<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 1-13220
PARAGON GROUP, INC.
-------------------
(Exact name of Registrant as specified in its charter)
MARYLAND 75-2540957
--------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7557 RAMBLER ROAD, SUITE 1200, DALLAS, TEXAS 75231
--------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(214) 891-2000
--------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 and Exchange Act
of 1934 during the preceding 12 month (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..........
APPLICABLE ONLY TO CORPORATE ISSUERS;
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
14,791,165 Shares of common stock, $.01 par value, as of November 14, 1996.
----------
1
<PAGE>
PARAGON GROUP, INC.
FORM 10-Q
INDEX
Page
----
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets of Paragon Group, Inc.
as of September 30, 1996 and December 31, 1995 . . . . . . 3
Condensed Consolidated Statements of Operations of Paragon
Group, Inc. for the three months and nine months ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows of Paragon
Group, Inc. for the nine months ended September 30, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 22
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . 22
Item 3. Defaults on Senior Securities. . . . . . . . . . . . . 22
Item 4. Submission of Matters to a Vote of Security Holders. . 22
Item 5. Other Information. . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 22
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2
<PAGE>
PARAGON GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
ASSETS
Real estate assets:
Land $ 78,075 $ 86,602
Buildings and improvements 477,541 516,925
--------- ---------
555,616 603,527
Less: Accumulated depreciation (123,486) (126,437)
--------- ---------
Operating real estate assets 432,130 477,090
Construction in process 17,720 27,944
Real estate held for sale 36,932 --
--------- ---------
Net real estate assets 486,782 505,034
Cash and cash equivalents 3,787 6,583
Restricted cash 4,762 3,909
Accounts receivable, including amounts
due from affiliates of $758 and $1,424,
respectively in 1996 and 1995 2,287 4,716
Advances to affiliates 1,355 186
Investment in ventures 15,151 7,401
Note receivable from venture 6,754 --
Deferred charges, net 6,033 9,254
Other assets 2,614 2,528
--------- ---------
Total assets $ 529,525 $ 539,611
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 287,648 $ 293,780
Accounts payable and accrued liabilities,
including amounts due to affiliates
of $18 in 1996 21,450 17,155
Deferred gain on sale of commercial
property services business 1,100 --
--------- ---------
Total liabilities 310,198 310,935
--------- ---------
Minority interests 47,761 50,210
--------- ---------
Stockholders' equity:
Common stock $.01 par value, authorized
100,000,000 shares, issued 14,791,165 shares 148 148
Additional paid-in capital 204,617 204,537
Unamortized employee restricted stock compensation (1,332) (4,085)
Accumulated deficit (30,072) (21,236)
--------- ---------
173,361 179,364
Less: Cost of 84,486 treasury shares (42,266 in 1995) (1,795) (898)
--------- ---------
Total stockholders' equity 171,566 178,466
--------- ---------
Total liabilities and stockholders' equity $ 529,525 $ 539,611
--------- ---------
--------- ---------
See accompanying notes.
3
<PAGE>
PARAGON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1995, 1996 1995,
AS RESTATED AS RESTATED
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUE
Rental $ 22,953 $ 20,418 $ 67,928 $ 59,099
Property management services - third party 149 1,490 2,277 5,290
Property management services - affiliates 423 1,201 2,197 3,270
Leasing and other property services - third party - 2,222 2,634 6,328
Leasing and other property services - affiliates 392 503 1,168 1,253
Interest income 230 123 485 365
Other - properties 870 712 2,462 2,140
Other - property services 185 228 734 721
---------- ---------- ---------- ----------
Total revenue 25,202 26,897 79,885 78,466
---------- ---------- ---------- ----------
EXPENSES
Property operating and maintenance expense 7,649 6,496 21,882 18,444
Real estate taxes and insurance 2,536 2,196 7,842 6,791
Depreciation and amortization 4,747 4,355 14,606 12,659
Property management, net of amounts reimbursed by
affiliates of $18 and $20 for the three months ended
and $69 and $83 for the nine months ended
September 30, 1996 and 1995, respectively 2,152 4,295 10,725 13,448
Interest 5,378 4,196 16,379 12,159
General and administrative - property services, net of
amounts reimbursed by affiliates of $27 and $86 for the
three months ended and $153 and $201 for the nine months
ended September 30, 1996 and 1995, respectively 1,035 1,182 3,908 4,058
General and administrative - corporate 512 454 1,500 1,528
---------- ---------- ---------- ----------
Total expenses 24,009 23,174 76,842 69,087
---------- ---------- ---------- ----------
Income before equity in income of ventures, impairment loss,
gain on sale and minority interests 1,193 3,723 3,043 9,379
Equity in income of ventures 162 174 726 468
Impairment loss on real estate held for sale - - (1,143) -
Gain on sale of commercial property services business - - 11,930 -
---------- ---------- ---------- ----------
Income before minority interests 1,355 3,897 14,556 9,847
Minority interests (218) (806) (2,838) (2,025)
---------- ---------- ---------- ----------
Net income $ 1,137 $ 3,091 $ 11,718 $ 7,822
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share of common stock $ 0.08 $ 0.21 $ 0.79 $ 0.53
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares outstanding 14,791,165 14,697,047 14,791,165 14,697,047
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
4
<PAGE>
PARAGON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995,
AS RESTATED
-------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,718 $ 7,822
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,606 12,659
Amortization of deferred financing costs 1,203 1,135
Amortization of employee restricted stock compensation 1,089 1,053
Impairment loss on real estate held for sale 1,143 -
Gain on sale of commercial property services business (11,930) -
Post-Measurement Date cash flow of commercial
property services business 167 -
Minority interests in income 2,838 2,025
Changes in assets and liabilities:
Increase in restricted cash (904) (494)
Decrease in accounts receivable 2,411 184
Increase in prepaid leasing costs (56) (57)
Increase in other assets (127) (1,028)
Increase in accounts payable and accrued liabilities 2,906 5,630
-------- --------
Net cash provided by operating activities 25,064 28,929
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate assets, net of payables (37,260) (38,896)
Additions to investment in ventures (75) (3,582)
Payments of organization costs - (23)
Distributions received from ventures 6,942 529
Increase in note receivable from venture (6,754) -
Proceeds from sale of commercial property services
business, net of selling costs of $781 17,456 -
-------- --------
Net cash used in investing activities (19,691) (41,972)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (20,554) (20,455)
Distributions to minority interests (5,307) (5,304)
Payments of deferred financing costs (387) (211)
Proceeds from notes payable 58,100 40,000
Payments on notes payable (38,449) (3,603)
Decrease (increase) in advances to affiliates (1,572) 1,036
-------- --------
Net cash provided by (used in) financing activities (8,169) 11,463
-------- --------
Net decrease in cash and cash equivalents (2,796) (1,580)
Cash and cash equivalents, beginning of period 6,583 5,913
-------- --------
Cash and cash equivalents, end of period $ 3,787 $ 4,333
-------- --------
-------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
PARAGON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Paragon Group, Inc. (together with its subsidiaries, the "Company") qualifies
as a real estate investment trust ("REIT") for Federal Income tax purposes and
was incorporated in the state of Maryland on March 23, 1994 to continue the
operations of certain entities involved in management, leasing, construction,
development and ownership of real estate assets (collectively the
"Predecessors"). On July 27, 1994, the Company completed an initial public
offering (the "Initial Offering") of 13,000,000 shares of common stock
(including 1,000,000 shares issued upon exercise of the underwriters' over-
allotment option), a sale of 695,000 shares of common stock to the sponsors (the
"Private Placement") and a business combination with the Predecessors.
