UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________ .
Commission file number 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 May 15, 1996.
- --------------
<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 March 31, 1996 and December 31, 1995.......................... 3
Condensed Consolidated Statements of Operations of Paragon
Group, Inc. for the three months ended March 31, 1996 and 1995...... 4
Condensed Consolidated Statements of Cash Flows of Paragon
Group, Inc. for the three months ended March 31, 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.................................... 10
Part II - Other Information
Item 1. Legal Proceedings.................................................. 15
Item 2. Changes in Securities.............................................. 15
Item 3. Defaults on Senior Securities...................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
Item 5. Other Information.................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................... 15
Signatures................................................................... 16
2
<PAGE>
PARAGON GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate assets:
Land $ 90,441 $ 86,602
Buildings and improvements 526,748 516,925
------------------ ------------------
617,189 603,527
Less: Accumulated depreciation (131,314) (126,437)
------------------ ------------------
Operating real estate assets 485,875 477,090
Construction in process 27,200 27,944
------------------ ------------------
Net real estate assets 513,075 505,034
Cash and cash equivalents 5,218 6,583
Restricted cash 4,255 3,909
Accounts receivable, including amounts due from
affiliates of $325 and $1,424, respectively
in 1996 and 1995 2,496 4,716
Advances to affiliates 136 186
Investment in ventures 7,318 7,401
Deferred charges, net 8,602 9,254
Other assets 3,089 2,528
------------------ ------------------
Total assets $ 544,189 $ 539,611
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 306,642 $ 293,780
Accounts payable and accrued liabilities, including amounts
due to affiliates of $21 in 1996 15,273 17,155
------------------ ------------------
Total liabilities 321,915 310,935
------------------ ------------------
Minority interests 48,829 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 (3,610) (4,085)
Accumulated deficit (26,716) (21,236)
------------------ ------------------
174,439 179,364
Less: Cost of 46,798 treasury shares (42,266 in 1995) (994) (898)
------------------ ------------------
Total stockholders' equity 173,445 178,466
------------------ ------------------
Total liabilities and stockholders' equity $ 544,189 $ 539,611
================== ==================
</TABLE>
See accompanying notes.
3
<PAGE>
PARAGON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995, as
Restated
------------------ -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue
Rental $ 22,892 $ 18,942
Property management services - third party 1,489 2,065
Property management services - affiliates 1,030 957
Leasing and other property services - third party 1,482 1,829
Leasing and other property services - affiliates 368 304
Interest 135 79
Other - properties 762 692
Other - property services 380 435
------------------ -----------------
Total revenue 28,538 25,303
------------------ -----------------
Expenses
Property operating expense 7,069 5,678
Real estate taxes and insurance 2,797 2,260
Depreciation and amortization 5,111 4,083
Property management, net of amounts reimbursed by
affiliates of $23 and $43 for 1996 and 1995, respectively 4,427 5,042
Interest 5,626 3,885
General and administrative - property services, net
of amounts reimbursed by affiliates of $61 and $63
for 1996 and 1995, respectively 1,571 1,409
General and administrative - corporate 447 467
------------------ -----------------
Total expenses 27,048 22,824
------------------ -----------------
Income before equity in income of ventures
and minority interests 1,490 2,479
Equity in income of ventures 232 95
------------------ -----------------
Income before minority interests 1,722 2,574
Minority interests (344) (520)
------------------ -----------------
Net income $ 1,378 $ 2,054
================== =================
Net income per share of common stock $ 0.09 $ 0.14
================== =================
Weighted average common shares outstanding 14,791,165 14,697,047
================== =================
</TABLE>
See accompanying notes.
