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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]*
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _________________ TO________________
COMMISSION FILE NUMBER 0-8003
TARRAGON REALTY INVESTORS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 94-2432628
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 MONTICELLO AVENUE, SUITE 200, DALLAS, TX 75205
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 599-2200
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
9% SERIES A SUBORDINATED DEBENTURES DUE JUNE 30, 2003
COMMON STOCK, $.01 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of April 5, 1999, the Registrant had 8,391,632 shares of common stock
outstanding. Of the total shares outstanding, 5,460,384 were held by other than
those who may be deemed to be affiliated, for an aggregate value of $67,572,252
based on the last trade as reported by the National Association of Securities
Dealers Automated Quotation System on April 5, 1999. The basis of this
calculation does not constitute a determination by the Registrant that all of
such persons or entities are affiliates of the Registrant as defined in rule 405
of the Securities Act of 1933, as amended.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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INDEX TO
ANNUAL REPORT ON FORM 10-K
Page
PART I
Item 1. Business........................................................................................... 3
Item 2. Properties......................................................................................... 6
Item 3. Legal Proceedings.................................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders................................................ 21
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters................................................................. 22
Item 6. Selected Financial Data............................................................................. 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................................... 41
Item 8. Financial Statements and Supplementary Data........................................................ 42
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................................ 82
PART III
Item 10. Directors and Executive Officers of the Registrant................................................. 82
Item 11. Executive Compensation............................................................................. 88
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 90
Item 13. Certain Relationships and Related Transactions..................................................... 93
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 96
Signature Page..................................................................................... 98
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PART I
ITEM 1. BUSINESS
General
Tarragon Realty Investors, Inc., (the "Company"), a Nevada corporation
incorporated on April 2, 1997, is the successor in interest to National Income
Realty Trust ("NIRT") and Vinland Property Trust ("Vinland"). NIRT was a
California business trust organized on October 31, 1978. It commenced operations
as a real estate investment trust ("REIT") on March 27, 1979. Vinland was also a
California business trust established on July 18, 1973. Vinland commenced
operations on April 2, 1974, as a REIT. In July 1997, Vinland merged with the
Company, its wholly-owned subsidiary.
Effective November 23, 1998, NIRT incorporated as a California corporation and
on November 24, 1998, merged with and into the Company, with the Company as the
survivor. Pursuant to the terms of the Agreement and Plan of Merger dated June
5, 1998, (the "Merger Agreement") entered into by the Company and NIRT, each
share of beneficial interest of NIRT was converted into 1.97 shares of common
stock of the Company. As a result, the shareholders of NIRT became the owners of
85% of the Company's common stock.
FOR ACCOUNTING PURPOSES, THE MERGER IS TREATED AS A REVERSE ACQUISITION OF THE
COMPANY BY NIRT USING THE PURCHASE METHOD OF ACCOUNTING, AND HISTORICAL BALANCES
AND OPERATIONS OF THE COMPANY FOUND IN THIS FORM 10-K ARE THOSE OF NIRT. SHARE
AND PER SHARE INFORMATION HAS BEEN RESTATED RETROACTIVELY TO GIVE EFFECT TO THE
1.97 TO 1 EXCHANGE RATIO IN THE MERGER. REFERENCES TO THE COMPANY IN RELATION TO
DATES PRIOR TO NOVEMBER 24, 1998, ARE INTENDED TO INCLUDE BOTH OF THE COMPANY'S
PREDECESSORS, NIRT AND VINLAND.
Immediately following the merger, the Company acquired Tarragon Realty Advisors,
Inc. ("TRA"), the Company's advisor since March 1, 1994, and NIRT's advisor
since April 1, 1994, from William S. Friedman and his wife, Lucy N. Friedman,
for 100,000 shares of the Company's common stock and options to acquire 350,000
additional shares of the Company's common stock at prices ranging between $13
and $16 per share. William S. Friedman is the President, Chief Executive
Officer, and a Director of the Company and also served as President, Chief
Executive Officer, and a Trustee of NIRT and as Director and Chief Executive
Officer of TRA. The Friedman family owns approximately 34% of the outstanding
shares of common stock of the Company. In addition to the options to acquire
350,000 additional shares received in connection with the Company's purchase of
TRA discussed above, Mr. Friedman also holds options to acquire 450,000
additional shares of the Company's common stock at prices ranging between $12
and $15 per share.
The Company is now an integrated, self-administered, self-managed REIT
controlling approximately 15,000 apartment units and 2.1 million square feet of
retail and office space, primarily in Florida, Texas, Connecticut, California,
and Colorado.
The Company's principal offices are located at 3100 Monticello Avenue, Suite
200, Dallas, Texas 75205. The telephone number is (214) 599-2200 and fax number
is (214) 599-2220.