Additionally, in August 1994, the Company issued 324,400 shares of common stock
for use in the Employee Restricted Stock Plan.
Upon completion of the Initial Offering, the Company, through its wholly-
owned subsidiary, Paragon Group LP Holdings, Inc., acquired a 79.1% limited
partner interest in Paragon Group L.P. (the "Operating Partnership"). The
Operating Partnership succeeded to substantially all of the interests of the
Predecessors and certain others in certain properties. The Company, through its
wholly-owned subsidiary, Paragon Group GP Holdings, Inc., is the sole general
partner and the holder of a 1% interest in the Operating Partnership. In
consideration for the sale of certain properties and partnership interests,
certain owners of the Predecessors, including affiliates of the Company, elected
to receive limited partnership units ("Units") in the Operating Partnership.
The Units received by such owners at formation represented an approximate 19.9%
equity interest in the Operating Partnership. At September 30, 1996, the
Company's ownership interest in the Operating Partnership was 80.1%.
Subsequent to the business combination and prior to June 30, 1996, the
Company's management, leasing, construction and development businesses were
conducted through Paragon Group Property Services, Inc. ("PGPSI"). The Company,
through the Operating Partnership, owned 100% of the non-voting stock and 1% of
the voting stock of PGPSI (collectively representing 99% of the total equity).
As discussed in Note 4, effective June 30, 1996, the Company sold its interest
in PGPSI (after spin-off of the residential property services business) and
formed Paragon Residential Services, Inc. ("PRSI") to continue the Company's
residential property services business previously conducted through PGPSI. The
Company has a 95% economic interest in PRSI through ownership of 100% of the
nonvoting common stock and 1% of the voting stock. The remaining 99% of the
voting stock, which represents a 5% economic interest, is owned by a partnership
controlled by certain current and former executive officers of the Company.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by the Company's management in accordance with generally accepted
accounting principles for interim financial information and in conjunction with
the rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and footnote disclosure
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normally recurring adjustments) considered necessary for a fair presentation
have been included. The results of operations for the three months and nine
months ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the full year. These condensed consolidated financial
statements should be read in conjunction with the Company's December 31, 1995
audited financial statements and notes thereto included in the Paragon Group,
Inc. Annual Report on Form 10-K, as amended, for the year ended December 31,
1995.
6
<PAGE>
PARAGON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying condensed consolidated financial statements include the
accounts of the Company, Paragon Group GP Holdings, Inc., Paragon Group LP
Holdings, Inc., Paragon Group L.P., PGPSI (through the date of sale), Paragon
Residential Services, Inc., 9 wholly-owned partnerships and limited liability
companies, and partnerships owning 13 properties where the Company, through the
Operating Partnership, has a controlling interest. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company, subsequent to the business combination on July 27, 1994 and
through the third quarter of 1995, accounted for its investment in PGPSI under
the cost method consistent with prior regulatory direction. However, in
September 1995, the Emerging Issues Task Force of the Financial Accounting
Standards Board ("EITF") reached a consensus in EITF 95-6 "ACCOUNTING BY A REAL
ESTATE INVESTMENT TRUST FOR AN INVESTMENT IN A SERVICE CORPORATION" that the
cost method of accounting for such investments was not appropriate and, based
upon the specific facts and circumstances, either the equity method or
consolidation accounting should be used. As a result, in the fourth quarter of
1995 the Company changed its method of accounting for PGPSI from the cost method
to consolidation of the financial position and results of operations of PGPSI in
the Company's consolidated financial statements. Accordingly, the accompanying
condensed consolidated financial statements for the three months and nine months
ended September 30, 1995 have been restated to consolidate PGPSI. The effect of
the restatement was to decrease stockholders' equity at September 30, 1995 by
$19,385, to decrease net income for the three months and nine months ended
September 30, 1995 by $163 and $1,281, respectively, and to decrease net income
per share for the three months and nine months ended September 30, 1995 by $.01
and $.09, respectively.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In October 1995, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK BASED
COMPENSATION" ("FAS 123") which establishes financial accounting and disclosure
standards for stock based employee compensation plans and is effective for
fiscal years beginning after December 15, 1995. FAS 123 provides an alternative
of adopting the new accounting standards of the statement or remaining under the
existing requirements of Accounting Principles Board Opinion No. 25 "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES". The Company has elected to continue to account
for its stock compensation arrangements under the provisions of APB 25.
3. REAL ESTATE INVESTMENTS
REAL ESTATE
As of September 30, 1996, the Company, through the Operating Partnership,
controls either through direct ownership or in some instances through an
investment in a partnership or a limited liability company, 57 multifamily
properties and four commercial properties in Florida, Kentucky, Missouri, North
Carolina, South Carolina and Texas. The Company, through the Operating
Partnership, also owns an interest in a venture formed April 1, 1996 which owns
3 multifamily properties that were previously wholly-owned by the Company. In
addition, the Company, through the Operating Partnership, owns a minority
interest in two ventures which own three office properties containing 724,470
square feet; one in Missouri and two in suburban Washington, D.C.
At September 30, 1996, the 57 multifamily properties include 55 operating
properties containing 14,954 apartment units and two properties under
development for which 520 units are planned. Three of the operating properties
containing 788 units are in the initial lease-up phase. The four commercial
properties include two retail properties containing 172,884 square feet, one
office property containing 102,486 square feet and one office/warehouse property
under development which, when completed, will contain 108,600 square feet. The
three multifamily properties owned by the venture formed April 1, 1996 include
two operating properties containing 928 apartment units and one property under
development for which 336 units are planned.
7
<PAGE>
PARAGON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DEVELOPMENT
On January 29, 1996, the Company, through PGPSI, acquired a 5.15 acre tract
of land in suburban Dallas, Texas. Construction activities commenced
immediately on the Post and Paddock office/warehouse development which, when
completed, will contain 108,600 square feet. The Company expects to sell this
development once completed.
The Company completed construction of the following multifamily developments
during the nine months ended September 30, 1996:
<TABLE>
Number of
Property Location Apartment Units Date Completed
-------- -------- --------------- --------------
<S> <C> <C> <C>
Heron Pointe Tampa, Florida 276 February 1996
Renaissance Pointe Orlando, Florida 272 July 1996
Stone Gate Dallas, Texas 276 August 1996
</TABLE>
ACQUISITIONS
On July 10, 1996, the Company entered into a contract with a single seller to
purchase two North Carolina multifamily residential communities for a total
purchase price of $20,900; the 240 unit Habersham Pointe apartments in
Charlotte, North Carolina and the 216 unit River Oaks apartments in Greensboro,
North Carolina. The closing of the purchase is expected to occur in November
1996.