4
<PAGE>
PARAGON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995, as Restated
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,378 $ 2,054
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,111 4,083
Amortization of deferred financing costs 414 365
Amortization of employee restricted stock compensation 379 422
Minority interests in income 344 520
Changes in assets and liabilities:
Increase in restricted cash (346) (56)
Decrease in accounts receivable 2,220 706
Increase in prepaid leasing costs (26) (30)
Increase in other assets (561) (127)
Decrease in accounts payable and accrued liabilities (2,657) (2,166)
------------------ ------------------
Net cash provided by operating activities 6,256 5,771
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate assets (12,072) (8,946)
Additions to investment in ventures (17) -
Payments of organization costs - (22)
Distributions received from ventures 100 306
------------------ ------------------
Net cash used in investing activities (11,989) (8,662)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (6,858) (6,819)
Distributions to minority interests (1,745) (1,807)
Payments of deferred financing costs (41) (69)
Proceeds from notes payable 21,200 7,500
Payments on notes payable (8,238) (34)
Decrease (increase) in advances to affiliates 50 (243)
------------------ ------------------
Net cash provided by (used in) financing activities 4,368 (1,472)
------------------ ------------------
Net decrease in cash and cash equivalents (1,365) (4,363)
Cash and cash equivalents, beginning of period 6,583 5,913
------------------ ------------------
Cash and cash equivalents, end of period $ 5,218 $ 1,550
================== ==================
</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. Subsequent to the business combination, the
Company's management, leasing, construction and development businesses are
being conducted through Paragon Group Property Services, Inc. ("PGPSI").
The Company, through the Operating Partnership, owns 100% of the non-voting
stock and 1% of the voting stock of PGPSI (collectively representing 99% of
the total equity).
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 March 31, 1996, the Company's ownership interest in the
Operating Partnership was 80.1%.
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 ended March 31, 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. 1995 Annual Report to
Stockholders.
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., Paragon Group Property Services,
Inc., 12 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, since the consummation of its Initial Offering on July 27,
1994, 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.
6
<PAGE>
While the Company only holds 1% of the voting stock of PGPSI, due to its
99% economic interest and other factors the Company believes that the
consolidation method should be used and will provide for the most
meaningful financial statement presentation. Accordingly, 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. As
a result, the accompanying condensed consolidated financial statements for
the three months ended March 31, 1995 have been restated to consolidate
PGPSI. The effect of the restatement was to decrease stockholders' equity
at March 31, 1995 by $19,672, to decrease net income by $889 and to
decrease net income per share by $.06.
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 March 31, 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, 60 multifamily
properties and four commercial properties in Florida, Kentucky, Missouri,
North Carolina, South Carolina and Texas. 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 March 31, 1996, the 60 multifamily properties include 55 operating
properties containing 15,334 apartment units and five properties under
development for which 1,404 units are planned. Two of the operating
properties containing 516 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.
Acquisition and Development Activities
On January 29, 1996, 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. PGPSI expects to sell this development
once completed.
In February 1996, the Company completed construction of the Heron
Pointe apartments in Tampa, Florida. Heron Pointe contains 276 apartment
units and was completed at a total cost of $13,420.
4. PROPERTY SERVICES
Subsequent to the business combination, the Company's management,
leasing, construction and development businesses are being conducted
through PGPSI. PGPSI is a real estate property services company engaged in
providing property services for the Company, affiliates of the Company and
unrelated third parties. The services provided by PGPSI include asset and
property management, leasing, acquisitions, sales, construction management
and development. PGPSI is currently operating in 18 states and
approximately 40 metropolitan areas. At March 31, 1996, PGPSI managed
22,421 apartment units and over 24.3 million square feet of commercial
space (of which 15,334 apartment units and 1 million square feet were for
the Company).
7
<PAGE>
5. NOTES PAYABLE
Mortgages payable consist of 32 loans at March 31, 1996, each of which
is collateralized by properties included in real estate assets. At March
31, 1996, 26 of the loans carry a fixed interest rate and provide for the
monthly payment of interest only, and six loans 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 period ended
March 31, 1996, $8,238 of principal was paid on existing mortgages.
Concurrent with the Initial Offering, the Company obtained a line of
credit facility which is currently in the amount of $90,000 and under
certain conditions can be increased to $150,000. The line of credit matures
in July 1996 but may be extended for up to two years at the Company's
option. Borrowings under the line of credit are collateralized by specified
properties. At March 31, 1996, $35,700 was outstanding (including $21,200
of new borrowings drawn during the three month period ended March 31, 1996)
under the line of credit which consists of six contracts, each of which is
priced at interest rates ranging from 7.28% to 7.56% (based upon LIBOR plus
2.0%) and with repricing maturities ranging from April 11, 1996 through
June 28, 1996.