Business Plan and Investment Policy
The Company's business and only industry segment is investing in and developing
income-producing real estate directly and through partnerships and joint
ventures. At December 31, 1998, the Company's directly owned real estate
portfolio consisted of 78 properties, including 51 apartment communities, 14
shopping centers, four office buildings, one office park, one combination office
building and shopping center, one combination office/ retail/medical facility,
five parcels of land, and one single family residence, located throughout the
continental United States, with concentrations in Florida, Texas, California,
and Colorado. The Company also held
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ITEM 1. BUSINESS (Continued)
Business Plan and Investment Policy (Continued)
investments in 14 unconsolidated real estate partnerships reported on the equity
method (owning three office buildings and 21 apartment communities, two of which
are currently under construction and one on which construction is expected to
begin in mid-1999).
Due to the nature and diversity of the Company's properties and tenants, the
Company's business is not seasonal.
The Company's acquisition strategy is opportunistic but focused on acquiring
properties that add to the efficiency of the Company's portfolio. For example,
all ten of the operating apartment properties purchased by the Company since the
beginning of 1996 were in markets where the Company already had a presence. The
Company acquires older and often troubled properties that are not considered of
institutional quality as well as better performing, new, or high quality
properties. The Company has a policy of continuously improving and upgrading its
older properties in order to achieve increased revenues. During 1998, $12.9
million in capital expenditures were made to the operating apartment portfolio.
In addition, $1.5 million ($179 per unit) was expensed for recurring
replacements and repairs and maintenance. Management believes that a significant
portion of such capital expenditures was required to remedy deferred maintenance
existing at the time of acquisition and to upgrade maintenance and curb appeal.
Accordingly, such expenses are expected to decline on a per unit basis as the
proportion of stabilized properties in the Company's portfolio increases.
The Company has financed acquisitions and capital improvements largely through
mortgages and internally generated funds. As a matter of policy, cash
distributions have been held to less than fifty percent of funds from operations
("FFO"), as defined by the National Association of Real Estate Investment Trusts
(see ITEM 6. "SELECTED FINANCIAL DATA - Other Data" for the definition of FFO).
Funds for investment have also been generated by property sales and from the
collection of mortgages receivable, which will not be a material future source.
Accordingly, property sales and proceeds realized from financing or refinancing
are expected to provide the bulk of funds available for investment. In this
regard, the availability and cost of long term mortgage funds are key factors in
the Company's ability to continue to make new investments without additional
equity offerings.
Management of the Company
The Board of Directors, elected annually by the shareholders or appointed by the
incumbent Board until the next annual shareholder meeting, is responsible for
managing the affairs of the Company. There are currently nine members on the
Board, eight of whom are independent. Until November 1998, day-to-day management
was performed by TRA, which operated under the supervision of the Board pursuant
to a written advisory agreement approved by shareholders (terminated following
the merger). TRA's duties included, among other things, locating, investigating,
evaluating, and recommending real estate investment and sale opportunities and
financing and refinancing sources for the Company. TRA also served as a
consultant in connection with the business plan and investment policy decisions
made by the Board.
Prior to the November 1998 acquisition of TRA, the Company had no employees.
Employees of TRA provided services to the Company, such as accounting, legal,
and administrative services. Currently, the Company has approximately 420
employees, including 330 site-level property employees (such as property
managers and maintenance staff) and 90 corporate employees. The Company has an
employment contract only with William S. Friedman, President and Chief Executive
Officer. See ITEM 11. "EXECUTIVE COMPENSATION" for the terms of his employment
contract. Management of the Company believes employee relations to be good.
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ITEM 1. BUSINESS (Continued)
Property Management
From April 1994 through November 1998, the Company paid property management fees
of 4.5% of the monthly gross rents collected on apartment properties and 1.5% to
5% of the monthly gross rents collected on commercial properties to TRA and/or
Tarragon Management, Inc. ("TMI"), a wholly-owned subsidiary of TRA. TRA
subcontracted with third parties to provide property level management services
to most of the retail and office properties and the apartment properties located
in California, Connecticut, and Colorado. Since the Company acquired TRA in
November 1998, the Company is no longer required to pay management fees on the
directly owned properties managed in-house, although it continues to pay
management fees on those properties under contract with outside management
companies.
Competition
The Company has not experienced difficulty in locating investment opportunities.
Management believes that ownership of properties in which the Company invests is
highly fragmented among individuals, partnerships, public and private
corporations, and other REITs. No single entity or person dominates the market
for such properties. At any given time, a significant number of apartment
properties are available for purchase in the various markets where the Company
seeks additional acquisitions. Management believes that there is and will
continue to be a strong demand for well-maintained, affordable housing in these
markets and that the factors discussed above provide a market where a sufficient
number of attractive investment opportunities will be available to allow the
Company to continue to expand through acquisitions as well as through the
development of new properties. However, since the success of any multifamily
real estate investment is impacted by other factors outside the control of the
Company, including general demand for apartment living, interest rates,
operating costs, and job growth, there can be no assurances that the Company
will be successful in its plan to continue to expand through acquisitions.
