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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________to_____________________
Commission File Number 0-22999
TARRAGON REALTY INVESTORS, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 94-2432628
- --------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1775 Broadway, 23rd Floor, New York, NY 10019
----------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 949-5000
------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common Stock, $.01 per value 11,796,113
- ----------------------------- ------------------------------------
(Class) (Outstanding at April 30, 2003)
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended March
31, 2003, have not been audited by independent certified public accountants,
but, in our opinion, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of consolidated financial position,
consolidated results of operations, and consolidated cash flows at the dates and
for the periods indicated have been included.
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
March 31, December 31,
2003 2002
-------- -----------
Assets
Real estate held for investment (net of accumulated depreciation of
$101,561 in 2003 and $103,173 in 2002) ............................................ $398,592 $427,989
Real estate held for sale (net of accumulated depreciation of $301 in 2003
and 2002) ......................................................................... 7,665 7,538
For-sale housing inventory .......................................................... 29,790 31,632
Investments in and advances to partnerships and joint ventures ...................... 34,117 29,102
Cash and cash equivalents ........................................................... 21,258 18,023
Restricted cash ..................................................................... 5,075 6,115
Goodwill ............................................................................ 2,691 2,691
Other assets, net (including $471 in 2003 and $626 in 2002 due from affiliates) ..... 15,823 17,134
-------- --------
$515,011 $540,224
======== ========
Liabilities and Stockholders' Equity
Liabilities
Notes, debentures, and interest payable ............................................. $406,110 $428,926
Other liabilities ................................................................... 15,636 19,042
-------- --------
421,746 447,968
Commitments and contingencies........................................................
Minority interests .................................................................. 18,729 18,523
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000; shares outstanding,
11,800,107 in 2003 and 7,896,760 in 2002 (after deducting 5,587,837 in 2003
and 3,705,382 in 2002 held in treasury) ........................................... 118 79
Special stock, $.01 par value; authorized shares, 7,500,000; shares outstanding,
none............................................................................... - -
Preferred stock, $.01 par value; authorized shares, 2,500,000; shares
outstanding, 557,518 in 2003 and 560,518 in 2002; liquidation preference,
$6,690 in 2003 and $6,726 in 2002, or $12 per share ............................... 6 6
Paid-in capital ..................................................................... 306,110 306,414
Accumulated deficit ................................................................. <231,698> <232,766>
-------- --------
74,536 73,733
-------- --------
$515,011 $540,224
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
For the Three Months
Ended March 31,
------------------------------
2003 2002
----------- -----------
Revenue
Rentals ............................................................................. $ 21,567 $ 19,457
For-sale housing inventory sales .................................................... 3,754 9,244
Interest (including $88 in 2002 from affiliates) .................................... 129 146
Management fees and other (including $95 in 2003 and $190 in
2002 from affiliates) ............................................................ 108 224
Equity in income of partnerships and joint ventures .......................... <130> 9,632
----------- -----------
25,428 38,703
Expenses
Property operations ................................................................. 11,232 10,268
Costs of for-sale housing inventory sales ........................................... 5,325 9,244
Interest (including $59 in 2002 to affiliates) ...................................... 8,722 5,713
Depreciation ........................................................................ 4,765 4,322
General and administrative
Corporate ........................................................................ 3,282 2,038
Property ......................................................................... 835 727
----------- -----------
34,161 32,312
----------- -----------
Income before other items ...................................................... <8,733> 6,391
Minority interests in income of consolidated partnerships ............................. <486> <149>
Gain on sale of real estate ........................................................... 1,223 -
----------- -----------
Income from continuing operations .............................................. <7,996> 6,242
Discontinued operations
Income from operations .............................................................. 7 61
Gain on sale of real estate ......................................................... 9,223 2,267
----------- -----------
Net income ............................................................................ 1,234 8,570
Dividends on cumulative preferred stock ............................................... <166> <171>
----------- -----------
Net income allocable to common stockholders ........................................... $ 1,068 $ 8,399
=========== ===========
Earnings per common share
Income from continuing operations allocable to common stockholders ............. $ <.69> $ .50
Discontinued operations ............................................................... .78 .19
----------- -----------
Net income allocable to common stockholders ........................................... $ .09 $ .69
=========== ===========
Weighted average shares of common stock used in computing earnings per share .......... 11,821,410 12,221,577
=========== ===========
Earnings per common share - assuming dilution
Income from continuing operations allocable to common stockholders ............. $ <.69> $ .46
Discontinued operations ............................................................... .78 .18
----------- -----------
Net income allocable to common stockholders ........................................... $ .09 $ .64
=========== ===========
Weighted average shares of common stock used in computing earnings per
share - assuming dilution ........................................................... 11,821,410 13,163,652
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
For the Three Months
Ended March 31,
------------------------------
2003 2002
----------- -----------
Cash Flows from Operating Activities
Net income.............................................................................. $ 1,234 $ 8,570
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of real estate........................................................... <10,446> <2,267>
Minority interest in income of consolidated partnerships.............................. 486 149
Depreciation and amortization......................................................... 5,504 5,377
Equity in loss of partnerships and joint ventures............................ 130 <9,632>
Noncash compensation related to stock options......................................... 103 75
Decrease in for-sale housing inventory development costs.............................. 2,244 7,461
Changes in other assets and liabilities, net of effects of
noncash investing and financing activities:
decrease in interest receivable.......................................... <19> 3
Decrease in other assets............................................................ 466 713
in other liabilities..................................................... <2,164> <4,597>
in interest payable...................................................... <110> <285>
----------- -----------
Net cash provided by operating activities................................ <2,572> 5,567
Cash Flows from Investing Activities
Proceeds from the sale of real estate .................................................... 13,585 3,005
Real estate development costs and improvements ........................................... <7,932> <8,999>
Distributions from investing activities of partnerships and joint ventures................ - 8,451
Advances to partnerships and joint ventures for development costs......................... <3,378> <9,581>
Net distributions related to property operations of partnerships and joint ventures....... 1,265 1,747
Other..................................................................................... <734> <252>
----------- -----------
Net cash provided by investing activities.................................... 2,806 <5,629>
Cash Flows from Financing Activities
Proceeds from borrowings.................................................................. 30,636 44,471
Payments of mortgage notes payable........................................................ <27,372> <39,902>
Advances from affiliates, net............................................................. - 1,378
Stock repurchases......................................................................... <395> <1,326>
Dividends to stockholders................................................................. <171> <204>
Other..................................................................................... 303 <245>
----------- -----------
Net cash provided by financing activities............................................... 3,001 4,172
----------- -----------
Net increase in cash and cash equivalents................................................... 3,235 4,110
Cash and cash equivalents, beginning of period.............................................. 18,023 8,989
----------- -----------
Cash and cash equivalents, end of period.................................................... $ 21,258 $ 13,099
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
For the Three Months
Ended March 31,
------------------------------
2003 2002
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................................................... $ 8,354 $ 5,865
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets written off and liabilities released in connection with the
disposition of real estate:
Real estate....................................................................... $ 16,045 $ 2,676
Other assets...................................................................... 52 <3>
Notes and interest payable........................................................ <12,546> <1,897>
Other liabilities ................................................................ <412> <38>
Gain on sale...................................................................... 10,446 2,267
----------- -----------
Cash received................................................................... $ 13,585 $ 3,005
=========== ===========
Effect on assets and liabilities of the deconsolidation of a property in
connection with a change in control:
Real estate....................................................................... $ 16,377 $ -
Investments in and advances to partnerships and joint ventures.................... <2,549> -
Other assets...................................................................... 260 -
Notes and interest payable........................................................ <13,424> -
Other liabilities ................................................................ <664> -
----------- -----------
$ - $ -
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial
statements. Operating results for the three month period ended March 31, 2003,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. For further information, refer to the Consolidated
Financial Statements and Notes included in our Annual Report on Form 10-K for
the year ended December 31, 2002. Dollar amounts in tables are in thousands.