DISPOSITIONS
As a result of the sale of its commercial property services business
discussed in Note 4, the Company intends to dispose of its three wholly-owned
operating commercial properties. As of September 30, 1996, the Company has
entered into contracts to sell the three operating properties which are
summarized in the following table.
<TABLE>
Expected
Property Location Contract Date Sales Price Closing Date
-------- -------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Southwood Mall Bradenton, Florida July 30, 1996 $ 3,170 October 1, 1996
Westgate Centre St. Louis, Missouri September 3, 1996 $ 7,130 November 1, 1996
The Paragon St. Louis, Missouri September 18, 1996 $10,000 December 15, 1996
</TABLE>
The three operating properties are classified as held for sale at September
30, 1996. In accordance with Statement of Financial Accounting Standards No.
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS", properties held for
sale are to be carried at the lower of the carrying amount or estimated fair
value less selling costs. Accordingly, at June 30, 1996, the Company recognized
an impairment adjustment of $1,143, all of which related to Southwood Mall. The
Company also expects to sell the Post and Paddock office/warehouse property,
currently under development, when complete at a price in excess of its carrying
amount.
In addition, in an effort to maximize the long term growth potential of the
portfolio, management intends to regularly evaluate the possible disposition
of targeted multifamily residential assets where a redeployment of capital can
increase geographic efficiencies or improve operating results. At September 30,
1996, four multifamily properties (Brookfield in Dallas, Texas; Westchase in
Charleston, South Carolina; and Turtle Creek I & II in Asheville, North
Carolina) are classified as held for sale. The Company expects to sell these
properties at prices in excess of carrying amounts.
8
<PAGE>
PARAGON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JOINT VENTURE
On April 1, 1996, the Company entered into a joint venture ("Paradim") with
Careit Investments Limited Partnership ("Careit"), an affiliate of Caisse de
dep"t et placement du Quebec, to acquire, develop and operate selected
multifamily residential properties in markets in which the Company operates.
The Company and Careit each have committed up to $22,500 for investment in
Paradim, which will be operated so as to permit its qualification as a REIT for
Federal income tax purposes. The Company and Careit each effectively own an
approximate 44% interest and a number of private investors own the remaining
interest in the joint venture. In connection with the formation of Paradim, the
Company effectively contributed its interest in three properties (Overlook,
formerly known as The Phoenix, a 220-unit multifamily residential complex in
Charlotte, North Carolina; Highpoint, a 708-unit multifamily residential complex
in Dallas, Texas; and Brassfield Park, a 336-unit multifamily residential
complex under development in Greensboro, North Carolina) and Careit contributed
$7,926 in cash. At formation, the Company also received a distribution of
approximately $6,618, which was used to repay existing indebtedness under the
line of credit. The Company recorded the initial contribution of these
properties at their net carrying value on April 1, 1996, which was approximately
$14,726 (net book value of $40,376 subject to existing indebtedness of $25,650),
and is accounting for its investment in Paradim using the equity method of
accounting. As of September 30, 1996, the Company's net investment in Paradim
was approximately $8,011. Additional investments by Paragon and Careit will be
made from time to time when and if additional property acquisition or
development opportunities are approved.
4. PROPERTY SERVICES
Subsequent to the business combination on July 27, 1994, through June 30,
1996, the Company's management, leasing, construction and development businesses
were conducted through PGPSI. PGPSI provided residential and commercial
property services to the Company, affiliates of the Company and unrelated third
parties.
In May 1996, the Company executed an agreement to sell its commercial property
services business to an affiliate of Insignia Financial Group, Inc.
("Insignia"). In order to accomplish the sale, PGPSI's residential property
services business was transferred to PRSI. Immediately following the transfer,
as of June 30, 1996, Insignia acquired all of the outstanding stock of PGPSI and
a $12,432 note receivable from PGPSI held by the Company. The acquisition price
included initial cash consideration of $18,200 and two potential earn-out
payments totaling up to $4,000 which are contingent upon PGPSI revenue meeting
certain specified targets over the next three years. The earn-out payments may
be reduced by as much as $2,900 in the event certain management contracts are
terminated within a two year period after closing. In addition, the initial
acquisition price may be reduced by up to $1,100 in the event the employment of
certain employees of PGPSI is terminated within one year after closing or
certain existing management contracts are terminated within a five-year period
after closing.
In connection with the sale, the Company received warrants to purchase up to
50,000 shares of Insignia Financial Group, Inc. stock at a price of $28.96 per
share and Insignia received warrants to purchase 50,000 shares of the Company's
stock at $18.25 per share and may receive warrants to purchase an additional
238,000 shares at $18.25 per share, depending on the termination of certain
management contracts during the two-year period after closing.
As a result of the sale, the Company recognized a gain of $11,930 which does
not consider potential earn-out payments, the value of warrants issued or
received, or $1,100 of the initial acquisition price which is contingent on
future events. The contingent portion of the initial acquisition price and the
earn-out payments, if any, will be recognized when earned. The gain on sale was
determined in accordance with Accounting Principles Board Opinion No. 30,
"REPORTING THE RESULTS OF OPERATIONS", whereby the commercial property services
net loss of $843 from the date (May 7, 1996) management committed to the
disposal of the commercial property services
9
<PAGE>
PARAGON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
business (the "Measurement Date") through the date of sale (June 30, 1996)
was treated as a reduction of the gain on sale.
The closing of the sale occurred on July 2, 1996, at which time the Company
received net proceeds from the sale of $18,072 (net of prorations of $165).
Proceeds from the sale were used to reduce borrowings outstanding under the line
of credit.
PRSI will continue the Company's residential property services business and
will provide all residential property service functions previously provided by
PGPSI, including property management, leasing, development, acquisition and
disposition for its owned residential communities as well as for affiliated and
third party residential owners. As of September 30, 1996, the Company, through
PRSI, managed 78 multifamily residential communities located across the United
States, totaling approximately 21,774 apartment units (of which 57 communities
and 15,882 apartment units were for the Company, including two communities and
928 apartment units for Paradim).
5. NOTES PAYABLE
Mortgages payable consist of 28 loans at September 30, 1996, each of which is
collateralized by properties included in real estate assets. At September 30,
1996, 22 of the loans ($219,134 principal amount) carry a fixed interest rate
and provide for the monthly payment of interest only, and six loans ($21,814
principal amount) provide for monthly payments of principal and interest at a
fixed rate. The fixed rate mortgages bear interest at rates ranging from 5.75%
to 8.52% and mature at various dates through September 2028. During the three
month and nine month period ended September 30, 1996, $4,207 and $12,549,
respectively, of principal was paid on existing mortgages.