Certain Factors Associated with Real Estate and Related Investments
The Company is subject to the risks associated with ownership, operation, and
financing of real estate. These risks include, but are not limited to, liability
for environmental hazards; changes in general or local economic conditions;
changes in interest rates and the availability of permanent mortgage financing
which may render the acquisition, sale, or refinancing of a property difficult
or unattractive and which may make debt service burdensome; changes in real
estate and zoning laws; changes in income taxes, real estate taxes, or federal
or local economic or rent controls; floods, earthquakes, and other acts of
nature; and other factors beyond the control of the Company. The illiquidity of
real estate investments generally may impair the ability of the Company to
respond promptly to changing circumstances. The Company's management believes
that some of these risks are partially mitigated by the diversification by
geographic region and property type of the Company's real estate. However, to
the extent new investments continue to be concentrated in any particular region
or property type, the advantages of diversification may diminish.
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ITEM 2. PROPERTIES
Details of the Company's real estate portfolio at December 31, 1998, are set
forth in Schedule III to the Consolidated Financial Statements and NOTE 4. "REAL
ESTATE AND DEPRECIATION" of the Notes to Consolidated Financial Statements, both
included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The
discussion below provides summary information about the Company's real estate.
To continue to qualify for federal taxation as a REIT, the Company is required,
among other things, to hold at least 75% of the value of its assets in real
estate assets, government securities, and cash and cash equivalents at the close
of each quarter of each taxable year. At December 31, 1998, the Company's assets
consisted of 82% equity investments in real estate, 10% investments in
partnerships that own real estate, and about 1% cash and cash equivalents. The
remaining 7% were restricted cash and other assets. It should be noted, however,
that the percentage of assets invested in any one category at any particular
time is subject to change, and no assurance can be given that the composition of
the Company's assets in the future will approximate the percentages listed
above.
At December 31, 1998, the Company's real estate portfolio consisted of 78
properties, 53 of which were held for investment. The remaining 25 properties,
some of which were obtained through foreclosure of collateral securing the
Company's mortgage loans receivable, were held for sale. Eleven of the Company's
properties with an aggregate carrying value of $14.9 million were held free and
clear. The other 67 Company properties are encumbered by mortgages securing
indebtedness of $251.1 million at December 31, 1998.
[This space intentionally left blank.]
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ITEM 2. PROPERTIES (Continued)
The following table shows the number of apartment units and commercial square
footage of the Company's properties, including those owned through partnerships,
by state. Number of apartment units includes 834 units under construction owned
through partnerships and 320 units under construction owned directly.
[MAP OF U.S.A.]
Number of Commercial
Apartment Units Square Footage
--------------- --------------
California 973 288,945
Colorado 880 --
Connecticut 1,950 --
Florida 5,601 324,577
Georgia 360 200,264
Illinois -- 105,363
Kentucky 424 --
Louisiana 320 --
Maryland 459 --
Michigan 163 30,650
Mississippi -- 341,361
North Carolina -- 117,200
Nevada -- 39,600
Ohio 504 --
Oklahoma 793 --
Tennessee 840 --
Texas 2,010 363,408
Wisconsin -- 214,620
Washington DC -- 62,229
------ ---------
Total 15,277 2,088,217
====== =========
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ITEM 2. PROPERTIES (Continued)
Types of Real Estate Investments. The Company's real estate consists of
multifamily and commercial properties, primarily office buildings and shopping
centers, or similar properties having established income-producing capabilities.
In selecting real estate for investment, the Company concentrates on properties
for which intensive management coupled with capital improvements can materially
increase value. The Company favors buying or developing properties in areas in
which it presently operates. The location, age, and type of property, gross
rentals, lease terms, financial and business standing of tenants, operating
expenses, fixed charges, land values, and physical condition are also
considered. The Company may acquire properties subject to, or assume, existing
debt and may mortgage, pledge, or otherwise obtain financing for a portion of
its real estate.
Although the Company has traditionally invested in a wide variety of developed,
income-producing real estate, the Company intends to invest increasing amounts
in major apartment renovations and new construction or development projects
either directly or in partnership with others. To the extent the Company invests
in construction and development projects, it is subject to business risks, such
as cost overruns and delays, associated with higher risk activities. During 1998
and 1997, the Company formed or acquired interests in 12 partnerships set up to
construct or purchase and operate apartment properties. For information on
properties owned through partnerships, see the discussion below under
"Partnership Properties."
The following tables present information about real estate directly owned and
mortgage loans secured by owned real estate at December 31, 1998.
[This space intentionally left blank.]