Certain 2002 balances have been reclassified to conform to the 2003
presentation.
NOTE 2. STOCK OPTION PLANS
In 2002, we adopted the fair value method defined in Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," in accounting for our stock option plans, where previously we
applied the Accounting Principles Board's Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," and related Interpretations. We
elected to apply it prospectively for all options granted or modified since the
beginning of 2002, as allowed by SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." Because some awards under the plans
vest over periods ranging from one to five years, the cost related to
stock-based employee compensation included in the determination of net income
for the three months ended March 31, 2003 and 2002, is less than that which
would have been recognized if the fair value based method had been applied to
all awards since the original effective date of SFAS No. 123. The following
table illustrates the effect on net income and earnings per common share as if
the fair value based method had been applied to all outstanding and unvested
awards in each period.
For the Three Months Ended
March 31,
------------------------------
2003 2002
----------- ------------
Net income allocable to common stockholders, as reported........... $ 1,068 $ 8,399
Add:
Stock-based employee compensation expense included in reported
net income.................................................... 103 75
Deduct:
Total stock-based employee compensation expense determined
under fair value based method for all awards.................. <166> <282>
----------- ------------
Pro forma net income allocable to common stockholders.............. $ 1,005 $ 8,192
=========== ============
Earnings per common share
Net income allocable to common stockholders, as reported......... $ .09 $ .69
=========== ============
Net income allocable to common stockholders, pro forma........... $ .09 $ .67
=========== ============
Earnings per common share - assuming dilution
Net income allocable to common stockholders, as reported......... $ .09 $ .64
=========== ============
Net income allocable to common stockholders, pro forma........... $ .09 $ .62
=========== ============
6
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
Investments in and advances to partnerships and joint ventures consisted of the
following at March 31, 2003:
Percentage
Interest
----------
601 Ninth Street Development, L.L.C....................................... 50% $ 380
801 Pennsylvania Avenue................................................... 50% -
Adams Street Development, L.L.C........................................... 40% 516
Ansonia Apartments, L.P................................................... 70% -
Ansonia Liberty, L.L.C.................................................... 90% -
Block 88 Development, L.L.C............................................... 40% 357
Block 99/102 Development, L.L.C........................................... 40% 189
Danforth Apartment Owners, L.L.C.......................................... 99% 189
Fenwick Tarragon Apartments, L.L.C. ...................................... 70% 2,384
Guardian-Jupiter Partners, Ltd............................................ 70% 4,158
Lake Sherwood Partners, L.L.C............................................. 70% -
Larchmont Associates, L.P................................................. 57% 2,350
Merritt 8 Acquisitions, L.L.C............................................. 80% 2,246
Merritt Stratford, L.L.C.................................................. 50% 519
One Las Olas, Ltd......................................................... 70% 10,323
100 East Las Olas, Ltd., and East Las Olas, Ltd........................... 70% 4,796
Sacramento Nine........................................................... 70% 509
Summit/Tarragon Murfreesboro, L.L.C....................................... 70% 771
Tarragon Calistoga, L.L.C................................................. 80% 319
Tarragon Savannah I & II, L.L.C........................................... 99% 2,655
Thirteenth Street Development, L.L.C...................................... 50% 1,176
Vineyard at Eagle Harbor, L.L.C........................................... 99% 280
-------
$34,117
=======
We exercise significant influence over but hold noncontrolling interests in each
of the above partnerships or joint ventures or our outside partners have
significant participating rights, as defined in the Financial Accounting
Standard Board's Emerging Issues Task Force's 96-16 Abstract. Therefore, we
account for our investments in these partnerships and joint ventures using the
equity method.
As of January 1, 2003, Tarragon contributed its interest in Vintage at Fenwick
Plantation to Fenwick Tarragon Apartments, L.L.C. and acquired a 70% interest in
the joint venture. This contribution reduced our real estate held for investment
and other assets by $16.6 million and reduced our notes and interest payable and
other liabilities by $14 million. No gain or loss was recognized on the
contribution.
We have guaranteed $7.8 million of mortgages on three unconsolidated properties.
$925,000 relates to a mortgage that matures in 2012, $2.8 million relates to a
mortgage that matures in 2003, and $4.1 million relates to a mortgage that
matures in 2004. We have also guaranteed construction loans totaling $182.8
million on five unconsolidated properties, including the $90 million
construction loan for the Las Olas River House condominium development. This
construction loan has a March 31, 2003, balance of $14.7 million, matures in
2005, and provides for a one-year extension option. The aggregate balance of the
other construction loans at March 31, 2003, is $89 million. These construction
loans mature in 2003 or 2004 and have one- or two-year extension options. We
have recorded no liability in connection with these guarantees.
7
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)
Below is unaudited summarized financial information for Ansonia, Devonshire, and
our other partnership and joint venture interests for the three month periods
ended March 31, 2003 and 2002:
Three Months Ended March 31, 2003
Ansonia Other Total
------------ ------------ ------------
Rental revenue $ 4,954 $ 5,904 $ 10,858
Property operating expenses <2,624> <3,259> <5,883>
Interest expense <1,564> <2,271> <3,835>
Depreciation expense <815> <1,474> <2,289>
------------ ------------ ------------
Net <49> <1,100> <1,149>
Elimination of management fees paid
to Tarragon 245 133 378
------------ ------------ ------------
Net income before management fees paid to Tarragon $ 196 $ <967> $ <771>
============ ============ ============
Equity in income of partnerships and joint ventures $ 137 $ <675> $ <538>
Cash distributions in excess of investment 350 58 408
------------ ------------ ------------
$ 487 $ <617> $ <130>
============ ============ ============
Three Months Ended March 31, 2002
Ansonia Devonshire Other Total
----------- ------------ -------------- --------------
Rental revenue $ 5,236 $ 571 $ 5,729 $ 11,536
Property operating expenses <2,612> <405> <2,612> <5,629>
Interest expense <1,549> <205> <1,757> <3,511>
Depreciation expense <735> - <1,175> <1,910>
----------- ------------ ------------- --------------
Income before other items 340 <39> 185 486
Gain on sale of real estate 1,122 25,106 - 26,228
----------- ------------ ------------- --------------
Income from continuing operations 1,462 25,067 185 26,714
Discontinued operations (1) - - 109 109
----------- ------------ ------------- --------------
Net income 1,462 25,067 294 26,823
Elimination of management fees paid
to Tarragon 261 - 85 346
----------- ------------ ------------- --------------
Net income before management fees paid
to Tarragon $ 1,723 $ 25,067 $ 379 $ 27,169
=========== ============ ============= ==============
Equity in income of partnerships and joint ventures $ 1,206 $ 8,156 $ 270 $ 9,632
=========== ============ ============= ==============
- ----------------------------
(1) Includes revenue of $814.