6. RELATED PARTY TRANSACTIONS
On January 3, 1996, the Company repaid $300 of debt payable to
affiliates assumed on 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. These Units were not eligible for
participation in the distribution on February 27, 1996 but will participate
in distributions on a pro-rata basis beginning with the distribution with
respect to the first quarter of 1996.
The Company, through 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; however, certain
common operating expenses are paid through the centralized account and are
subsequently reimbursed by the appropriate properties. Additionally, cash
of PGPSI is periodically transferred to the Operating Partnership for short
term investment purposes.
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.
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.
8. SUBSEQUENT EVENTS
On May 7, 1996, the Company declared a dividend, with respect to the
first quarter of 1996, of $.465 per share of common stock, payable May 29,
1996 to holders of record on May 17, 1996. Concurrent with the dividend
announcement, the Operating Partnership authorized a distribution of $.465
per Unit, payable May 29, 1996 to holders of record on May 17, 1996.
Effective April 1, 1996, the Company entered into a joint venture with
a real estate affiliate of the Caisse de depot et placement du Quebec
("Careit"). The venture was formed to acquire, develop, and operate
multifamily residential communities in markets where the Company currently
operates. The Company and Careit share joint control of the venture with
each owning an approximate 45% interest. The remaining minority position is
owned by two groups of private investors. Subject to certain provisions,
the Company and Careit have each agreed to invest equity in the joint
venture of between $7.5 million and $22.5 million. Properties acquired or
developed in the venture are expected to be leveraged with secured property
debt generally ranging between 65% and 70% of market value.
8
<PAGE>
Concurrent with its formation, the joint venture acceded to a
controlling interest in three multifamily properties that were previously
owned 100% by the Company; the 220 unit Overlook apartments in Charlotte,
North Carolina, the 708 unit Highpoint apartments in Dallas, Texas and the
336 unit Brassfield Park apartments currently under development in
Greensboro, North Carolina. The Company's original interests in the
properties were diluted to approximately 45%. All cash contributions made
by the joint venture partners were used to pay down property debt and
establish working capital reserves. To date, the joint venture partners
have contributed an aggregate amount of $15.85 million to the joint venture
with respect to these properties.
Additionally, the joint venture has entered into certain agreements
with PGPSI whereby PGPSI will provide acquisition, development, leasing,
management and other real estate services on a fee basis.
9
<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.
Company Activities
On January 3, 1996, the Company, through the Operating Partnership, issued
4,694 Units to an affiliate in partial settlement of debt it assumed on the
purchase of the Overlook Apartments.
On January 29, 1996, 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. PGPSI expects to sell this development once completed.
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.
Effective April 1, 1996, the Company entered into a joint venture with a
real estate affiliate of the Caisse de depot et placement du Quebec ("Careit").
The venture was formed to acquire, develop, and operate multifamily residential
communities in markets where the Company currently operates. The Company and
Careit share joint control of the venture with each owning an approximate 45%
interest. The remaining minority position is owned by two groups of private
investors. Subject to certain provisions, the Company and Careit have each
agreed to invest equity in the joint venture of between $7.5 million and $22.5
million. Properties acquired or developed in the venture are expected to be
leveraged with secured property debt generally ranging between 65% and 70% of
market value.
Concurrent with its formation, the joint venture acceded to a controlling
interest in three multifamily properties that were previously owned 100% by the
Company; the 220 unit Overlook apartments in Charlotte, North Carolina, the 708
unit Highpoint apartments in Dallas, Texas and the 336 unit Brassfield Park
apartments currently under development in Greensboro, North Carolina. The
Company's original interests in the properties were diluted to approximately
45%. All cash contributions made by the joint venture partners were used to pay
down property debt and establish working capital reserves. To date, the joint
venture partners have contributed an aggregate amount of $15.85 million to the
joint venture with respect to these properties.
Additionally, the joint venture has entered into certain agreements with
PGPSI whereby PGPSI will provide acquisition, development, leasing, management
and other real estate services on a fee basis.