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TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE --------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- ------ ------- ---- ---- ----
Apartments
Acadian Place .......... 120 143,450 $4.52 $4.04 $3.74
Baton Rouge, LA
Bay West ............... 299 323,774 4.94 5.17 5.22
Bradenton, FL
Bayfront ............... 200 172,720 6.69 5.61 5.56
Houston, TX
Bryan Hill ............. 232 193,500 4.83 4.77 4.59
Bethany, OK
Carlyle Towers ......... 163 247,850 5.86 5.41 5.39
Southfield, MI
Cornell ................ 55 30,150 14.76 13.70 12.70
Los Angeles, CA
Creekwood North ........ 180 166,500 5.99 5.99 5.56
Altamonte Springs, FL
Cross Creek ............ 144 102,258 6.98 7.32 7.14
Lexington, KY
Devonshire ............. 760 521,800 7.54 6.74 5.84
Denver, CO
Diamond Loch ........... 138 139,354 5.64 5.78 5.57
Fort Worth, TX
Fenway Hall ............ 53 27,175 12.19 11.39 11.68
Los Angeles, CA
Forest Oaks ............ 154 132,460 5.52 5.71 5.68
Lexington, KY
Heather Hills .......... 459 401,029 8.50 7.83 7.87
Temple Hills, MD
Kirklevington .......... 126 99,080 6.84 6.77 6.56
Lexington, KY
Lake Point ............. 540 540,160 3.88 4.25 3.92
Memphis, TN
Marina Park ............ 90 86,850 9.31 8.89 7.76
Miami, FL
Mariposa Manor ......... 41 19,710 9.42 7.48 9.25
Los Angeles, CA
Martins Landing ........ 236 207,704 6.78 6.49 6.41
Lakeland, FL
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- -------- ----------- ----------- ------------ ------------ ------------
Apartments
Acadian Place .......... 93.00% 89.20% $5.27 $5.13 $5.81
Baton Rouge, LA
Bay West ............... 84.00% 93.60% 6.52 6.14 6.73
Bradenton, FL
Bayfront ............... 97.00% 93.50% 7.27 6.92 7.79
Houston, TX
Bryan Hill ............. 98.00% 90.50% 5.26 5.23 5.55
Bethany, OK
Carlyle Towers ......... 94.00% 93.90% 6.25 6.24 6.54
Southfield, MI
Cornell ................ 98.20% 96.40% 15.16 14.41 16.56
Los Angeles, CA
Creekwood North ........ 92.00% 93.90% 6.97 6.72 7.07
Altamonte Springs, FL
Cross Creek ............ 89.00% 81.90% 8.96 8.57 9.27
Lexington, KY
Devonshire ............. 91.00% 95.00% 8.28 7.72 9.57
Denver, CO
Diamond Loch ........... 93.00% 92.80% 6.70 6.42 7.26
Fort Worth, TX
Fenway Hall ............ 100.00% 98.10% 12.83 12.39 13.45
Los Angeles, CA
Forest Oaks ............ 86.00% 85.70% 6.92 6.58 7.40
Lexington, KY
Heather Hills .......... 94.00% 93.00% 9.78 9.90 10.24
Temple Hills, MD
Kirklevington .......... 92.00% 85.70% 7.86 7.64 8.14
Lexington, KY
Lake Point ............. 90.00% 90.00% 5.33 5.12 5.66
Memphis, TN
Marina Park ............ 96.00% 91.10% 10.38 9.93 10.80
Miami, FL
Mariposa Manor ......... 87.80% 100.00% 10.23 10.36 10.67
Los Angeles, CA
Martins Landing ........ 94.00% 95.30% 7.25 7.06 7.86
Lakeland, FL
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TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE ------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- ------ ------- ---- ---- ----
Apartments (Continued)
Meadowbrook ............ 200 126,736 $7.57 $7.14 $6.80
Baton Rouge, LA
Mustang Creek .......... 120 167,880 5.68 5.19 5.11
Arlington, TX
Palm Court ............. 144 125,280 7.80 7.61 7.47
Miami, FL
Park Dale Gardens ...... 224 206,640 5.93 5.36 5.26
Dallas, TX
Park Norton ............ 55 21,744 11.17 9.77 8.67
Los Angeles, CA
Park Place ............. 39 15,640 10.52 8.42 8.15
Los Angeles, CA
Pinecrest .............. 324 226,065 13.63 12.86 12.06
Ft. Lauderdale, FL
Prado Bay .............. 123 109,756 10.03 9.64 8.72
North Bay Village, FL
The Regent ............. 304 288,320 4.64 3.74 1.74
Jacksonville, FL
River City Landing ..... 352 356,800 4.79 2.99 1.45
Jacksonville, FL
Summit on the Lake ..... 198 138,262 7.46 7.53 7.51
Ft. Worth, TX
Woodbrier .............. 128 115,550 4.61 4.61 3.23
Oklahoma City, OK
Woodcreek .............. 120 99,622 8.86 8.64 8.36
Denver, CO
Woodcreek .............. 260 198,623 7.62 7.30 6.82
------- --------- ----- ----- -----
Jacksonville, FL
SUBTOTAL (e) ........... 6,581 5,752,442 6.61 6.19 5.70
------- --------- ----- ----- -----
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- -------- ----------- ----------- ------------ ------------ ------------
Apartments (Continued)
Meadowbrook ............ 97.00% 93.50% $8.29 $7.89 $8.79