8
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 4. FOR-SALE HOUSING
At March 31, 2003, there were 15 units remaining in the 5600 Collins Avenue
project. With the sell-out of the project nearing completion, we implemented a
new sales strategy in April 2003 to facilitate a quick close-out of the project
and to enable us to reallocate resources devoted to this project to other
projects. In connection with the new sales strategy, we lowered the asking
prices of the remaining condominium units. Based on the lower sale prices, we
have written down the carrying value of the project as of March 31, 2003, by
$1.6 million. As of May 9, 2003, we have only four unsold units remaining.
NOTE 5. EARNINGS PER COMMON SHARE
Earnings per common share has been computed based on the weighted average number
of shares of common stock outstanding for the three month periods ended March
31, 2003 and 2002. Following is a reconciliation of the weighted average shares
of common stock outstanding used in the computation of earnings per share and
earnings per share - assuming dilution. The information presented for 2002 has
been restated to give effect to the three-for-two stock split in February 2003.
For the Three Months
Ended March 31,
-----------------------------
2003 2002
---------- ----------
Weighted average shares of common stock outstanding.......... 11,821,410 12,221,577
Convertible preferred interest of minority partner in
consolidated partnership................................... - 311,778
Stock options................................................ - 630,297
---------- ----------
Weighted average shares of common stock outstanding -
assuming dilution.......................................... 11,821,410 13,163,652
========== ==========
On a weighted average basis, options to purchase 2,891,651 shares of common
stock at a price of $7.07 were outstanding during the three month period ended
March 31, 2003. Their effect is not reflected in the computation of weighted
average shares of common stock outstanding - assuming dilution because their
effect is antidilutive due to a loss from continuing operations allocable to
common stockholders. The options, which expire between December 31, 2005, and
December 31, 2012, were still outstanding at March 31, 2003. During both periods
presented, the exercise prices of all options were less than the market prices
of the common stock on a weighted average basis.
The convertible preferred interest of minority partner in consolidated
partnership represents the preferred interest of Mr. Robert Rohdie in a
partnership we consolidate. For the three month period ended March 31, 2003, his
interest was convertible into 356,318 shares. However, its effect is not
reflected in weighted average shares of common stock outstanding - assuming
dilution because its effect is antidilutive due to a loss from continuing
operations allocable to common stockholders.
9
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING
Our business is divided into three principal segments - the operation of our
investment portfolio, property development, and for-sale housing. Our investment
portfolio of stabilized apartment communities and commercial properties is the
largest segment and the one whose operation most resembles that of traditional
real estate investment trusts. Funds generated by the operation, sale, or
refinancing of properties in the investment portfolio support our overhead and
finance our development activities. The second segment is property development
through which we create new investment properties, primarily apartment
communities, which, upon stabilization, become part of our investment portfolio.
Our activities in the third segment, for-sale housing, encompass condominium
conversions of existing apartment communities and the development of town homes
and new, high-rise condominiums for sale to residents. We reclassify properties
from the Development Division to the Investment Division once they have achieved
stabilized operations, as defined below. We reclassify properties for which we
have initiated renovation or reposition activities from the Investment Division
to the Development Division. We reclassify properties for which we have
initiated condominium conversion activities from the Investment Division to the
For-Sale Housing Division.
- Development. Assets in this division are under development or in
initial lease-up, under renovation, or land held for development
or sale.
- Investment. This division includes properties with stabilized
operations. We consider a property "stabilized" when development
or renovation is complete and recurring operating income exceeds
operating expenses and debt service. Prior to 2003, we defined
stabilized properties as completed properties with stabilized
market rate occupancy at market rents for comparable product in
the property's market and which are subject to neither renovation
nor repositioning.
- For-Sale Housing. Assets in this division include luxury high-rise
condominiums, senior housing communities, and townhouses under
development and existing apartment communities under conversion to
condominiums.
The following table summarizes apartment units and commercial square footage in
the Development and Investment Divisions. The For-Sale Housing Division includes
two consolidated properties under renovation and scheduled for sale as 272
condominium homes and a land parcel on which we plan to begin construction of a
131-unit condominium project in the second quarter of 2003. It also includes a
42-story luxury condominium project under development and a mixed-use retail and
residential condominium project with an aggregate 325 homes owned through
unconsolidated joint ventures.
10
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
March 31,
------------------------------
2003 2002
--------- ---------
Apartment units:
Consolidated or directly owned:
Development division:
Completed apartment units in lease-up or under renovation......... 702 1,261
Apartment units under construction ............................... 296 394
Investment division ................................................ 8,780 8,088
Unconsolidated and owned through joint ventures:
Development division:
Completed apartment units in lease-up or under renovation......... 558 -
Apartment units under construction ............................... 390 1,010
Investment division ................................................ 4,146 5,215
--------- ---------
14,872 15,968
========= =========
Commercial square footage:
Consolidated or directly owned:
Development division:
Completed commercial space under renovation ...................... 151,387 373,131
Commercial space under construction .............................. - 34,381
Investment division ................................................ 993,169 762,367
Unconsolidated and owned through joint ventures:
Development division ............................................... - -
Investment division ................................................ 267,022 267,022
--------- ---------
1,411,578 1,436,901
========= =========
The following tables summarize operating data through income from
continuing operations for the three divisions and net operating income (rental
revenue less property operating expenses) and funds from operations for our
Investment Division.
We use funds from operations, as defined below, to measure the performance of
our Investment Division. We measure the performance of our Development and
For-Sale Housing Divisions primarily by gross profit from third party and
intercompany sales. Intercompany sales for 2003 include transfers on January 1,
2003, from the Development Division to the Investment Division of properties
with 278 apartments and 221,744 square feet of commercial space that were
stabilized during 2002. Intercompany sales for 2002 include transfers on January
1, 2002, from the Development Division to the Investment Division of properties
with 2,970 apartments and 355,737 square feet of commercial space that were
stabilized during 2001. The sale prices for these properties were their
estimated fair market values as of the date of transfer, and the cost of sales
was their net carrying values as of the same date. Gains on transfers of assets
between segments do not represent gains recognizable in accordance with GAAP
and, accordingly, are eliminated for purposes of consolidated reporting.
We allocate our general and administrative expenses among our three segments
based on the functions of the corporate departments. We allocate other corporate
items, including interest, management fee, and other revenue, and minority
interests in income of consolidated partnerships in the same proportions as
general and administrative expenses are allocated.
