ---------
Weighted average shares of
beneficial interest outstanding -
assuming dilution .................. 3,873,845 3,915,137 3,884,665 3,918,768
========= ========= ========= =========
</TABLE>
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
and expects that it will continue to do so.
13
<PAGE> 14
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
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, financial position, or results
of operations.
NOTE 10. SUBSEQUENT EVENTS
In July 1998, the Trust obtained aggregate fundings of $4.3 million under the
$50 million revolving credit facility. These fundings were obtained by
increasing the debt against two properties previously financed with advances
under the $50 million revolving credit facility. The Trust paid financing fees
totaling $43,425 to Tarragon in connection with these transactions.
In August 1998, the Trust obtained a $7.1 million mortgage secured by Woodcreek
Apartments in Jacksonville, Florida. The Trust received net proceeds of $2.7
million after the payoff of the existing $4 million mortgage, funding required
escrows, and closing costs. The Trust paid Tarragon a $70,800 fee in connection
with this financing.
In July and August 1998, Ansonia purchased six additional apartment properties
in Connecticut in four separate transactions for an aggregate purchase price of
$47.9 million, $40.6 million of which was financed with mortgages. The remainder
of the purchase price was paid with funds the Trust contributed to Ansonia.
[This space intentionally left blank.]
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes thereto included
elsewhere in this report.
Introduction
National Income Realty Trust (the "Trust") invests in income-producing real
estate through acquisitions, leases, and partnerships. The Trust was organized
on October 31, 1978, and commenced operations on March 27, 1979. At June 30,
1998, the Trust's real estate portfolio included 65 properties, seven of which
were held for sale, located throughout the United States, with concentrations in
the Southeast and Southwest. These properties consisted of 43 apartment
complexes, 13 shopping centers, three office buildings, five parcels of land,
and one single-family residence. All of the Trust's real estate, except for ten
properties, is encumbered by mortgages. The Trust's current policy is to make
mortgage loans only in connection with, and to facilitate, the sale of real
estate. Accordingly, as existing mortgages receivable have been paid off, the
Trust's portfolio of mortgage notes receivable has declined and is expected to
continue 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 geographical regions where the Trust
presently owns properties. The Trust also intends to invest increasing amounts
in new construction of apartment communities either directly or through
partnerships. In the first six months of 1998, the Trust completed construction
of three apartment communities, two of which are owned through partnerships. The
Trust currently has five apartments communities under construction, three of
which are owned through partnerships. To the extent it invests in construction
projects, the Trust is subject to business risks, such as cost overruns and
delays, associated with such higher risk activities. 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 $6.4 million at June 30, 1998, compared to
$4.3 million at December 31, 1997. The Trust's principal sources of cash have
been property operations and external sources, such as property sales and
refinancings. 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 cash distributions.
The Trust purchased five properties during the six months ended June 30, 1998,
for an aggregate purchase price of $10.6 million, a portion of which was
financed through first mortgages totaling $7.1 million. The Trust paid cash
totaling $3.8 million at closing of these purchases.
The Trust sold one shopping center during the six months ended June 30, 1998,
recognizing a gain of $1.3 million and receiving net cash proceeds of $972,000.
The Trust invested $6.3 million in capital improvements to its properties during
the first half of 1998, including $2.3 million on the construction of The Vistas
at Lake Worth, which was substantially completed in the first quarter of 1998.
The Trust anticipates expenditures for capital improvement on its properties
(excluding those
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
under construction) during the remainder of 1998 to total approximately $7
million.