On July 27, 1996, the Company executed a renewal and modification of its
existing line of credit facility. Under the terms of the new agreement, the
Company may borrow up to $85,000 including up to $50,000 related to development
activities. The line of credit matures in July 1998, but may be extended
through July 1999 at the Company's option. Borrowings under the line of credit
are collateralized by specified operating properties and properties under
development. The interest rate on the amounts outstanding under the line are
based on, at the Company's election, either (i) the greater of the prime rate or
the Federal Funds rate plus .50% or, (ii) the London Interbank Offer Rate
("LIBOR") plus 2.0% - 2.25%, depending on certain financial ratios concerning
leverage and debt service coverage.
At September 30, 1996, $46,700 was outstanding under the line of credit which
consists of three contracts, each of which is priced at interest rates ranging
from 7.50% to 7.56% (based upon LIBOR plus 2.0%) and with repricing maturities
ranging from October 15, 1996 through October 28, 1996. Borrowings under the
line of credit are collateralized by specified properties. During the three
month and nine month period ended September 30, 1996, $20,400 and $58,100,
respectively, of new borrowings were drawn under the line of credit and $18,000
and $25,900, respectively, of principal was repaid.
6. RELATED PARTY TRANSACTIONS
On January 3, 1996, the Company repaid $300 of debt, payable to affiliates,
assumed in connection with the purchase of the Overlook Apartments. As partial
settlement of the debt, the Company, through the Operating Partnership, issued
4,694 Units to an affiliate.
The Company, through PRSI (and previously PGPSI), uses a centralized
disbursement and receipt system whereby, for certain properties owned by the
Company and other affiliated properties, all project deposits are transferred to
a central operating account and all expenses and other disbursements are paid
therefrom. In other cases, certain properties maintain a separate cash account
for recording project receipts and disbursements;
10
<PAGE>
PARAGON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
however, certain common operating expenses are paid through the centralized
account and are subsequently reimbursed by the appropriate properties.
PRSI (and previously PGPSI) provides services to affiliated partnerships on a
contractual basis. The related party fees and expenses for such services are
reflected in the accompanying condensed consolidated financial statements.
At September 30, 1996, the Company has a note receivable from a subsidiary of
Paradim in the amount of $6,754. Proceeds of the note are being used to fund
construction of Brassfield Park, a planned 336-unit multifamily residential
complex in Greensboro, North Carolina.
7. DIVIDENDS
On February 27, 1996, the Company paid a dividend, with respect to the fourth
quarter of 1995, of $.465 per share of common stock. Concurrent with the
dividend payments, the Operating Partnership distributed $.465 per Unit.
On May 17, 1996, the Company paid a dividend, with respect to the first
quarter of 1996, of $.465 per share of common stock. Concurrent with the
dividend payments, the Operating Partnership distributed $.465 per Unit.
On August 27, 1996, the Company paid a dividend, with respect to the second
quarter of 1996, of $.465 per share of common stock. Concurrent with the
dividend payments, the Operating Partnership distributed $.465 per Unit.
8. SUBSEQUENT EVENTS
On October 1, 1996, the Company sold Southwood Mall, a 113,949 square foot
shopping center located in Bradenton, Florida for $3,170 and on November 1,
1996, the Company sold Westgate Centre, a 58,935 square foot shopping center in
St. Louis, Missouri for $7,130. Proceeds from the sale of these properties will
be used for reinvestment into multifamily acquisitions or to repay borrowings
under the line of credit.
On November 1, 1996, the Company entered into a contract with the United
States Postal Service to sell the Post and Paddock office/warehouse property in
suburban Dallas, Texas for $3,700. Closing of the sale is expected to occur on
or about December 1, 1996.
On November 5, 1996, the Company declared a dividend, with respect to the
third quarter of 1996, of $.465 per share of common stock, payable November 26,
1996 to holders of record on November 15, 1996. Concurrent with the dividend
announcement, the Operating Partnership authorized a distribution of $.465 per
Unit, payable November 26, 1996 to holders of record on November 15, 1996.
On November 6, 1996, the Company obtained new debt in the amount of $7,400
collateralized by the 278 unit Schooner Bay apartments in Tampa, Florida. The
new debt requires monthly payments of principal and interest at 7.7% per annum
for seven years and matures in November 2003. Net proceeds of the new debt were
used to fund a portion of the purchase price of the two multifamily acquisitions
discussed below.
On November 8, 1996, the Company purchased two North Carolina multifamily
residential communities from a single seller for a total purchase price of
$20,900; the 240 unit Habersham Pointe apartments in Charlotte, North Carolina
and the 216 unit River Oaks apartments in Greensboro, North Carolina. In
connection with the purchase, the Company assumed a $6,357 mortgage note payable
collateralized by the River Oaks apartments.
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is based primarily on, and should be read in
conjunction with, the Condensed Consolidated Financial Statements of Paragon
Group, Inc. and notes thereto appearing elsewhere in this report.
OVERVIEW
Paragon Group, Inc. (together with its subsidiaries, the "Company") is a
fully integrated, diversified real estate investment trust headquartered in
Dallas, Texas focused on the operation, development and acquisition of
multifamily residential communities in its key markets in the Southwest,
Midwest, Carolina and Florida markets. The Company is a self-administered and
self-managed real estate investment trust ("REIT") that as of September 30,
1996, owned (either directly or through interests in other entities) interests
in 67 properties -- 60 multifamily residential communities and seven commercial
properties located in six states. The 60 multifamily residential communities
include 57 operating properties containing 15,882 apartment units and three
properties currently under development for which 856 units are planned. Three
of the operating properties containing 788 units are in the initial lease-up
phase. The commercial properties include four office buildings and two shopping
centers containing approximately 1,000,000 rentable square feet and one
office/warehouse property completed in November 1996 containing 108,600 square
feet.
In addition, the Company, through an affiliate, Paragon Residential Services,
Inc. ("PRSI"), provides residential property services, including property
management, leasing, construction, development, acquisition, and disposition
services, for its owned residential communities as well as for affiliated and
third party residential owners. As of September 30, 1996, PRSI managed 78
multifamily residential communities located across the United States containing
approximately 21,774 apartment units (of which 57 communities and 15,882 units
were owned by the Company, either directly or through interests in other
entities). The Company sold its economic interest in its commercial property
services business as of June 30, 1996. See "Company Activities" below. Prior
to June 30, 1996, the Company's residential and commercial property services
business was conducted through Paragon Group Property Services, Inc. ("PGPSI").
COMPANY ACTIVITIES
SALE OF COMMERCIAL PROPERTY SERVICES BUSINESS
In May 1996, the Company executed an agreement to sell its commercial
property services business to an affiliate of Insignia Financial Group, Inc.
("Insignia"). In order to accomplish the sale, PGPSI's residential property
services business was transferred to PRSI. Immediately following the transfer,
as of June 30, 1996, Insignia acquired all of the outstanding stock of PGPSI and
a $12.4 million note receivable from PGPSI held by the Company. The acquisition
price included initial cash consideration of $18.2 million and two potential
earn-out payments totaling up to $4.0 million which are contingent upon PGPSI
revenue meeting certain specified targets over the next three years. The earn-
out payments may be reduced by as much as $2.9 million in the event certain
management contracts are terminated within a two year period after closing. In
addition, the initial acquisition price may be reduced by up to $1.1 million in
the event that the employment of certain employees of PGPSI is terminated within
one year after closing or certain existing management contracts are terminated
within a five-year period after closing.