11
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months Ended March 31, 2003
----------------------------------------------------------------------
For-Sale
Investment Development Housing Eliminations Total
---------- ----------- -------- ------------ -------
Rental revenue
Consolidated properties ......................... $20,041 $ 1,188 $ 338 $ - $21,567
Unconsolidated properties ....................... 9,678 1,180 - - 10,858
------- ------- ------- ------- -------
Total rental revenue ......................... 29,719 2,368 338 - 32,425
Sales of apartment development and for-sale housing
inventory
Consolidated properties
Sales to third parties ..................... - - 3,754 - 3,754
Intercompany sales ......................... - 12,709 - <12,709> -
Unconsolidated properties
Intercompany sales ......................... - 18,000 - <18,000> -
------- ------- ------- ------- -------
29,719 33,077 4,092 <30,709> 36,179
Property operating expenses
Consolidated properties ......................... 10,026 1,027 179 - 11,232
Unconsolidated properties ....................... 5,047 828 8 - 5,883
Costs of sales of apartment development and
for-sale housing inventory
Consolidated properties
Sales to third parties ..................... - - 5,325 - 5,325
Intercompany sales ......................... - 9,443 - <9,443> -
Unconsolidated properties
Intercompany sales ......................... - 14,744 - <14,744> -
------- ------- ------- ------- -------
15,073 26,042 5,512 <24,187> 22,440
------- ------- ------- ------- -------
Net operating income ....................... 14,646 7,035 <1,420> <6,522> 13,739
Interest expense
Consolidated properties ......................... 4,947 268 3,507 - 8,722
Unconsolidated properties ....................... 3,261 574 - - 3,835
------- ------- ------- ------- -------
Property level income before depreciation... 6,438 6,193 <4,927> <6,522> 1,182
Allocated general and administrative expenses and
other corporate items ........................... <1,845> <2,047> <474> - <4,366>
------- ------- ------- ------- -------
Income before depreciation and gain on sale
of real estate .................................. 4,593 4,146 <5,401> <6,522> <3,184>
12
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months Ended March 31, 2003
------------------------------------------------------------------
For-Sale
Investment Development Housing Eliminations Total
---------- ----------- --------- ------------ ----------
Depreciation
Consolidated properties........................... $ <4,687> $ <413> $ - $ 335 $ <4,765>
Unconsolidated properties......................... <2,158> <498> - 367 <2,289>
Gain on sale of real estate - consolidated
properties
Sales to third parties............................ <66> - - 1,289 1,223
Distributions from unconsolidated partnerships and
joint ventures in excess of investment............ 408 - - - 408
Elimination of management fees paid by partnerships
and joint ventures to Tarragon.................... 342 36 - - 378
Outside partners' interests in loss of
unconsolidated partnerships and joint ventures 80 205 8 <60> 233
Outside partners' interests in intercompany sales
of unconsolidated partnerships and joint
ventures.......................................... - <977> - 977 -
---------- --------- --------- ---------- ----------
Income from continuing operations............ $ <1,488> $ 2,499 $ <5,393> $ <3,614> $ <7,996>
========== ========= ========= ========== ==========
For the Three Months Ended March 31, 2002
------------------------------------------------------------------------
For-Sale
Investment Development Housing Eliminations Total
---------- ----------- -------- ------------ ---------
Rental revenue
Consolidated properties ......................... $ 15,637 $ 2,882 $ 938 $ - $ 19,457
Unconsolidated properties ....................... 11,432 104 - - 11,536
-------- -------- -------- -------- ---------
Total rental revenue ......................... 27,069 2,986 938 - 30,993
Sales of apartment development and for-sale housing
inventory
Consolidated properties
Sales to third parties ..................... - - 9,244 - 9,244
Intercompany sales ......................... - 111,830 - <111,830> -
Unconsolidated properties
Intercompany sales ......................... - 118,850 - <118,850> -
-------- -------- -------- -------- ---------
27,069 233,666 10,182 <230,680> 40,237
Property operating expenses
Consolidated properties ......................... 7,912 1,936 420 - 10,268
Unconsolidated properties ....................... 5,582 47 - - 5,629
Costs of sales of apartment development and
for-sale housing inventory
Consolidated properties
Sales to third parties ..................... - - 9,244 - 9,244
Intercompany sales ......................... - 99,577 - <99,577> -
Unconsolidated properties
Intercompany sales ......................... - 89,628 - <89,628> -
-------- -------- -------- -------- ---------
13,494 191,188 9,664 <189,205> 25,141
-------- -------- -------- -------- ---------
Net operating income .............................. 13,575 42,478 518 <41,475> 15,096
13
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months Ended March 31, 2002
--------------------------------------------------------------------
For-Sale
Investment Development Housing Eliminations Total
---------- ----------- --------- ------------ --------
Interest expense
Consolidated properties.......................... $ 4,293 $ 927 $ 493 $ - $ 5,713
Unconsolidated properties........................ 3,483 28 - - 3,511
---------- ---------- --------- ----------- --------
Property level income before depreciation.......... 5,799 41,523 25 <41,475> 5,872
Allocated general and administrative expenses and
other corporate items............................ <1,239> <1,102> <203> - <2,544>
---------- ---------- --------- ----------- --------
Income before depreciation and gain on sale
of real estate................................... 4,560 40,421 <178> <41,475> 3,328
Depreciation
Consolidated properties.......................... <3,695> <848> - 221 <4,322>
Unconsolidated properties........................ <2,235> <56> - 381 <1,910>
Gain on sale of real estate of unconsolidated
partnerships and joint ventures, net of income
previously recognized by Tarragon................ 9,971 - - - 9,971
Discontinued operations of unconsolidated
partnerships and joint ventures.................. 102 - - 7 109
Elimination of management fees paid by partnerships
and joint ventures to Tarragon................... 344 2 - - 346
Outside partners' interests in loss of
unconsolidated partnerships and joint ventures <1,217> 8 - <71> <1,280>
Outside partners' interests in intercompany sales
of unconsolidated partnerships and joint
ventures......................................... - <2,754> - 2,754 -
---------- ---------- --------- ----------- --------
Income from continuing operations........... $ 7,830 $ 36,773 $ <178> $ <38,183> $ 6,242
========== ========== ========= =========== ========
14
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months Ended
March 31,
---------------------------------
2003 2002
------------ ------------
Reconciliation of revenues per operating data table to total revenues per
accompanying Consolidated Statements of Operations:
Total revenues per operating data table............................................. $ 36,179 $ 40,237
Less expenses related to unconsolidated partnerships and joint ventures:
Property operating expenses...................................................... <5,883> <5,629>
Interest expense................................................................. <3,835> <3,511>
Depreciation expense............................................................. <2,289> <1,910>
Gain on sale of real estate of unconsolidated partnerships and joint ventures, net
of income previously recognized by Tarragon...................................... - 9,971
Discontinued operations for unconsolidated partnerships and joint ventures.......... - 109
Distributions from unconsolidated partnerships and joint ventures in excess of
investment....................................................................... 408 -
Elimination of management fees paid by partnerships and joint ventures to
Tarragon......................................................................... 378 346
Outside partners' interests in loss of unconsolidated partnerships and
joint ventures................................................................... 233 <1,280>
Interest, management fee, and other revenue presented with allocated
general and administrative expenses and other corporate items.................... 237 370
------------ ------------
Total revenues per accompanying Consolidated Statements of Operations............... $ 25,428 $ 38,703
============ ============
Investment Division Net Operating Income:
Rental revenue
Same store stabilized apartment communities....................................... $ 23,735 $ 23,175
Apartment communities stabilized during period.................................... 2,407 -
Apartment communities sold during period.......................................... - 1,419
Commercial properties............................................................. 3,577 2,475
------------ ------------
29,719 27,069
Property operating expenses
Same store stabilized apartment communities....................................... <12,359> <11,458>
Apartment communities stabilized during period.................................... <1,068> -
Apartment communities sold during period.......................................... - <888>