During the six months ended June 30, 1998, the Trust acquired a 50% interest in
Orange National Partners, Ltd. ("Orange"), which is constructing an apartment
property in Orange Park, Florida. During the first half of 1998, the Trust made
net contributions and advances totaling $12.7 million to this and the previously
formed partnerships accounted for using the equity method. Of this total, $4.4
million was contributed to National Omni Associates, L.P., which purchased 5600
Collins Avenue, a 289-unit, high rise apartment building in Miami Beach,
Florida, in February 1998; $4.8 million was contributed or advanced to Tarragon
Savannah, Ltd., and to Orange, in which the Trust holds 50% interests, and to
Danforth National Apartments, Ltd., in which the Trust holds an 80%
non-controlling interest. Each of these partnerships is constructing a luxury
apartment community with a construction loan expected to fund remaining
construction costs. The balance of $3.5 million represented contributions to
Ansonia Apartments, L.P., which purchased Lakeview Apartments with 88 units
located in Waterbury, Connecticut in April 1998 and six additional properties in
July and August 1998.
During the six months ended June 30, 1998, the Trust received proceeds from the
sale of marketable equity securities of $417,000 and realized gains on these
sales totaling $117,000.
During the first half of 1998, the Trust obtained first mortgage financing
totaling $37.9 million and received net cash proceeds of $19.3 million after the
payoff of existing debt of $16.5 million, funding escrows, and paying associated
closing costs. The Trust made other principal payments totaling $900,000 during
the six months ended June 30, 1998. Principal payments of $5.2 million,
including balloon payments of $4.2 million, are due during the remainder of
1998. The Trust intends to either pay off the maturing mortgages or extend the
due 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.
The Company received advances from Tarragon Realty Advisors, Inc., ("Tarragon")
totaling $1.3 million during the first six months of 1998. Such advances do not
bear interest, are payable on demand, and were made on a short-term basis in
part to facilitate acquisitions by the Trust and partnerships in which it holds
interests.
The Trust received $3.8 million from the refinancing of 801 Pennsylvania Avenue
in June 1998.
During the six months ended June 30, 1998, the Trust repurchased 56,544 of its
shares of beneficial interest at a total cost of $1.1 million. During 1996, the
Trust's Board of Trustees authorized the Trust to repurchase up to an additional
313,092 shares of beneficial interest, of which 272,907 had been purchased as of
June 30, 1998.
Cash distributions to shareholders totaling $1.9 million, or $0.40 per share,
were paid during the six month period ended June 30, 1998. The Trust has paid
regular quarterly cash distributions since September 1993.
Results of Operations
The Trust reported net income of $1.4 million and $1.3 million, respectively,
for the three and six month periods ended June 30, 1998, compared to net income
of $1.9 million and $2.3 million, respectively, for the three and six month
periods ended June 30, 1997. The major components of the change in results of
operations are discussed in the following paragraphs.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Net rental income (rental revenue less property operating expenses) increased
from $5.4 million and $10.7 million for the three and six month periods ended
June 30, 1997, to $6.2 million and $12.7 million for the corresponding periods
in 1998.
Multifamily Properties
The Trust's multifamily portfolio, which represented 81% of the Trust's real
estate and included 8,433 operating apartment units at June 30, 1998,
reported increases in net rental income of $782,000, or 18%, and $1.9
million, or 21%, respectively, for the three and six month periods ended June
30, 1998, compared to the corresponding periods in 1997. Of these increases,
$525,000 and $1 million are related to properties acquired in 1997 and 1998.
Decreases of $204,000 and $490,000 resulted from the sale of three
multifamily properties during 1997. The remainder of the increase comes from
higher rents and decreased vacancy losses for multifamily properties held in
both years. Overall, both physical and economic occupancy levels have
increased for multifamily properties held in both years.
Commercial Properties
The Trust's commercial portfolio included 1.6 million square feet at June 30,
1998. The sale of Mountain View Shopping Center in April 1998 resulted in
decreases in net rental income of $20,000 and $26,000, respectively, for the
three and six month periods ended June 30, 1998, compared to the
corresponding periods in 1997. The addition of Mariner Plaza Shopping Center
to the Trust's commercial portfolio in August 1997 contributed additional net
rental income of $52,000 and $108,000 for these periods. Overall, commercial
properties held in both years reported an increase in net rental income of
$141,000, for the six months ended June 30, 1998, compared to the
corresponding period in 1997, principally due to increased rental rates,
while net rental income for the three months ended June 30, 1998, was
relatively stable compared to the corresponding period in 1997. Overall,
physical occupancy levels for commercial properties held in both years were
slightly lower than reported in 1997.