In connection with the sale, the Company received warrants to purchase up to
50,000 shares of Insignia Financial Group, Inc. stock at a price of $28.96 per
share and Insignia received warrants to purchase 50,000 shares of the Company's
stock at $18.25 per share and may receive warrants to purchase an additional
238,000 shares at $18.25 per share, depending on the termination of certain
management contracts during the two-year period after closing.
As a result of the sale, the Company recognized a gain of $11.9 million
which does not consider potential earn-out payments, the value of warrants
issued or received, or $1.1 million of the acquisition price which is contingent
on future events. The contingent portion of the initial acquisition price and
the earn-out payments, if any, will be recognized when earned. The gain on sale
was determined in accordance with Accounting Principles Board Opinion No. 30,
"REPORTING THE RESULTS OF OPERATIONS", whereby the commercial property services
net loss of $.8 million from the date (May 7, 1996) management committed to the
disposal of the commercial property services business (the "Measurement Date")
through the date of sale (June 30, 1996) was treated as a reduction of the gain
on sale.
12
<PAGE>
The closing of the sale occurred on July 2, 1996, at which time the Company
received net proceeds from the sale of $18.1 million (net of prorations of $.1
million). Proceeds from the sale were used to reduce borrowings outstanding
under the Company's line of credit.
The Company believes that the property services business has become
increasingly competitive, and is likely to remain so for the foreseeable future,
which could adversely impact future operating results. As a result of the sale
of the commercial property services business, the Company has substantially
reduced its dependence on such service oriented revenues. The Company intends
to continue providing its full range of residential property services to
existing clients and select potential clients where relational, operational or
geographical efficiencies exist and will actively pursue opportunities which
complement its current operations.
DEVELOPMENT
On January 29, 1996, the Company, through PGPSI, acquired a 5.15 acre tract
of land in suburban Dallas, Texas. Construction activities commenced
immediately on the Post and Paddock office/warehouse development. Construction
was completed on the 108,600 square feet development in November 1996.
The Company completed construction of the following multifamily
developments during the nine months ended September 30, 1996:
Number of
Property Location Apartment Units Date Completed
-------- -------- --------------- --------------
Heron Pointe Tampa, Florida 276 February 1996
Renaissance Pointe Orlando, Florida 272 July 1996
Stone Gate Dallas, Texas 276 August 1996
On July 1, 1996, the Heron Pointe apartments achieved stabilization at an
occupancy of 94.9%. On October 1, 1996, the 240 unit Stone Creek apartments in
suburban north Dallas, Texas, completed in November 1995, achieved stabilization
at an occupancy of 94.6%. A residential property is considered by the Company
to have achieved stabilized occupancy on the earlier to occur of (i) attainment
of 93% physical occupancy on the first day of any month or (ii) one year after
completion of construction.
The Company anticipates that development properties which were recently
completed will not generate their full net income potential for the year ended
December 1996. Additionally, those properties currently under development are
expected to experience operating losses during their stabilization period from
completion to lease-up. The Company believes, however, that the positive impact
of these development projects, once stabilized occupancy levels are achieved,
will significantly contribute to the net income from operations of the Company.
ACQUISITIONS
On November 8, 1996, the Company purchased two North Carolina multifamily
residential communities from a single seller for a total purchase price of
$20.9 million; the 240 unit Habersham Pointe apartments in Charlotte, North
Carolina and the 216 unit River Oaks apartments in Greensboro, North Carolina.
In connection with the purchase, the Company assumed a $6.36 million mortgage
note payable collateralized by the River Oaks apartments. Both properties are
well leased and in good physical condition. On a combined basis, the properties
are projected to generate an unleveraged yield for 1997 in excess of 9.5%.
DISPOSITIONS
As a result of the sale of its commercial property services business, the
Company intends to dispose of its three wholly-owned operating commercial
properties. Two of the three properties have been sold to date, and the other
property is under contract for sale. Proceeds from the sale of these properties
will be used for reinvestment into
13
<PAGE>
multifamily acquisitions or to repay borrowings under the line of credit. The
status of the sales of the three operating properties is summarized in the
following table.
<TABLE>
Property Location Contract Date Sales Price Status Closing Date
-------- -------- ------------- ----------- ------ ------------
<S> <C> <C> <C> <C> <C>
Southwood Mall Bradenton, Florida July 30, 1996 $ 3,170 Closed October 1, 1996
Westgate Centre St. Louis, Missouri September 3, 1996 $ 7,130 Closed November 1, 1996
The Paragon St. Louis, Missouri September 18, 1996 $10,000 Under Contract Est. Dec. 15, 1996
</TABLE>
The three operating properties are classified as held for sale at
September 30, 1996 in the accompanying condensed consolidated financial
statements. In accordance with Statement of Financial Accounting Standards No.
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS", properties held for
sale are to be carried at the lower of the carrying amount or estimated fair
value less selling costs. Accordingly, at June 30, 1996, the Company recognized
an impairment adjustment of $1.1 million, all of which related to Southwood
Mall.
On November 1, 1996, the Company entered into a contract with the United
States Postal Service to sell the Post and Paddock office/warehouse property in
suburban Dallas, Texas for $3.7 million. Closing of the sale is expected to
occur on or about December 1, 1996.
In addition, in an effort to maximize the long term growth potential of
the portfolio, management intends to regularly evaluate the possible
disposition of targeted multifamily residential assets where a redeployment
of capital can increase geographic efficiencies or improve operating results.
At September 30, 1996, four multifamily properties (Brookfield in Dallas,
Texas; Westchase in Charleston, South Carolina; and Turtle Creek I & II in
Asheville, North Carolina) are classified as held for sale. The Company
expects to sell these properties at prices in excess of carrying amounts.
JOINT VENTURE
On April 1, 1996, the Company entered into a joint venture ("Paradim") with
Careit Investments Limited Partnership ("Careit"), an affiliate of Caisse de
depot et placement du Quebec, to acquire, develop and operate selected
multifamily residential properties in markets in which the Company operates.
The Company and Careit each have committed up to $22.5 million for investment in
Paradim, which will be operated so as to permit its qualification as a REIT for
Federal income tax purposes. The Company and Careit each effectively own an
approximate 44% interest and a number of private investors own the remaining
interest in the joint venture. In connection with the formation of Paradim, the
Company effectively contributed its interest in three properties (Overlook,
formerly known as The Phoenix, a 220-unit multifamily residential complex in
Charlotte, North Carolina; Highpoint, a 708-unit multifamily residential complex
in Dallas, Texas; and Brassfield Park, a 336-unit multifamily residential
complex under development in Greensboro, North Carolina) and Careit contributed
$7.9 million in cash. At formation, the Company also received a distribution of
approximately $6.6 million, which was used to repay existing indebtedness under
the Company's line of credit. The Company recorded the initial contribution of
these properties at their net carrying value on April 1, 1996, which was
approximately $14.7 million (net book value of $40.3 million subject to existing
indebtedness of $25.6 million) and is accounting for its investment in Paradim
using the equity method of accounting. As of September 30, 1996, the Company's
net investment in Paradim was approximately $8.0 million. Additional
investments by Paragon and Careit will be made from time to time when and if
additional property acquisition or development opportunities are approved.