Commercial properties............................................................. <1,646> <1,148>
------------ ------------
<15,073> <13,494>
Net operating income
Same store stabilized apartment communities....................................... 11,376 11,717
Apartment communities stabilized during period.................................... 1,339 -
Apartment communities sold during period.......................................... - 531
Commercial properties............................................................. 1,931 1,327
------------ ------------
$ 14,646 $ 13,575
============ ============
15
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months Ended
March 31,
---------------------------------
2003 2002
------------ ------------
Funds from operations - Investment Division (1):
Same store stabilized apartment communities.............................................. $ 4,701 $ 4,694
Apartment communities stabilized during period........................................... 704 -
Apartment communities sold during period................................................. - 240
Apartment communities in discontinued operations......................................... 25 411
Commercial properties.................................................................... 1,082 699
------------ ------------
6,512 6,044
Allocation of corporate interest expense................................................. <238> <342>
Allocation of general and administrative expenses and other corporate items.............. <1,845> <1,239>
------------ ------------
$ 4,429 $ 4,463
============ ============
Reconciliation of funds from operations to income from continuing
operations - Investment Division:
Funds from operations...................................................................... $ 4,429 $ 4,463
Discontinued operations ................................................................. <25> <411>
Depreciation and amortization of real estate assets...................................... <4,517> <3,737>
Depreciation and amortization of real estate assets of partnerships and joint ventures... <1,717> <1,426>
Distributions from partnerships and joint ventures in excess of investments.............. 408 -
Loss on sale of real estate to third parties............................................. <66> -
Gain on sale of real estate of unconsolidated partnerships and joint ventures............ - 8,941
------------ ------------
Income from continuing operations................................................... $ <1,488> $ 7,830
============ ============
- ----------------------------
(1) Tarragon considers funds from operations ("FFO") to be an appropriate
measure of the performance of our investment portfolio but not of our other
assets. FFO, as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), equals net income , computed in
accordance with GAAP, excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation and amortization of real estate
assets, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect FFO on the same basis. We believe that a clear
understanding of the operating results of our investment portfolio requires
examining FFO along with net income as shown in the Consolidated
Financial Statements and Notes. FFO does not represent cash generated from
operating activities in accordance with GAAP and is not an alternative to
net income as an indication of our operating performance or to cash flow as
a measure of liquidity, nor is it necessarily indicative of cash available
to fund cash needs and cash dividends. Our calculation of FFO may be
different from the methods used by other companies and, therefore, may not
be comparable to other companies.
NOTE 7. DISCONTINUED OPERATIONS
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," operating results for properties for which we implemented
plans of disposals after the adoption of this pronouncement have been reported
in discontinued operations. Discontinued operations for the three month periods
ended March 31, 2003 and 2002, include the operations of seven properties sold
in 2002 or the first quarter of 2003. Total revenues for these properties for
the three months ended March 31, 2003, were $382,000 and for the three months
ended March 31, 2002, were $1.7 million. The operations of these properties were
previously reported in the Investment Division.
NOTE 8. COMMITMENTS AND CONTINGENCIES
In April 2003, in connection with the condominium conversion of Pine Crest
Village at Victoria Park, representatives of Tarragon may have inadvertently
disturbed asbestos-containing materials in violation of federal, state and/or
local environmental laws. Such actions are currently under investigation by the
Environmental Protection Agency and may result in civil and/or criminal
proceedings under applicable law. The extent of any liability is unknown at
this time.
Tarragon is also party to various claims and routine litigation arising in the
ordinary course of business. We do not believe that the results of such claims
and litigation, individually or in the aggregate, will have a material adverse
effect on our business, financial position, or results of operations.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Please read this discussion along with the Consolidated Financial Statements and
Notes included elsewhere in this report. Dollar amounts in tables are in
thousands except for per unit or per share amounts.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q
In addition to historical information, this Form 10-Q contains forward-looking
statements. Forward-looking statements are expressions of our current beliefs
and expectations, based on information currently available to us, estimates, and
projections about our industry, and certain assumptions made by our management.
These statements are not historical facts. We use words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions to identify our forward-looking statements, which include, among
other things, our anticipated financings and sales of properties and For-Sale
Housing inventory.
Because we are unable to control or predict many of the factors that will
determine our future performance and financial results, including future
economic, competitive, and market conditions, our forward-looking statements are
not guarantees of future performance. They are subject to risks, uncertainties,
and errors in assumptions that could cause our actual results to differ
materially from those reflected in our forward-looking statements. We believe
that the assumptions underlying our forward-looking statements are reasonable.
However, you should not place undue reliance on these forward-looking
statements. They only reflect our view and expectations as of the date of this
Form 10-Q. We undertake no obligation to publicly update or revise any
forward-looking statement in light of new information, future events, or
otherwise.
CRITICAL ACCOUNTING POLICIES
Asset Impairment
We periodically review the carrying values of our properties. Accounting
principles generally accepted in the United States of America ("GAAP") require
that the carrying value of a property held for sale not exceed the lower of its
cost or its estimated fair value less costs to sell. In instances where a
property's estimated fair value less costs to sell is less than its carrying
value at the time of evaluation, we provide an allowance for loss by making a
charge against operations. Our review of properties held for sale generally
includes selective site inspections, comparing the property's current rents to
market rents, reviewing the property's expenses and maintenance requirements,
discussions with the property manager, and a review of the surrounding area. We
may make adjustments to estimated fair values based on future reviews.
We also evaluate our properties held for investment for impairment whenever
events or changes in circumstances indicate that a property's carrying value may
not be recoverable. This evaluation generally consists of reviewing the
property's cash flow and current and projected market conditions, as well as
changes in general and local economic conditions. If we conclude that a property
has been impaired, its carrying value is written down to estimated fair value
with a charge against current earnings.
Investments in Partnerships and Joint Ventures Accounted for Using the Equity
Method
We use the equity method to account for investments in partnerships and joint
ventures over which we exercise significant influence but do not control. Under
the equity method, our initial investments are increased by our proportionate
share of the partnerships' operating income and additional advances and
decreased by our proportionate share of the partnerships' operating losses and
distributions received. All significant intercompany transactions are
eliminated.
17
We have investments in 22 partnerships or joint ventures in which we hold
noncontrolling interests or our outside partners have significant participating
rights, as defined by the Financial Accounting Standards Board's Emerging Issues
Task Force in its 96-16 Abstract. The net effect of not consolidating these
joint ventures has been to reduce consolidated total assets, total liabilities,
and gross revenues and expenses but has had no effect on reported net income or
loss except in instances where we have received distributions from a joint
venture in excess of our investment in the joint venture, with the excess
recorded as income.