Baton Rouge, LA
Mustang Creek .......... 88.00% 90.00% 6.92 6.46 7.31
Arlington, TX
Palm Court ............. 91.00% 88.90% 8.90 8.57 9.17
Miami, FL
Park Dale Gardens ...... 96.00% 94.60% 6.49 6.17 7.02
Dallas, TX
Park Norton ............ 92.70% 87.30% 11.96 11.59 12.74
Los Angeles, CA
Park Place ............. 87.20% 89.70% 11.16 10.88 11.81
Los Angeles, CA
Pinecrest .............. 96.00% 97.20% 15.14 14.07 15.46
Ft. Lauderdale, FL
Prado Bay .............. 99.00% 96.70% 10.51 10.18 10.87
North Bay Village, FL
The Regent ............. 88.00% 87.80% 6.00 5.97 6.09
Jacksonville, FL
River City Landing ..... 87.00% 75.60% 6.65 6.07 6.81
Jacksonville, FL
Summit on the Lake ..... 87.00% 89.40% 8.63 8.19 9.13
Ft. Worth, TX
Woodbrier .............. 95.00% 89.10% 5.10 4.94 5.67
Oklahoma City, OK
Woodcreek .............. 97.50% 99.20% 9.30 9.14 9.74
Denver, CO
Woodcreek .............. 94.00% 94.60% 7.93 7.65 8.19
----- ----- ----- ----- -----
Jacksonville, FL
SUBTOTAL (e) ........... 91.88% 91.21% 7.65 7.34 8.10
----- ----- ----- ----- -----
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TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE ----------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- ------ ------- ---- ---- ----
Office Buildings
Emerson Center .......... - 126,979 $10.50 $10.13 $ 7.51
Atlanta, GA
Northwest O'Hare ........ - 105,363 12.41 12.30 11.38
Des Plaines, IL
Rancho Sorrento ......... - 147,973 8.12 7.14 6.83
---- ------- ------ ------ ------
San Diego, CA
SUBTOTAL (e) ............ - 380,315 10.10 9.57 8.32
---- ------- ------ ------ ------
Shopping Centers
Emerson Center .......... - 17,733 14.05 12.86 13.61
Atlanta, GA
Jackson Square .......... - 341,361 1.20 1.23 1.32
Jackson, MS
K-Mart Plaza (f) ....... - 117,200 0.73 0.47 0.39
Charlotte, NC
K-Mart Plaza ............ - 63,887 3.65 3.65 3.65
Temple Terrace, FL
K-Mart Plaza (g) ........ - 55,552 2.96 2.96 2.96
Thomasville, GA
Lakeview Mall ........... - 214,620 1.03 0.74 1.43
Manitowoc, WI
Midland Plaza ........... - 30,650 3.38 3.38 3.38
Midland, MI
Midway Mills ............ - 72,065 9.55 9.74 9.70
Carrollton, TX
Northside Center (h) .... - 139,337 4.03 3.84 3.93
Gainesville, FL
Stewart Square .......... - 39,600 10.18 9.43 8.96
Las Vegas, NV
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- -------- ----------- ----------- ------------ ------------ ------------
Office Buildings
Emerson Center .......... 92.90% 90.42% $13.58 $12.40 $13.27
Atlanta, GA
Northwest O'Hare ........ 80.00% 86.76% 14.80 14.36 14.28
Des Plaines, IL
Rancho Sorrento ......... 85.64% 83.06% 9.80 8.87 11.53
------ ------ ------ ------ ------
San Diego, CA
SUBTOTAL (e) ............ 86.50% 86.54% 12.45 11.57 12.87
------ ------ ------ ------ ------
Shopping Centers
Emerson Center .......... 100.00% 77.31% 14.70 14.12 14.95
Atlanta, GA
Jackson Square .......... 36.80% 39.52% 3.49 3.46 3.48
Jackson, MS
K-Mart Plaza (f) ....... 3.10% 3.10% 2.19 2.00 0.79
Charlotte, NC
K-Mart Plaza ............ 100.00% 100.00% 3.65 3.65 3.65
Temple Terrace, FL
K-Mart Plaza (g) ........ 100.00% 100.00% 2.96 2.96 2.96
Thomasville, GA
Lakeview Mall ........... 37.83% 37.83% 3.17 3.23 2.43
Manitowoc, WI
Midland Plaza ........... 100.00% 100.00% 3.38 3.38 3.38
Midland, MI
Midway Mills ............ 95.00% 93.87% 11.28 10.59 11.53
Carrollton, TX
Northside Center (h) .... 98.92% 97.56% 4.10 4.10 4.10
Gainesville, FL
Stewart Square .......... 93.94% 93.94% 10.96 10.33 8.64
Las Vegas, NV
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TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE ---------------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- --------- --------- --------- --------- ---------
Shopping Centers (Continued)
Times Square ...................... -- 19,550 $ 5.33 $ 5.07 $ 4.72
Lubbock, TX
University Center ................. -- 80,725 2.71 2.48 2.47
--------- --------- --------- --------- ---------
Waco, TX
SUBTOTAL (e) ...................... -- 1,192,280 2.89 2.74 2.88
--------- --------- --------- --------- ---------
SAME STORE TOTAL .................. -- 7,325,037 6.19 5.80 5.38
--------- --------- --------- --------- ---------
(WEIGHTED AVG) (e)
1997 Acquisitions
Courtyard at the Park ............. 127 106,266 4.48 5.47 --
Miami, FL