Interest revenue increased for the three and six month periods ended June 30,
1998, compared to the corresponding periods in 1997, primarily due to interest
on advances to certain partnerships in which the Trust holds investments
accounted for using the equity method.
Interest expense increased from $3 million and $5.7 million, respectively, for
the three and six month periods ended June 30, 1997, to $3.9 million and $7.6
million, respectively, for the corresponding periods in 1998. Increases of
$594,000 and $1.1 million resulted from the 1997 and 1998 acquisitions. In
addition, long term and interim mortgage financing, including advances under
line of credit facilities, obtained in 1997 and 1998 on properties held in both
years increased mortgage loans by $64.5 million and the related interest expense
by $569,000 and $1.2 million for these periods. Decreases of $176,000 and
$354,000 resulted from the sale of four properties in 1997 and 1998.
Depreciation expense increased from $1.6 million and $3.1 million for the three
and six months ended June 30, 1997, to $1.7 million and $3.8 million for the
corresponding periods in 1998. Additional depreciation associated with the 1997
and 1998 acquisitions and capital improvements to existing properties were the
major contributors to this increase.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
During the first half of 1998, the Trust recognized gains totaling $117,000
relating to sales of investments in marketable equity securities and a gain on
the sale of real estate of $1.3 million.
Also, during the first half of 1998, the Trust recognized $330,000 in
extraordinary losses resulting from prepayment penalties and the write-off of
deferred financing expenses associated with certain 1998 refinancings.
During the first half of 1997, the Trust recognized gains totaling $1.6 million
on the sale of Plaza Hills Apartments and Huntington Green Apartments.
Funds from Operations
The following information should be read in conjunction with all of the
financial statements and notes thereto included elsewhere in this report and
with the discussion set forth above in "Liquidity and Capital Resources" and
"Results of Operations."
Funds from operations ("FFO") for the three and six month periods ended June 30,
1998 and 1997, are as follows (unaudited) (dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income ............................ $ 1,424 $ 1,941 $ 1,293 $ 2,282
Extraordinary loss .................... 68 -- 330 --
Gain on sale of real estate ........... (1,275) (1,576) (1,275) (1,576)
Depreciation and amortization of
real estate assets .................. 1,712 1,634 3,871 3,178
Depreciation and amortization of
real estate assets of partnerships .. 275 100 433 191
Distributions from partnerships in
excess of the Trust's investments
in the partnerships ................. (267) (35) (267) (39)
------- ------- ------- -------
Funds from operations ................. $ 1,937 $ 2,064 $ 4,385 $ 4,036
======= ======= ======= =======
</TABLE>
The Trust generally considers FFO to be an appropriate measure of the
performance of an equity real estate investment trust ("REIT"). FFO, as defined
by the National Association of Real Estate Investment Trusts ("NAREIT"), equals
net income (loss), computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization of real estate assets, and
after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are calculated to
reflect FFO on the same basis. The amortization of deferred financing costs is
not added back to net income (loss) in the Trust's calculation. This treatment
is consistent with the Trust's historical calculation of FFO. The Trust believes
that FFO is useful to investors as a measure of the performance of an equity
REIT because, along with cash flows from operating activities, investing
activities, and financing activities, it provides investors an understanding of
the ability of the Trust to incur and service debt and to make capital
expenditures. The Trust believes that in order to
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Funds from Operations (Continued)
facilitate a clear understanding of its operating results, FFO should be
examined in conjunction with net income (loss) as presented in the financial
statements included elsewhere in this report. FFO does not represent cash
generated from operating activities in accordance with GAAP and therefore should
not be considered an alternative to net income as an indication of the Trust's
operating performance or to cash flow as a measure of liquidity and is not
necessarily indicative of cash available to fund cash needs and cash
distributions. The Trust's calculation of FFO may differ from the methodology
for calculating FFO utilized by other REITs and, accordingly, may not be
comparable to such other REITs.