STRATEGIC INITIATIVE
On November 12, 1996, the Company announced that it has engaged the
investment banking firm of Merrill Lynch & Co. as the Company's financial
advisor to assist the Company in evaluating potential strategic alternatives to
enhance long-term shareholder value. The alternatives the Company currently is
exploring include a potential strategic merger transaction with a limited number
of potential strategic partners, direct institutional investment, public and
private sources of debt and equity capital, and continuing strategic actions
with its existing multifamily portfolio. No decision has yet been made on
which, if any, strategic alternatives might be pursued.
14
<PAGE>
DIVIDENDS AND CAPITAL
On January 3, 1996, the Company, through the Operating Partnership, issued
4,694 Units to an affiliate in partial settlement of debt assumed in connection
with the purchase of the Overlook Apartments.
On February 27, 1996, the Company paid a dividend, with respect to the fourth
quarter of 1995, of $.465 per share of common stock. Concurrent with the
dividend payments, the Operating Partnership distributed $.465 per Unit.
On May 17, 1996, the Company paid a dividend, with respect to the first
quarter of 1996, of $.465 per share of common stock. Concurrent with the
dividend payment, the Operating Partnership distributed $.465 per Unit.
On August 27, 1996, the Company paid a dividend, with respect to the second
quarter of 1996, of $.465 per share of common stock. Concurrent with the
dividend payment, the Operating Partnership distributed $.465 per Unit.
On November 5, 1996, the Company declared a dividend, with respect to the
third quarter of 1996, of $.465 per share of common stock, payable November 26,
1996 to holders of record on November 15, 1996. Concurrent with the dividend
announcement, the Operating Partnership authorized a distribution of $.465 per
Unit, payable November 26, 1996 to holders of record on November 15, 1996.
RESULTS OF OPERATIONS - COMPARISON OF THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
Net income for the three month period ended September 30, 1996 decreased
$1.95 million from the comparable period in 1995. Total revenue for the three
month period decreased $1.70 million, total expenses increased $.84 million
while minority interests in income decreased $.59 million. Net income for the
nine month period ended September 30, 1996 increased $3.9 million principally as
a result of the gain on sale of the commercial property services business of
$11.9 million. Net income for the nine month period was also affected by an
increase in total revenue of $1.4 million, an increase in total expenses of $7.8
million, an increase in equity in income of ventures of $.3 million, the
impairment loss on real estate held for sale of $1.1 million and an increase in
minority interests in income of $.8 million.
Rental income increased $2.5 and $8.8 million, or 12.4% and 14.9%,
respectively, for the three and nine month periods due primarily to increases in
the rental income on the Company's multifamily residential same community
portfolio and the addition of income generated from the acquisition and
development of additional apartment units. For the three month period, rental
income on the Company's multifamily residential same community portfolio
increased $.1 million, the acquisition of apartment units in the fourth quarter
of 1995 contributed $1.1 million, and the completion of apartment units
developed by the Company contributed $1.3 million. For the nine month period,
rental income on the Company's multifamily residential same community portfolio
increased $1.0 million, the acquisition of apartment units in the fourth quarter
of 1995 contributed $4.6 million, and the completion of apartment units
developed by the Company contributed $3.1 million.
Property management income decreased $2.1 and $4.1 million, or 78.7% and
47.7%, respectively, for the three and nine month periods. Leasing and other
property services income decreased $2.3 and $3.8 million, or 85.6% and 49.8%,
respectively, for the three and nine month periods. The decreases were due
primarily to the sale of the commercial property services business as well as
terminated management contracts that were not replaced, reduced rates charged
for management services on third-party contracts and to reduced transaction
volume on which management, leasing and other property services' fees are
earned.
Property operating and maintenance expense and real estate taxes and
insurance increased $1.5 and $4.5 million, or 17.2% and 17.8%, respectively, for
the three and nine month periods due primarily to increases in expenses on the
Company's multifamily residential same community portfolio and to the
acquisition and development of additional apartment units. For the three month
period, expenses on the Company's multifamily residential same community
portfolio increased $.37 million, or 4.5%, expenses related to the apartment
units acquired in the fourth quarter of 1995 were $.51 million, and the
completion of apartment units developed by the Company accounted for $.59
million of the increase. For the nine month period, expenses on the Company's
multifamily residential same community portfolio increased $.76 million, or
3.2%, expenses related to the apartment units acquired in the fourth quarter of
1995 were
15
<PAGE>
$2.0 million, and the completion of apartment units developed by the Company
accounted for $1.6 million of the increase.
Depreciation and amortization expense increased $.4 and $1.9 million, or 9.0%
and 15.4%, respectively, for the three and nine month periods due principally to
the acquisition and development of additional apartment units, off-set by
decreases in depreciation and amortization resulting from the sale of the
commercial property services business.
Property management expenses decreased $2.1 and $2.7 million, or 49.9% and
20.2%, respectively, for the three and nine month periods due primarily to the
sale of the commercial property services business.
Interest expense increased $1.2 and $4.2 million, or 28.2% and 34.7%,
respectively, for the three and nine month periods due to an increase in
operating debt principally associated with the acquisition and development of
additional apartment units.
General and administrative - property services decreased $.15 and $.15
million, or 12.4% and 3.7%, respectively, for the three and nine month periods.
The decreases resulted primarily from the sale of the commercial property
services business, off-set by additional consulting and implementation expenses
associated with the Company's new financial reporting and information system.
Equity in income of ventures increased $.26 million, or 55.1%, for the nine
month period due to an increase in income from the Company's commercial ventures
and an increase resulting from the Company's investment in Paradim on April 1,
1996. Equity in income of ventures for the three month period remained stable.
During the nine months ended September 30, 1996, the Company recognized a
gain on sale of $11.9 million from the sale of its commercial property services
business. Additionally, the Company recognized an impairment loss of $1.1
million attributable to Southwood Mall to record the property at the lower of
its carrying amount or estimated fair value less selling costs.
RESULTS OF OPERATIONS - MULTIFAMILY RESIDENTIAL COMMUNITIES
TOTAL PORTFOLIO
The results of operations of the Company's total consolidated portfolio of 57
multifamily residential communities (as of September 30, 1996) for the three and
nine months ended September 30, 1996 and 1995 is summarized in the following
table (dollars in thousands). The consolidated results of operations do not
include the operations of the three properties contributed to Paradim, which are
now accounted for under the equity method, for the period after April 1, 1996.
The operations of these properties for the period after April 1, 1996 are
included in equity in income of ventures.