English Village ................... 300 364,680 4.78 4.70 --
Memphis, TN
Fountainhead ...................... 184 187,080 6.75 7.18 --
Kissimmee, FL
Landmark .......................... 128 113,720 4.56 3.71 --
Tallahassee, FL
Mariner Plaza ..................... -- 52,288 5.63 5.34 --
Panama City, FL
Morningside ....................... 112 89,200 6.28 5.90 --
Jacksonville, FL
Newport ........................... 152 139,364 8.19 7.71 --
Plantation, FL
Vistas at Lake Worth (i) .......... 265 188,120 3.28 0.04
--------- --------- --------- --------- ---------
Ft. Worth, TX
SUBTOTAL (e) ...................... 1,268 1,240,718 5.33 4.79 --
--------- --------- --------- --------- ---------
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- -------- ------------ ------------ ------------ ------------ ------------
Shopping Centers (Continued)
Times Square ............... 84.00% 79.80% $ 6.52 $ 6.12 $ 6.54
Lubbock, TX
University Center .......... 42.96% 42.55% 6.37 5.17 5.64
------------ ------------ ------------ ------------ ------------
Waco, TX
SUBTOTAL (e) ............... 56.43% 56.55% 4.49 4.31 4.11
------------ ------------ ------------ ------------ ------------
SAME STORE TOTAL ........... 85.83% 85.33% 7.38 7.07 7.69
------------ ------------ ------------ ------------ ------------
(WEIGHTED AVG) (e)
1997 Acquisitions
Courtyard at the Park ...... 80.00% 48.80% 9.50 8.21 9.56
Miami, FL
English Village ............ 86.00% 93.00% 5.39 5.18 5.82
Memphis, TN
Fountainhead ............... 92.00% 96.20% 8.00 7.69 8.46
Kissimmee, FL
Landmark ................... 93.00% 72.70% 6.58 5.72 6.79
Tallahassee, FL
Mariner Plaza .............. 100.00% 87.67% 6.19 5.93 6.25
Panama City, FL
Morningside ................ 88.00% 94.60% 7.03 6.53 7.47
Jacksonville, FL
Newport .................... 96.00% 84.90% 9.54 9.29 9.96
Plantation, FL
Vistas at Lake Worth (i) ... 55.00% 1.50% 13.02 13.00 13.03
------------ ------------ ------------ ------------ ------------
Ft. Worth, TX
SUBTOTAL (e) ............... 84.19% 72.94% 8.02 7.64 8.32
------------ ------------ ------------ ------------ ------------
12
13
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE ---------------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- --------- --------- --------- --------- ---------
1998 Acquisitions
1505 Highway 6 .................... -- 62,934 $ 9.75 $ -- $ --
Houston, TX
Desert Winds ...................... 152 121,056 10.61 -- --
Jacksonville, FL
Palm Grove ........................ 142 99,684 8.62 -- --
Orlando, FL
Silver Creek ...................... 152 144,240 8.41 -- --
--------- --------- --------- --------- ---------
Jacksonville, FL
SUBTOTAL (e) ...................... 446 427,914 9.28 -- --
--------- --------- --------- --------- ---------
Acquired through Merger (j)
Aspentree ......................... 296 212,864 7.78 7.50 8.03
Dallas, TX
Briarwest ......................... -- 25,323 10.68 10.77 11.59
Houston, TX
The Brooks ........................ 104 94,176 6.61 6.84 --
Addison, TX
Collegewood ....................... 162 83,700 7.32 8.04 8.28
Tallahassee, FL
French Villa ...................... 101 104,720 6.30 6.09 6.76
Tulsa, OK
Holly House ....................... 57 45,417 8.70 7.84 7.67
North Miami, FL
Mission Trace ..................... 96 104,400 4.32 4.59 5.35
Tallahassee, FL
One Turtle Creek .................. -- 102,811 9.02 8.93 11.13
Dallas, TX
Park 20 West ...................... -- 69,065 13.46 14.82 --
Tallahassee, FL
Phoenix ........................... 254 208,726 5.06 4.91 5.01
Tulsa, OK
Riverside ......................... 145 110,868 9.00 8.49 9.46
Austin, TX
Southern Elms ..................... 78 65,159 6.75 6.66 7.18
Tulsa, OK
Tarzana Towne Plaza ............... -- 37,208 15.92 16.54 14.30
--------- --------- --------- --------- ---------
Tarzana, CA
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- --------- ------------ ------------ ------------ ------------ ------------
1998 Acquisitions
1505 Highway 6 ............. 100.00% -- $ 9.75 $ -- $ 2.38
Houston, TX
Desert Winds ............... 95.00% -- 10.99 -- 9.39
Jacksonville, FL
Palm Grove ................. 99.00% -- 8.91 -- 8.91
Orlando, FL
Silver Creek ............... 99.00% -- 8.60 -- 7.21
------------ ------------ ------------ ------------ ------------
Jacksonville, FL