Revenue Recognition
Rental, interest, and management fee revenue are recognized when earned. Revenue
from long term laundry and cable service contracts is deferred and amortized to
income on the straight-line basis over the terms of the contracts.
Gains on sales of real estate are recognized when and to the extent permitted by
Statement of Financial Accounting Standards ("SFAS") No. 66 - "Accounting for
Sales of Real Estate." Until the requirements of SFAS No. 66 for full profit
recognition have been met, transactions are accounted for using the deposit,
installment, cost recovery, or financing method, whichever is appropriate.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," which, among other things, rescinded SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt." SFAS No. 4
required gains and losses from extinguishments of debt to be classified as
extraordinary items, if material. Under SFAS No. 145, gains and losses on
extinguishments of debt will no longer be classified as extraordinary unless
they meet the unusual in nature and infrequency of occurrence criteria in the
Accounting Principles Board's Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
which is expected to be rare. We adopted SFAS No. 145 on January 1, 2003.
Therefore, gains or losses on extinguishment of debt prior to maturity are
longer classified as extraordinary items, but there was no impact on our
reported net income or loss.
In November 2002, the FASB issued Interpretation (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5,
"Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures," and
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." FIN 45
requires guarantors to recognize a liability at the inception of guarantee
arrangements within its scope. Guarantors are also required to provide
additional disclosures for guarantees. We adopted FIN 45 on January 1, 2003.
There was no impact on our reported net income or loss.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin 51,
"Consolidated Financial Statements," for certain entities that do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of
FIN 46 will be required to be consolidated by their primary beneficiary. The
primary beneficiary of a variable interest entity is determined to be the party
that absorbs a majority of the entity's expected losses, receives a majority of
its expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the
18
first fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. Our initial determination is that the adoption
of the provisions of FIN 46 will not have a material impact upon our financial
condition or results of operations.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 improves financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS No. 149 clarifies the circumstances in which a
contract with an initial net investment meets the characteristics of a
derivative and when a derivative contains a financing component. It also amends
certain other existing pronouncements. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. We are currently evaluating the
effect adopting this pronouncement will have on our financial statements.
ENVIRONMENTAL MATTERS
Under federal, state, and local environmental laws, ordinances, and regulations,
Tarragon may be liable for removal or remediation costs, as well as other costs
(such as fines or injuries to persons and property) where our employees may have
arranged for removal, disposal, or treatment of hazardous or toxic substances.
In addition, environmental laws impose liability for release of
asbestos-containing materials into the air, and third parties can seek recovery
from Tarragon for personal injury associated with those materials. We are not
aware of any liability relating to these matters that would have a material
adverse effect on our business, financial position, or results of operations.
However, we have recently become aware of a matter involving
asbestos-containing materials at one of our condominium conversion projects, as
described in Part II, Item 1. "LEGAL PROCEEDINGS." As of this date, we are
unable to determine the outcome of this matter and whether it will have a
material impact on our financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash are property operations, borrowings, and proceeds
from the sale of properties. We believe these sources will continue to meet our
cash requirements, including debt service payments, property maintenance and
improvements, development costs for properties under construction, projected
purchases of existing properties, dividends on preferred stock, and planned
repurchases of common stock. Although we expect these sources of cash to be
sufficient to fund planned uses of cash, we can make no assurance that the
expected sales and refinancings of properties will be completed as planned.
Proceeds from borrowings are expected to continue to be a key source of cash for
Tarragon. During the remainder of 2003, we expect to generate net proceeds from
mortgage borrowings on consolidated and unconsolidated properties of $20
million. We have a $20 million unsecured line of credit with affiliates of
William S. Friedman, our President and Chief Executive Officer and Chairman of
our Board of Directors. The line of credit matures in January 2004. All of these
funds are available to us as of March 31, 2003, as there was no outstanding
balance. We have an additional $9.8 million available under two lines of credit
that mature in 2004.
Proceeds from sales of properties are also expected to continue to be a key
source of cash for Tarragon. We expect to generate $10 million in net proceeds
from the sale of consolidated properties during the remainder of 2003.
At April 28, 2003, we had entered into contracts to sell eight of the remaining
12 units at 5600 Collins Avenue for an aggregate contract price of $2.9 million.
We had also entered into contracts to sell 87 of 121 units at Pine Crest Village
I at Victoria Park for an aggregate contract price of $17.1 million. We began
the conversion of Pine Crest to homes for sale in 2002 and began closing sales
in April 2003. In the second quarter through April 28, 2003, we received net
cash proceeds of $1.7 million (net of release payments on the Pine Crest
construction loan of $3.9 million) from closing sales of three units at 5600
Collins and 18 units at Pine Crest. During the
19
remainder of 2003, we expect these two projects to generate sale proceeds of $13
million in excess of renovation costs and mortgage payments.
Principal payments on mortgages totaling $56.6 million come due during the
remainder of 2003, including $53.1 million of balloon payments. We intend to
extend the loans or pay them off as they come due, largely through refinancings.
Of the loans maturing during the remainder of 2003, a $19.8 million mortgage
provides for a two-year extension option, and a $7.7 million mortgage provides
for a one-year extension option. We believe we can arrange such new financing as
may be needed to repay maturing notes.
We have guaranteed $7.8 million of mortgages on three unconsolidated properties.
$925,000 relates to a mortgage that matures in 2012, $2.8 million relates to a
mortgage that matures in 2003, and $4.1 million relates to a mortgage that
matures in 2004. We have also guaranteed construction loans totaling $182.8
million on five unconsolidated properties, including the $90 million
construction loan for the Las Olas River House condominium development. This
construction loan has a March 31, 2003, balance of $14.7 million, matures in
2005, and provides for a one-year extension option. The aggregate balance of the
other construction loans at March 31, 2003, is $89 million. These construction
loans mature in 2003 or 2004 and have one- or two-year extension options.
Cash Flows from Operating Activities
Our net cash flow provided by operating activities was $5.6 million in the first
quarter of 2002. In the first quarter of 2003, we used net cash in operating
activities of $2.6 million. This decrease in cash flow is primarily due to
increases in renovation costs for For-sale housing inventory coupled with a
reduction in sales collected. See "For-Sale Housing Inventory Sales" below.
Increased corporate general and administrative expenses, as discussed in
"Corporate Expenses" below, added to the decline.
Cash Flows from Investing Activities
During the first quarter of 2003, net cash provided by investing activities was
$2.8 million. In the first quarter of 2002, we used net cash in investing
activities of $5.6 million.
Proceeds from the sale of real estate increased $10.6 million. See "Sales of
Consolidated Properties" below for the detail of net cash proceeds from the sale
of consolidated properties during the first quarter of 2003. During the first
quarter of 2002, Tarragon received its share of net proceeds from the sale of
two partnership properties totaling $8.5 million.