16
<PAGE>
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1995, % OF 1995, % OF
1996 AS RESTATED CHANGE 1996 AS RESTATED CHANGE
------- ----------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
RENTAL AND OTHER REVENUE
Same Community $20,266 $20,067 1.0% $59,603 $58,541 1.8%
Development and Lease-Up 1,581 235 6.6% 3,475 267 5.5%
1995 Acquisitions 1,114 - 5.5% 4,785 - 8.1%
------- ------- ---- ------- ------- ----
22,961 20,302 13.1% 67,862 58,808 15.4%
------- ------- ---- ------- ------- ----
EXPENSES
Same Community 8,547 8,179 4.4% 24,791 24,029 3.1%
Development and Lease-Up 751 159 7.1% 1,856 224 6.7%
1995 Acquisitions 509 - 6.1% 2,046 - 8.4%
------- ------- ---- ------- ------- ----
9,807 8,338 17.6% 28,693 24,254 18.3%
------- ------- ---- ------- ------- ----
Net operating income $13,154 $11,964 10.0% $39,169 $34,555 13.4%
------- ------- ---- ------- ------- ----
------- ------- ---- ------- ------- ----
</TABLE>
SAME COMMUNITY
The results of operations of the Company's multifamily residential "same
community" portfolio for the three and nine months ended September 30, 1996 and
1995 is summarized in the following table (dollars in thousands, except for
average monthly rental revenue per unit). The Company defines same community
portfolio as those communities that achieved stabilized occupancy on or before
January 1, 1995 that were owned by the Company throughout the three and nine
month periods ended September 30, 1996 and 1995. The same community portfolio
consists of 49 communities containing 13,240 apartment units.
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1995, % 1995, %
1996 AS RESTATED CHANGE 1996 AS RESTATED CHANGE
------- ----------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
RENTAL AND OTHER REVENUE
Rental $19,548 $19,421 0.7% $57,612 $56,607 1.8%
Interest and other income 718 646 11.1% 1,991 1,934 3.0%
------- ------- ------- -------
20,266 20,067 1.0%* 59,603 58,541 1.8%
------- ------- ------- -------
EXPENSES
Property operating and
maintenance expense 6,435 6,111 5.3% 18,377 17,598 4.4%
Real estate taxes
and insurance 2,112 2,068 2.1% 6,415 6,431 (0.3%)
------- ------- ------- -------
8,547 8,179 4.5% 24,791 24,029 3.2%
------- ------- ------- -------
Net operating income $11,719 $11,888 (1.4%)* $34,811 $34,512 0.9%
------- ------- ------- -------
------- ------- ------- -------
Average occupancy 93.6% 95.2% (1.6%)* 93.3% 93.9% (0.6%)
------- ------- ------- -------
------- ------- ------- -------
Average monthly rental
revenue per unit $ 526 $ 513 2.5%* $ 518 $ 506 2.5%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- ----------------------
*The Company has implemented a revenue enhancing capital expenditure program
which began in late 1995 to upgrade selected same community properties which
it believes will generate the best long term yields as a result of
incremental capital investment. Occupancy and rental revenue losses are
occurring during this revenue enhancement process. Investment at four of the
39 properties included in the program represent in excess of 50% of the
overall budget. Excluding the operating results for those four properties,
the third quarter operating results from the balance of the same community
properties generated total revenue improvement of 2.4%, net operating income
improvement of 1.0%, an average occupancy rate of 94.6% and a 3.2% increase
in per unit average rental rate.
Rental income increased $.1 million and $1.0 million, respectively, for
the three and nine months ended September 30, 1996. For the three month period,
average monthly base revenue per leased apartment unit increased $13, or 2.5%,
from $513 to $526 and average occupancy decreased from 95.2% to 93.6%. For the
nine month period, average monthly base revenue per leased apartment unit
increased $12, or 2.5%, from $506 to $518 and average occupancy decreased from
93.9% to 93.3%. The Company believes that the increases in the average monthly
base revenue per leased apartment unit were achieved primarily as a result of
the implementation of select rental increases allowed by improved economic
conditions in certain of the Company's markets.
17
<PAGE>
ITEM 2: MANGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEVELOPMENT AND LEASE-UP PROPERTIES
The results of operations of the Company's multifamily residential
development and lease-up properties including completed development properties
not stabilized at January 1, 1995 for the three and nine months ended September
30, 1996 and 1995 is summarized in the following table (dollars in thousands).
The development and lease-up properties consist of the six consolidated
properties developed by the Company. As of September 30, 1996, one of these
properties (the 276 unit Heron Pointe) has achieved stabilized occupancy and
three of the properties containing 788 units are in the initial lease-up phase.
The consolidated development and lease-up properties do not include the
Brassfield Park property currently under development for which 336 units are
planned which the Company contributed to Paradim.
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1995, 1995,
1996 AS RESTATED 1996 AS RESTATED
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
RENTAL AND OTHER REVENUE
Rental $ 1,548 $ 230 $ 3,385 $ 260
Interest and other income 34 4 90 7
-------- ------ -------- ------
1,581 235 3,475 267
-------- ------ -------- ------
EXPENSES
Property operating and maintenance expense 564 149 1,375 217
Real estate taxes and insurance 187 10 481 7
-------- ------ -------- ------
751 159 1,856 224
-------- ------ -------- ------
Net operating income $ 830 $ 76 $ 1,619 $ 43
-------- ------ -------- ------
-------- ------ -------- ------
</TABLE>
1995 ACQUISITIONS
The consolidated results of operations of the four multifamily
residential communities containing 1,578 apartment units acquired by the
Company in the fourth quarter of 1995 for the three and nine months ended
September 30, 1996 is summarized in the following table (dollars in
thousands). The consolidated results of operations do not include the
operations of the two operating properties (Overlook and Highpoint containing
928 units) contributed to Paradim, which are now accounted for under the
equity method, for the period after April 1, 1996. The operations of these
properties for the period after April 1, 1996 are included in equity in
income of ventures.
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
------------------ -----------------
<S> <C> <C>
RENTAL AND OTHER REVENUE
Rental $ 1,065 $ 4,616
Interest and other income 50 169
-------- --------
1,114 4,785
-------- --------
EXPENSES
Property operating and maintenance expense 384 1,438
Real estate taxes and insurance 124 608
-------- --------
509 2,046
-------- --------
Net operating income $ 606 $ 2,739
-------- --------
-------- --------
</TABLE>
18
<PAGE>
ITEM 2: MANGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's total debt decreased from $293.8 million at December 31, 1995
to $287.6 million at September 30, 1996. Mortgages payable consisted of 28
loans ($240.9 million principal amount) at September 30, 1996 at fixed interest
rates ranging from 5.75% to 8.52% and mature at various dates through September
2028. At September 30, 1996, 22 of the loans ($219.1 million principal amount)
carry a fixed interest rate and provide for the monthly payment of interest
only, and six loans ($21.8 million principal amount) provide for monthly
payments of principal and interest at a fixed rate. During the three months and
nine months ended September 30, 1996, $4.2 million and $12.5 million,
respectively, of principal was paid on existing mortgages.