On May 7, 1996, the Company declared a dividend, with respect to the first
quarter of 1996, of $.465 per share of common stock, payable May 29, 1996 to
holders of record on May 17, 1996. Concurrent with the dividend announcement,
the Operating Partnership authorized a distribution of $.465 per Unit, payable
May 29, 1996 to holders of record on May 17, 1996.
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.
The Company believes that property service business revenues for the first
quarter tend to be lower than those recorded in the remainder of the year.
Management also believes that despite the increasingly competitive nature of the
property service business, results from this business should improve in the
second half of the year, consistent with historical trends. However, there can
be no assurance that the additional property management and transaction activity
necessary to record improvement will be achieved. Management will continue its
efforts at enhancing profitability and predictability in this business through
improved efficiencies, pursuit of additional long-term relationships as well as
other strategic possibilities.
10
<PAGE>
Presentation
The information contained in the Condensed Consolidated Statements of
Operations of Paragon Group, Inc. is presented on the following basis.
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., Paragon Group Property Services, Inc., 12
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, since the consummation of its Initial Offering on July 27,
1994, 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. While the Company only holds 1% of the voting stock of PGPSI, due to its
99% economic interest and other factors the Company believes that the
consolidation method should be used and will provide for the most meaningful
financial statement presentation. Accordingly, 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. As a result, the accompanying
condensed consolidated financial statements for the three months ended March 31,
1995 have been restated to consolidate PGPSI.
Results of Operations - Comparison of the Three Months Ended March 31, 1996 and
March 31, 1995
Net income decreased $.68 million from the comparable period in 1995
principally as a result of an increase in total expenses of $4.2 million, which
was partially offset by an increase in total revenue of $3.2 million, an
increase in equity in income of ventures of $.14 million and a decrease in
minority interests in income of $.18 million.
Rental income increased $4.0 million, or 20.9%, due to an increase of $.69
million in rental income on the 52 properties owned throughout both periods
("same community") and the addition of $3.27 million of income generated from
the acquisition and development of additional apartment units. The 1,578
apartment units acquired in 1995 contributed $2.5 million while the completion
of units developed by the Company contributed $.77 million. On a same community
basis, average monthly base revenue per leased apartment unit increased $17, or
3.4%, from $498 to $515 from March 31, 1995 to March 31, 1996, respectively. The
Company believes that the increase in rental income per occupied apartment unit
was achieved primarily as a result of the implementation of select rental
increases allowed by improved economic conditions in certain of the Company's
markets. Average occupancy for those residential properties was unchanged at
92.2% for both periods.
Property management income decreased $.50 million, or 17%. Leasing and
other property services income decreased $.28 million, or 13%. The decreases
were due to 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 payable.
Property operating expenses and real estate taxes and insurance increased
$1.9 million, or 24.3%, due to an increase of $.43 million, or 5.4%, in expenses
for same community properties and an increase of $1.5 million resulting from the
acquisition and development of additional apartment units. The apartment units
acquired in 1995 accounted for $1.0 million of the increase while the completion
of units developed by the Company accounted for $.46 million. The increase in
expenses associated with same community properties of $.43 million was
principally attributable to increases in repair and maintenance and other
operating expenses on certain of those properties.
11
<PAGE>
Depreciation and amortization expense increased $1.0 million, or 25.2%, due
principally to the acquisition and development of additional apartment units.
Property management expenses decreased $.62 million, or 12.2%, due
principally to reduced personnel compensation and severance pay resulting from
the realignment of PGPSI in 1995.
Interest expense increased $1.7 million, or 44.8%, due to an increase in
operating debt principally associated with the acquisition and completed
development of additional apartment units.
General and administrative - property services increased $.16 million, or
11.5%, principally attributable to consulting and implementation expenses
associated with the Company's new financial reporting and information system.
Equity in income of ventures increased $.14 million, or 144%, due to an
increase of $.07 million in income from the Company's 20% interest in Gateway
One Office Venture and an increase of $.06 million resulting from the
acquisition of the Company's 10% interest in Fair Grove Properties, L.L.C. in
April 1995.