During the first quarter of 2003, Tarragon advanced $2.3 million and $189,000,
respectively, to One Las Olas and East Las Olas in connection with the
development of luxury condominium projects. During the same period in 2002,
advances to these entities were $4.7 million and $4.1 million, respectively.
Cash Flows from Financing Activities
Cash provided by financing activities decreased $1.2 million in the first
quarter of 2003 compared to the first quarter of 2002.
As stated previously, proceeds from borrowings are a significant source of cash
for Tarragon. During the first quarter of 2002, we received net proceeds of $4.6
million from financings of consolidated properties. We also received $7.3
million from construction loan borrowings. During the first quarter of 2003,
construction loan borrowings were $26.1 million, of which $16.7 million was used
to payoff mortgages secured by Pine Crest Apartments.
20
Common Stock Repurchase Program
The Board of Directors has authorized a common stock repurchase program. We
intend to continue to repurchase shares of our common stock as long as we
believe the fair market value of our net assets per share is substantially
greater than the market price of our common stock. We repurchased 25,340 shares
of our common stock in open market and negotiated transactions during the first
quarter of 2003 at a cost of $350,000. Subject to market conditions, we expect
to repurchase shares of our common stock in 2003 at a rate consistent with that
of 2002. As of March 31, 2003, Tarragon had authority to repurchase an
additional 605,066 common shares.
Sales of Consolidated Properties
The following table summarizes sales of consolidated properties during the first
quarter of 2003. Except for the sale of a portion of Northwest O'Hare Office
Building, the gains on sale were presented in discontinued operations in
accordance with SFAS No. 144.
Net Cash Gain
Date of Sale Property Sale Price Proceeds on Sale
- -----------------------------------------------------------------------------------------------------------
Jan-03 Prado Bay Apartments $ 10,315 $ 4,119 $ 5,107
Jan-03 Newport Apartments 10,000 4,106 2,013
Jan-03(1) Northwest O'Hare Office Building 3,000 2,748 1,223
Feb-03 Briarwest Shopping Center 3,100 1,426 1,098
Mar-03 Holly House Apartments 3,017 1,186 1,005
-------- ------- -------
$ 29,432 $13,585 $10,446
======== ======= =======
- -------------------
(1) Represents the sale of a portion of the property.
For-Sale Housing Inventory Sales
The following table summarizes the sales and cash flow of 5600 Collins Avenue
for the three month periods ended March 31, 2003 and 2002. We recognized no
gross profit on sales for these periods.
Three Months Ended
March 31,
-----------------------------
2003 2002
-----------------------------
Number of units sold.............................. 12 37
Aggregate sales................................... $ 3,754 $ 9,244
Aggregate sales collected......................... $ 3,685 $ 8,948
Mortgage payments................................. - <6,737>
----------- -----------
Net cash proceeds................................. 3,685 2,211
Renovation costs paid............................. <513> <1,487>
----------- -----------
Net cash received................................. $ 3,172 $ 724
=========== ===========
Additionally, during the first quarter of 2003, we incurred $2.4 million in
renovation costs in connection with the Pine Crest condominium conversion.
Due to an increase in estimated costs to complete the condominium conversion of
5600 Collins Avenue, we recorded For-sale housing inventory write-downs in 2002
totaling $2.7 million. With the sell-out of the project nearing completion, we
implemented a new sales strategy in April 2003 to facilitate a quick close-out
of the project and to enable us to reallocate resources devoted to this project
to other projects. In connection with the
21
new sales strategy, we lowered the asking prices of the remaining condominium
units. Based on the lower sale prices, we have written down the carrying value
of the project as of March 31, 2003, by $1.6 million. As of May 9, 2003, we have
only four unsold units remaining.
RESULTS OF OPERATIONS
Consolidated Properties
At March 31, 2003, our consolidated apartment communities included 9,482
operating units, and our consolidated commercial properties had an aggregate 1.1
million square feet. The following table summarizes the components of aggregate
property level net operating results for all of our consolidated properties for
the three month periods ended March 31, 2003 and 2002.
Three Months Ended
March 31,
-----------------------------------------------
2003 2002 Change
-----------------------------------------------
Rental revenue.................................... $ 21,567 $ 19,457 $ 2,110
Property operating expenses....................... <11,232> <10,268> <964>
-------- -------- ---------
Net operating income.............................. 10,335 9,189 1,146
Interest expense.................................. <8,419> <5,221> <3,198>
Depreciation expense.............................. <4,765> <4,322> <443>
-------- -------- ---------
$ <2,849> $ <354> $ <2,495>
======== ======== =========
The following table presents the changes in property level revenues and expenses
caused by properties consolidated in April 2002 and new development properties
in lease-up.
Properties
Consolidated in Properties in Other
April 2002 (a) Lease-up (b) Changes Total
-----------------------------------------------------------------
Rental revenue......................... $ 1,536 $ 741 $ <167> $ 2,110
Property operating expenses............ <641> <224> <99> <964>
-----------------------------------------------------------------
Net operating income................... 895 517 <266> 1,146
Interest expense....................... <252> <279> <2,667> <3,198>
Depreciation expense................... <280> <120> <43> <443>
-----------------------------------------------------------------
$ 363 $ 118 $ <2,976> $ <2,495>
=================================================================
- --------------------------
(a) In connection with a change in control, Antelope Pines and Woodcreek
Garden were consolidated beginning April 2002.
(b) Includes three properties recently completed or under construction that
began lease-up in 2002 or 2003.
Other increases for interest expense include a $3.1 million prepayment penalty
and $241,000 of deferred financing expenses written off upon the early payoff of
two mortgages secured by Pine Crest Apartments. The mortgages were paid off in
connection with the closing of a $25 million construction loan to finance the
condominium conversion of this property.
22
The following table presents operating information about our same store
portfolio of 42 consolidated apartment communities with 8,716 units owned for
both three month periods.
Three Months Ended
March 31,
-------------------------------------------------------
Percentage
2003 2002 Change Change
-------------------------------------------------------
Rental revenue.................................... $ 16,562 $ 15,889 $ 673 4.2%
Property operating expenses....................... <8,860> <8,426> <434> <5.2%>
----------- -------- ---------- ------------
Net operating income.............................. $ 7,702 $ 7,463 $ 239 3.2%
=========== ======== ========== ============
Net operating income as a percentage of rental
revenue......................................... 46.5% 47.0% <.5%>
Average monthly rental revenue per unit........... $ 633 $ 608 $ 25 4.1%
Unconsolidated Partnerships and Joint Ventures
The following table summarizes the components of equity in income of
unconsolidated partnerships and joint ventures for the three month periods ended
March 31, 2003 and 2002.