On November 6, 1996, the Company obtained new debt in the amount of $7.4
million collateralized by the 278 unit Schooner Bay apartments in Tampa,
Florida. The new debt requires monthly payments of principal and interest at
7.7% per annum for seven years and matures in November 2003. Net proceeds of
the new debt were used to fund a portion of the purchase price of the two North
Carolina multifamily communities purchased on November 8, 1996.
On July 27, 1996, the Company executed a renewal and modification of its
existing line of credit facility. Under the terms of the new agreement, the
Company may borrow up to $85.0 million including up to $50.0 million related to
development activities. The line of credit matures in July 1998, but may be
extended through July 1999 at the Company's option. Borrowings under the line
of credit are collateralized by specified operating properties and properties
under development. The interest rate on the amounts outstanding under the line
are based on, at the Company's election, either (i) the greater of the prime
rate or the Federal Funds rate plus .50% or, (ii) the London Interbank Offer
Rate ("LIBOR") plus 2.0% - 2.25%, depending on certain financial ratios
concerning leverage and debt service coverage.
At September 30, 1996, $46.7 million was outstanding under the line of credit
which consisted of three contracts priced at interest rates ranging from 7.50%
to 7.56% (based upon LIBOR plus 2.0%) and with repricing maturities ranging from
October 15, 1996 through October 28, 1996. Borrowings under the line of credit
are collateralized by specified properties. During the three months and nine
months ended September 30, 1996, $20.4 million and $58.1 million, respectively,
of new borrowings were drawn under the line of credit and $18.0 million and
$25.9 million, respectively, of principal was repaid. The borrowings under the
line of credit were used primarily to fund development activity and to repay
$7.9 million of debt (included in the $12.5 million of principal paid on
existing mortgages during the nine months ended September 30, 1996) associated
with the purchase of the 278 unit Schooner Bay apartments in December 1995.
19
<PAGE>
ITEM 2: MANGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL EXPENDITURES
Under the Company's policy regarding repairs, maintenance and capital
expenditures, ordinary repairs and maintenance are expensed as incurred. Major
replacements and betterments are capitalized and depreciated on a straight-line
basis over the estimated useful lives of the properties (buildings and related
land improvements--10 to 40 years; furniture, fixtures and equipment--3 to 10
years; and tenant improvements--over the life of the related tenant lease). With
respect to the apartment properties, the Company capitalizes floor and window
coverings and depreciates such items over 5 years; appliances and heating,
ventilating and air conditioning equipment are capitalized and depreciated over
10 years.
During the three months and nine months ended September 30, 1996, the Company
incurred a per unit average of $318 and $662, respectively, for normalized and
revenue enhancing capital expenditures. Included in these per unit averages are
$197 and $333, respectively, representing 1996 revenue enhancing capital
expenditures on same community properties. The Company implemented a program
beginning in late 1995 to upgrade selected properties which it believed would
generate the best long term yields as a result of incremental capital
investment. Properties were generally selected due to locational and submarket
outlook and the property's competitive position in the submarket. This
"repositioning" plan encompasses 39 of the Company's multifamily properties and
is expected to be completed in the first quarter of 1997.
Also included in the per unit averages are $.26 and $.89 million,
respectively, of deferred maintenance and acquisition enhancement expenditures
on four properties purchased in December 1995. These costs represent a portion
of $2.6 million originally contemplated to be spent on these properties when
they were underwritten for purchase by the Company.
After taking into consideration these factors, the "normalized" capital
expenditures on the properties averaged $103 and $266 per unit, respectively.
The Company expects to expend annually an average of approximately $275 per
apartment unit through 1999 for the residential properties. This amount is
expected to be funded from Company operations, existing cash balances, and
borrowings under the Company's line of credit.
INFLATION
Substantially all of the residential property leases are for a term of one
year or less, which may enable the Company to seek increased rents upon renewal
of existing leases or commencement of new leases. Such short-term leases
generally minimize the risk to the Company of the adverse effects of inflation,
although as a general rule, these leases permit residents to leave at the end of
the lease term without penalty. Commercial property leases range in length from
1 to 25 years and most have expense pass-through provisions.
20
<PAGE>
ITEM 2: MANGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FUNDS FROM OPERATIONS
Funds from Operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("NAREIT") to mean net income, computed in accordance
with generally accepted accounting principles ("GAAP"), excluding gains (or
losses) from debt restructuring and sales of property, plus real estate
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. In addition, extraordinary or unusual items,
along with significant non-recurring events that materially distort the
comparative measure of FFO, should be disregarded in its calculation.
Management generally considers FFO to be a useful measure of the operating
performance of an equity REIT because, together with net income and cash flows,
FFO provides investors with an additional basis to evaluate the ability of a
REIT to incur and service debt and to fund acquisitions and other capital
expenditures. FFO does not represent cash flows from operating activities as
defined by GAAP, should not be considered as an alternative to net income as an
indicator of the Company's operating performance and is not indicative of cash
available to fund all cash flow needs, including principal amortization, capital
improvements and distributions to stockholders. Further, FFO as disclosed by
other REITs may not be comparable to the Company's calculation of FFO.
Consistent with the interpretive guidance by NAREIT, beginning with the
quarter ended March 31, 1996, the Company changed its method of calculating FFO.
The change primarily results in the Company no longer adding back certain non-
cash and non-real estate depreciation and amortization charges to net income in
determining FFO. The impact of the change was a reduction in FFO of
approximately $696 and $671, respectively, for the three months ended September
30, 1996 and September 30, 1995. The following table represents the Company's
calculation of FFO for the three months ended September 30, 1996 and September
30, 1995, as restated (dollars in thousands):
Three Months Ended
September 30,
------------------------
1995,
1996 as Restated
---- -----------
Net income $ 1,137 $ 3,091
Add:
Minority interests in income 218 806
Real estate depreciation/amortization 4,416 3,806
Real estate depreciation/amortization
from unconsolidated ventures 249 132
Amortization of management and leasing contracts 68 281
Grants/amortization of employee restricted stock 289 441
Less:
Minority interests in cash flow (46) (74)
-------- --------
Funds from Operations $ 6,331 $ 8,483
-------- --------
-------- --------
Supplemental information:
Adjustment for straight-lining of rents $ 21 $ 8
-------- --------
-------- --------
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit - none
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON GROUP, INC.
/s/ Thomas D. Ferguson
-------------------------------------------
Thomas D. Ferguson, Chief Financial Officer
and Senior Vice President
(principal financial officer)
/s/ J.C. Lowenberg, III
-------------------------------------------
J.C. Lowenberg III, Senior Vice President
and Assistant Secretary
(principal accounting officer)
Date: November 14, 1996
23
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,549
<SECURITIES> 0
<RECEIVABLES> 1,441
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<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 610,268
<DEPRECIATION> 123,486
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0
0
<COMMON> 148
<OTHER-SE> 171,418
<TOTAL-LIABILITY-AND-EQUITY> 529,525
<SALES> 0
<TOTAL-REVENUES> 79,885
<CGS> 0
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<INCOME-PRETAX> 3,043
<INCOME-TAX> 0
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<DISCONTINUED> 0
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