Included in FFO for the six months ended June 30, 1998, are gains totaling
$117,000 resulting from the Trust's sale of investments in marketable equity
securities.
Allowances for Estimated Losses and Provisions for Losses
The Trust's management periodically evaluates the carrying values of the Trust's
properties held for sale. Generally accepted accounting principles require that
the carrying value of a property held for sale cannot exceed the lower of its
cost or its estimated fair value less estimated costs to sell. In those
instances in which estimates of fair value less estimated selling costs 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 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 evaluations could cause the Trust's management to
adjust current estimates of fair value.
The Trust's management also evaluates the Trust's properties held for investment
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. This evaluation generally
consists of a review of the property's cash flow and current and projected
market conditions, as well as any changes in general and local economic
conditions. If an impairment loss exists based on the results of this review, a
loss is recognized by a charge against current earnings and a corresponding
reduction in the respective asset's carrying value. The amount of this
impairment loss is equal to the amount by which the carrying value of the
property exceeds its estimated fair value.
Environmental Matters
Under various federal, state, and local environmental laws, ordinances, and
regulations, the Trust may be potentially liable for removal or remediation
costs, 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, financial position, or results of operations.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Tax Matters
As more fully discussed in the Trust's Annual Report on Form 10-K for the year
ended December 31, 1997, the Trust has elected and, in the opinion of the
Trust's management, qualified to be taxed as a REIT, as defined under Sections
856 through 860 of the Internal Revenue Code of 1986 (the "Code"). The Code
requires a REIT to distribute at least 95% of its REIT taxable income, plus 95%
of its net income from foreclosure property, as defined in Section 857 of the
Code, on an annual basis to shareholders.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Trust's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Trust has initiated an assessment to determine the extent to which the Trust
is vulnerable to Year 2000 Issues. Management does not anticipate a material
impact on the Trust's business, financial position, or results of operations
from the Year 2000 Issue.
Possible Consolidation with Tarragon Realty Investors, Inc.
On February 19, 1998, the Trust and Tarragon Realty Investors, Inc., ("TRI")
jointly announced the agreement of their respective boards to form a single
consolidated entity with TRI, for convenience, as the survivor. The surviving
consolidated entity is intended to operate as a self-administered REIT. The
consolidation transaction will be submitted to shareholders of each of the Trust
and TRI for approval at special meetings to be held during 1998. Under the
proposed agreement, each shareholder of the Trust will receive 1.97 shares of
TRI common stock for each share of beneficial interest of the Trust held. TRI,
also a REIT, has a similar opportunistic approach to real estate investment and
had total consolidated assets of approximately $37 million as of December 31,
1997. Upon the approval and consummation of the consolidation transaction by the
respective shareholders of each entity, TRI will acquire Tarragon, the Trust's
advisor since April 1, 1994, and TRI's advisor since March 1, 1994, for 100,000
shares of common stock of TRI and options to acquire 350,000 shares of common
stock of TRI at prices ranging between $13 and $16 per share. The resulting
consolidated enterprise with TRI as the survivor will emerge from these
transactions as an integrated, self-administered, self-managed REIT controlling
approximately 14,000 apartment units and 2.1 million square feet of retail and
office space, primarily in California, Florida, and Texas. The consolidation
transaction will be accounted for as a reverse acquisition of TRI by the Trust.
William S. Friedman, President, Chief Executive Officer, and Trustee of the
Trust, also serves as Director and Chief Executive Officer of Tarragon and as
Director, President, and Chief Executive Officer of TRI. Tarragon is owned by
Mr. Friedman and his wife, Lucy N. Friedman. The Friedman family also owns
approximately 30% of the outstanding shares of common stock of TRI and
approximately 33% of the outstanding shares of beneficial interest of the Trust.