SUBTOTAL (e) ............... 98.02% -- 9.52 -- 8.81
------------ ------------ ------------ ------------ ------------
Acquired through Merger (j)
Aspentree .................. 95.00% 95.00% 8.54 8.19 9.04
Dallas, TX
Briarwest .................. 82.00% 82.00% 13.62 13.24 13.83
Houston, TX
The Brooks ................. 94.00% 89.00% 7.65 7.85 7.98
Addison, TX
Collegewood ................ 90.00% 92.00% 9.91 9.07 10.51
Tallahassee, FL
French Villa ............... 75.00% 91.00% 6.77 6.68 7.08
Tulsa, OK
Holly House ................ 98.00% 88.00% 9.98 9.03 10.21
North Miami, FL
Mission Trace .............. 88.00% 90.00% 6.61 6.66 6.82
Tallahassee, FL
One Turtle Creek ........... 74.05% 69.00% 14.27 13.32 14.26
Dallas, TX
Park 20 West ............... 97.29% 97.00% 14.17 15.50 14.53
Tallahassee, FL
Phoenix .................... 93.00% 90.00% 5.77 5.60 5.93
Tulsa, OK
Riverside .................. 97.00% 96.00% 9.82 9.51 10.15
Austin, TX
Southern Elms .............. 95.00% 90.00% 7.39 7.36 7.92
Tulsa, OK
Tarzana Towne Plaza ........ 77.70% 80.00% 19.97 20.05 19.74
------------ ------------ ------------ ------------ ------------
Tarzana, CA
13
14
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE ------------------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- ---------- ---------- ---------- ---------- ----------
Acquired through merger (Continued) (j)
SUBTOTAL (e) 1,293 1,264,437 $ 7.60 $ 7.61 $ 6.76
---------- ---------- ---------- ---------- ----------
ACQUISITION TOTAL 3,007 2,933,069 6.89 6.45 6.76
---------- ---------- ---------- ---------- ----------
(WEIGHTED AVG.) (e)
GRAND TOTAL 9,588 10,258,106 $ 6.39 $ 5.91 $ 5.58
========== ========== ========== ========== ==========
(WEIGHTED AVG.) (e)
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- -------- ------------ ------------ ------------ ------------ ------------
Acquired through merger (Continued) (j)
SUBTOTAL (e) 89.97% 89.66% $ 9.12 $ 8.91 $ 8.03
------------ ------------ ------------ ------------ ------------
ACQUISITION TOTAL 88.70% 81.58% 8.71 8.32 8.87
------------ ------------ ------------ ------------ ------------
(WEIGHTED AVG.) (e)
GRAND TOTAL 86.65% 84.32% $ 7.76 $ 7.38 $ 8.03
============ ============ ============ ============ ============
(WEIGHTED AVG.) (e)
(a) Amounts represent rental revenue per square foot on an annual basis. Rental
revenue is equal to gross potential rent after giving effect to all rental
losses including bad debt, vacancies, and discounts and concessions. Gross
potential rent equals actual lease rates on leased units/space and market
rates on vacant units/space.
(b) Represents annualized market rate per square foot at December 31, 1998,
based upon scheduled rents at such time.
(c) Represents actual physical occupancy as of the end of the last week of the
fiscal year ended December 31, 1998.
(d) Represents actual physical occupancy as of the end of the last week of the
fiscal year ended December 31, 1997.
(e) The weighted average rent per square foot and occupancy are based on the
square footage in each property.
(f) K-Mart's lease expired January 1994. At December 31, 1998, space had not
been re-leased.
(g) Lease expires September 2004. During the first quarter of 1995, K-Mart
moved out and sublet the space to two tenants.
(h) K-Mart's lease expires September 2002. K-Mart moved out in 1993 and
continues to pay the scheduled rent on the portion of the space it has not
sublet.
(i) For purposes of this schedule, this property is included with 1997
acquisitions because operations began during 1997 although the property was
purchased in 1994.
(j) Average rent per square foot for the years ended December 31, 1996 and
1997, and for the period from January 1, 1998, through November 23, 1998,
gross potential rent per square foot for the year ended December 31, 1997,
and for the period from January 1, 1998, through November 23, 1998, and
physical occupancy at December 31, 1997, relate to these properties prior
to the merger and therefore are not reflected in the Consolidated Financial
Statements included elsewhere in this Form 10-K. The Brooks Apartments and
Park 20 West Office Park were acquired by the Company in 1997. Therefore,
average rent per square foot for the year ended December 31, 1996, is not
presented for these two properties.