Three Months Ended
March 31,
----------------------------------------------
2003 2002 Change
----------------------------------------------
Rental revenue.................................... $ 10,858 $ 11,536 $ <678>
Property operating expenses....................... <5,883> <5,629> <254>
------------- ----------- -----------
Net operating income.............................. 4,975 5,907 <932>
Interest expense.................................. <3,835> <3,511> <324>
Depreciation expense.............................. <2,289> <1,910> <379>
Gain on sale of real estate....................... - 26,228 <26,228>
Discontinued operations........................... - 109 <109>
Elimination of management fees paid to Tarragon... 378 346 32
Outside partners' interest in loss of
joint ventures.................................. 233 <1,280> 1,513
Distributions in excess of investment............. 408 - 408
Reduction in gain recognized for distributions in
excess of investment recognized in 2000......... - <16,257> 16,257
------------- ----------- -----------
Equity in income of partnerships and
joint ventures.................................. $ <130> $ 9,632 $ <9,762>
============= =========== ===========
Gain on sale of real estate for 2002 includes a $25.1 million gain on the sale
of Devonshire Apartment Owners' sole property, The Villages at Gateway. The
reduction in gain recognized for distributions in excess of investment
recognized in 2000 relates to Devonshire Apartment Owners. This income was
recognized in connection with the transfer of ownership of The Villages at
Gateway to the joint venture in July 2000 and represented distribution of
financing proceeds in excess of our investment in the joint venture.
Discontinued operations include the net operating results of Stone Creek
Associates whose only property was sold in December 2002.
23
Distributions in excess of investment are primarily related to distributions of
financing proceeds of joint ventures in which we have recovered our investment.
In these situations, the joint ventures' debt is non-recourse to Tarragon, and
Tarragon has not committed to fund any cash flow deficits of the joint ventures.
The following table presents the effect of properties consolidated,
deconsolidated, or sold since March 31, 2002, and new development properties in
lease-up on aggregate joint ventures' property level revenues and expenses.
Properties Properties Property Other
Consolidated in Sold in De-consolidated Properties in Other
April 2002 (a) 2002 (b) in 2003 (c) Lease-up (d) Changes Total
-----------------------------------------------------------------------------------------
Rental revenue................... $ <1,405> $ <1,187> $ 188 $ 1,471 $ 255 $ <678>
Property operating expenses...... 550 730 <265> <826> <443> <254>
-----------------------------------------------------------------------------------------
Net operating income ...... <855> <457> <77> 645 <188> <932>
Interest expense................. 268 368 <142> <542> <276> <324>
Depreciation expense............. 243 - <130> <432> <60> <379>
-----------------------------------------------------------------------------------------
Loss before gain on sale of
real estate and discontinued
operations..................... $ <344> $ <89> $ <349> $ <329> $<524> $<1,635>
=========================================================================================
- --------------------------
(a) In connection with a change in control, Antelope Pines and Woodcreek
Garden were consolidated beginning April 2002.
(b) Includes four apartment communities sold in 2002. Operating results for
a fifth property sold have been presented in discontinued operations.
(c) Due to a change in control in connection with forming a joint venture,
The Vintage at Fenwick Plantation was deconsolidated in 2003.
Construction of this property was recently completed, and it began
leasing in July 2002.
(d) Includes three partnerships with properties recently completed or under
construction that began lease-up in 2002.
Corporate Expenses
Corporate general and administrative expenses increased $1.2 million for the
first quarter of 2003 compared to the first quarter of 2002 primarily due to
development-related personnel additions and compensation increases.
SEGMENT OPERATING RESULTS
Investment Division
Net operating income (rental revenue less property operating expenses) for our
55 same store Investment Division apartment communities with 11,911 units
(consolidated and unconsolidated) decreased $341,000, or 3%, in the first
quarter of 2003 compared to the first quarter of 2002. This decrease was due to
a $901,000, or 7.9%, increase in operating expenses, partially offset by a
$560,000, or 2.4%, increase in rental revenues. Net operating income as a
percentage of rental revenue for these properties was 47.9% in the first quarter
of 2003 and 50.6% in the first quarter of 2002. Weather-related costs,
including utilities and heavy snow removal, were higher in 2003.
The four (three consolidated and one unconsolidated) apartment communities
stabilized since March 31, 2002, contributed net operating income of $1.3
million in the first quarter of 2003 to the Investment Division. Prior to their
stabilization, their operating results were presented in the Development
Division.
Tarragon uses funds from operations ("FFO") along with net income or loss
computed in accordance with GAAP to measure the performance of the properties in
its Investment Division. See NOTE 6. "SEGMENT REPORTING" in the Notes to
Consolidated Financial Statements for the definition of FFO. The 55 same store
apartment communities with 11,911 units, both consolidated and unconsolidated,
reported FFO of $4.7 million in the first quarter of 2003, which is consistent
with that reported in the first quarter of 2002. The four apartment communities
stabilized since March 31, 2002, contributed FFO of $704,000 in the first
quarter of 2003 to the Investment Division.
24
Development Division
Tarragon measures the performance of its Development Division primarily by gross
profit from third party and intercompany sales. Gross profit from intercompany
sales is the excess of the properties' estimated fair values over their net
carrying values at the date they are determined to be stabilized and moved into
the Investment Division. Gains on transfers of assets between segments do not
represent gains recognizable in accordance with GAAP and, accordingly, are
eliminated for purposes of consolidated reporting.
In the first quarter of 2003, the Development Division reported gross profit of
$5.5 million on the transfer of properties that had become stabilized (three
consolidated and one unconsolidated) to the Investment Division. In the first
quarter of 2002, the Development Division reported gross profit of $38.7 million
on the transfer of seven consolidated and five unconsolidated properties to the
Investment Division upon the determination that they were stabilized.
For-Sale Housing Division
Tarragon also measures the performance of its For-Sale Housing Division
primarily by gross profit from third party and intercompany sales. Although it
is our smallest division, it is expected to be our most rapidly growing
division.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Tarragon is exposed to market risk from changes in interest rates that may
adversely affect our financial position, results of operations, and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage such
exposure through our regular operating and financing activities. We do not trade
or speculate in financial instruments. There have been no material changes to
Tarragon's market risk since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed within 90 days of the
filing of this Form 10-Q, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in reports that
the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There were no significant
changes in the Company's internal controls or other factors that could
significantly affect these disclosure controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 2003, in connection with the condominium conversion of Pine Crest
Village at Victoria Park, representatives of Tarragon may have inadvertently
disturbed asbestos-containing materials in violation of federal, state, and/or
local environmental laws. Such actions are currently under investigation by the
Environmental Protection Agency and may result in civil and/or criminal
proceedings under applicable law. The extent of any liability is unknown at
this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARRAGON REALTY INVESTORS, INC.
Date: May 13, 2003 By: /s/William S. Friedman
------------------------------
William S. Friedman
President, Chief Executive
Officer, Director, and Chairman of the
Board of Directors
Date May 13, 2003 By: /s/Erin D. Pickens
----------------------------------
Erin D. Pickens
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
27
CERTIFICATION
I, William S. Friedman, President/CEO, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tarragon Realty
Investors, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 /s/William S. Friedman
------------------------------------
William S. Friedman, President
and Chief Executive Officer
28
CERTIFICATION
I, Erin D. Pickens, Executive Vice President/CFO, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tarragon Realty
Investors, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 /s/Erin D. Pickens
-----------------------------------
Erin D. Pickens
Executive Vice President
and Chief Financial Officer
29
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
EXHIBIT 99.1 Certification of Chief Executive Officer Page 31
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
EXHIBIT 99.2 Certification of Chief Financial Officer Page 32
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
30