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Risks Associated with Forward-Looking Statements Included in this Form 10-Q
This form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of management
for future operations, including plans and objectives relating to capital
expenditures on Trust properties. The forward-looking statements included herein
are based on current expectations that involve numerous risks and uncertainties.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive, and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Trust. Although the
Trust believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could be inaccurate, and, therefore,
there can be no assurance that the forward-looking statements included in this
Form 10-Q will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Trust or any
other person that the objectives and plans of the Trust will be achieved.
[This space intentionally left blank.]
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On February 19, 1998, National Income Realty Trust (the "Trust") and Tarragon
Realty Investors, Inc., ("TRI") jointly announced the agreement of their
respective boards to form a single consolidated entity with TRI as the
survivor. On May 21, 1998, the Board of Trustees approved the forms of
documents relating to such transaction, and, on June 5, 1998, the Trust and
TRI each executed an Agreement and Plan of Merger (the "Merger Agreement").
The Merger Agreement provides, subject to shareholder approval of each
entity, for the incorporation of the Trust as a California corporation and
the merger of that California corporation with and into TRI, with TRI as the
surviving entity. Under the Merger Agreement, at the consummation of the
transaction, each shareholder of the Trust will receive 1.97 shares of TRI's
common stock for each share of beneficial interest of the Trust held.
Also on June 5, 1998, as contemplated by the Merger Agreement, TRI and others
executed a Stock Purchase Agreement (the "Advisor Acquisition Agreement")
pursuant to which, subject to consummation of the Merger Agreement, TRI will
acquire from William S. and Lucy N. Friedman all of the issued and
outstanding stock of Tarragon Realty Advisors, Inc. ("Tarragon"), the
contractual advisor to TRI since March 1, 1994, and to the Trust since April
1, 1994, for 100,000 shares of TRI common stock and options to acquire
350,000 shares of TRI common stock at prices ranging between $13 and $16 per
share. Assuming the approval and implementation of the Merger Agreement, at
the time of consummation of the Advisor Acquisition Agreement, Tarragon will
become a wholly-owned subsidiary of TRI, and TRI will assume indebtedness of
up to $1 million of Tarragon. At that time, the contractual advisory
agreement with the Trust will be terminated. If for any reason the Merger
Agreement is not consummated, the Advisor Acquisition Agreement will also not
be consummated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
2.1 Agreement and Plan of Merger dated June 5, 1998,
between Tarragon Realty Investors, Inc., and
National Income Realty Trust (incorporated by
reference to Exhibit 3.6 to Registration
Statement No. 333-60527 on Form S-4).
27.0 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
22
<PAGE> 23
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, 1998 By: /s/ William S. Friedman
-------------------------------- ------------------------------
William S. Friedman
President, Chief Executive
Officer, and Trustee
Date: August 14, 1998 By: /s/ Robert C. Irvine
-------------------------------- ------------------------------
Robert C. Irvine
Executive Vice President and
Chief Financial Officer
Date: August 14, 1998 By: /s/ Erin D. Davis
-------------------------------- ------------------------------
Erin D. Davis
Vice President and
Chief Accounting Officer
23
<PAGE> 24
NATIONAL INCOME REALTY TRUST
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated June 5, 1998, between Tarragon
Realty Investors, Inc., and National Income Realty Trust
27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,366
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (1,194)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 296,959
<DEPRECIATION> (49,558)
<TOTAL-ASSETS> 293,352
<CURRENT-LIABILITIES> 0
<BONDS> 210,826
0
0
<COMMON> 0
<OTHER-SE> 69,532
<TOTAL-LIABILITY-AND-EQUITY> 293,352
<SALES> 0
<TOTAL-REVENUES> 28,596
<CGS> 0
<TOTAL-COSTS> 15,109
<OTHER-EXPENSES> 4,507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,626
<INCOME-PRETAX> 1,623
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,623
<DISCONTINUED> 0
<EXTRAORDINARY> (330)
<CHANGES> 0
<NET-INCOME> 1,293
<EPS-PRIMARY> .34
<EPS-DILUTED> .33
</TABLE>