Liquidity and Capital Resources
The Company increased its total debt from $293.8 million at December 31,
1995 to $306.6 million at March 31, 1996. During the three months ended March
31, 1996, $8,238 of principal was paid on existing mortgages and $21,200 was
borrowed under the Company's line of credit. The borrowings under the line of
credit were used to fund development activity and to repay $7,900 of debt
(included in the $8,238 of principal paid on existing mortgages) associated with
the purchase of the 278 unit Schooner Bay apartments in December 1995. Mortgages
payable consisted of 32 loans at March 31, 1996 at fixed interest rates ranging
from 5.75% to 8.52%. At March 31, 1996, $35,700 was outstanding under the line
of credit which consisted of six contracts priced at interest rates ranging from
7.28% to 7.56% (based upon LIBOR plus 2.0%) and with repricing maturities
ranging from April 11, 1996 through June 28, 1996.
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 ended March 31, 1996, the Company incurred a per
unit average of $135 for normalized and revenue enhancing capital expenditures.
Included in the $135 per unit is $51 representing $.757 million spent in the
first quarter of 1996 on 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 60 multifamily properties and is expected to be completed in
the first quarter of 1997.
Also included in the $135 per unit is $.24 million representing deferred
maintenance and property repositioning 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.
12
<PAGE>
After taking into consideration these factors, the "normalized" capital
expenditures on the properties averaged $67 per unit. 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 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.
Funds from Operations
Industry analysts generally consider funds from operations an appropriate
measure of performance of an equity REIT. Funds from operations, as defined by
NAREIT (the "National Association of Real Estate Investment Trusts"), means net
income (computed in accordance with generally accepted accounting principles),
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 funds from operations, should be disregarded
in its calculation. The Company believes that in order to facilitate a clear
understanding of the consolidated historical operating results of Paragon Group,
Inc., funds from operations should be examined in conjunction with net income
(loss) as presented in the accompanying condensed consolidated financial
statements and information included in the Company's 1995 Annual Report to
Stockholders. Funds from operations does not represent cash generated from
operating activities in accordance with generally accepted accounting principles
(which, unlike funds from operations, generally reflects all cash effects of
transactions and other events that enter into the determination of net income)
and should not be considered as an alternative to net income as an indication of
the Company's performance or to cash flows as a measure of liquidity or ability
to make distributions.
Consistent with the interpretive guidance by NAREIT, beginning with the
quarter ended March 31, 1996, the Company has changed its method of calculating
funds from operations. 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 funds from operations. The impact of the
change was a reduction in funds from operations of approximately $687,000 and
$518,000, respectively, for the three months ended March 31, 1996 and March 31,
1995. The following table represents the Company's calculation of funds from
operations for the three months ended March 31, 1996 and March 31, 1995, as
restated (dollars in thousands):
13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995,
---- -----
as restated
<S> <C> <C>
Net income $ 1,378 $ 2,054
Adjustments to net income
Minority interests in income 344 520
Minority interests in cash flow (65) (57)
Depreciation 4,573 3,644
Amortization of tenant leasing costs 19 16
Depreciation and amortization from unconsolidated ventures 130 114
Amortization of management and leasing cotracts 202 280
Grants/amortization of employee restricted stock 429 411
Other cash reorganization expenses - 353
--------- --------
Funds from operations $ 7,010 $ 7,335
========= ========
Supplemetal information:
Adjustment for straight-lining of rents $ (44) $ 10
========= ========
</TABLE>
14
<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 March 31,
1996.
15
<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, Vice President
and Assistant Secretary
(principal accounting officer)
Date: May 15, 1996
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 9,473
<SECURITIES> 0
<RECEIVABLES> 2,058
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 644,389
<DEPRECIATION> 131,314
<TOTAL-ASSETS> 544,189
<CURRENT-LIABILITIES> 0
<BONDS> 306,642
0
0
<COMMON> 148
<OTHER-SE> 173,297
<TOTAL-LIABILITY-AND-EQUITY> 544,189
<SALES> 0
<TOTAL-REVENUES> 28,538
<CGS> 0
<TOTAL-COSTS> 14,293
<OTHER-EXPENSES> 5,111
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,626
<INCOME-PRETAX> 1,490
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,378
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