Management believes that its properties are adequately covered by liability and
casualty insurance, consistent with industry standards.
The Company also owns directly five parcels of land (one on which construction
of a 320 unit apartment community is underway and one on which construction of
an apartment community is planned) and a house held for rental which are not
reflected on this schedule.
14
15
TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 1998
(Dollars in thousands)
(Unaudited)
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1998 Rate Date Maturity
- ---------------- ------------ ------------ ------------ ------------ ------------
Apartments
Acadian Place ..................... $ 3,250 $ 3,250 6.56% Jan -09 $ 2,759
Aspentree ......................... 3,966 3,835 8.33% Nov -05 3,390
Bay West .......................... 5,100 4,759 8.89% Jan -19 --
Bayfront .......................... 4,300 4,296 5.99% Nov -08 3,605
The Brooks ........................ 1,375 1,279 9.63% Sep -04 1,074
Bryan Hill ........................ 3,500 3,467 6.93% Jan -08 2,998
Carlyle Towers .................... 5,500 5,464 6.96% Mar -08 4,715
Collegewood (A) ................... 2,050 2,018 8.25% Aug -99 2,002
Cornell ........................... 2,400 2,398 6.16% Nov -08 2,021
Courtyard at the Park (A) ......... 3,230 2,903 7.38% Dec -00 2,791
Creekwood North ................... 3,050 2,980 8.05% May -06 2,678
Cross Creek ....................... 2,720 2,691 7.54% Oct -07 2,367
Desert Winds ...................... 1,834 1,355 8.50% Jul -10 341
Devonshire (A) .................... 15,900 15,900 7.44% Jun -00 15,900
Diamond Loch ...................... 3,512 3,484 6.80% Mar -08 3,005
English Village ................... 6,200 5,918 7.56% Dec -05 4,965
Fenway Hall (A) ................... 1,375 1,286 8.50% Oct -08 720
Forest Oaks ....................... 3,075 2,971 8.16% Jun -06 2,501
Fountainhead (A) .................. 5,650 5,650 7.44% Jun -00 5,650
French Villa ...................... 1,925 1,925 6.82% Jan -09 1,648
Heather Hills ..................... 16,790 17,254 7.88% Jan -31 117
Holly House ....................... 1,760 1,758 6.57% Nov -08 1,498
Kirklevington ..................... 2,470 2,388 9.00% Nov -99 2,364
Lake Point (A) .................... 9,000 9,000 7.46% Jun -00 9,000
Landmark (A) ...................... 1,500 1,500 7.44% Jun -00 1,500
Marina Park ....................... 3,750 3,731 6.89% June -08 3,215
Mariposa Manor (A) ................ 784 747 8.00% Apr -02 708
Martins Landing ................... 5,000 4,776 7.65% Dec -05 4,014
Meadowbrook ....................... 3,700 3,700 6.56% Jan -09 3,148
Mission Trace (A) ................. 2,220 1,807 7.85% May -06 --
Mission Trace (A) ................. 290 236 7.60% May -06 --
Morningside ....................... 1,658 1,599 8.35% Apr -03 1,474
Mustang Creek (A) ................. 4,600 4,600 6.94% Jun -01 4,600
Newport ........................... 5,100 4,983 8.18% Apr -06 4,498
Palm Court ........................ 3,000 2,861 9.67% Dec -04 2,525
Palm Grove ........................ 1,879 1,307 8.50% Feb -12 --
Park Dale Gardens ................. 3,000 2,858 8.30% Jul -05 2,448
15
16
TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 1998
(Dollars in thousands)
(Unaudited)
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1998 Rate Date Maturity
- ----------------- ------------ ------------ ------------ ------------ ------------
Apartments (Continued)
Park Norton (A) ........................ $ 564 $ 536 4.98% Jun-05 $ 437
Pinecrest .............................. 14,500 14,291 7.96% Apr-17 8,799
Prado Bay .............................. 4,800 4,756 7.05% Jan-08 4,124
The Regent (A) ......................... 4,900 4,900 6.94% Jun-01 4,900
River City Landing (A) ................. 7,743 7,743 7.44% Jun-00 7,743
Riverside .............................. 4,200 4,159 7.16% Dec-07 3,627
Silver Creek ........................... 1,926 1,283 8.50% May-12 --
Southern Elms .......................... 1,370 1,310 9.68% Feb-02 1,242
Summit on the Lake ..................... 4,800 4,726 6.35% Aug-27 --
Vistas at Lake Worth (A) ............... 10,000 9,500 7.19% May-00 9,500
Vintage at Legacy Lakes (A) ............ 3,000 1,600 8.00% Jun-99 1,600
Vintage at Legacy Lakes (A), (C) ....... 1,921 1,921 6.79% Dec-00 1,921
Woodbrier .............................. 2,200 2,198 6.11% Nov-08 1,850
Woodcreek (CO) ......................... 4,750 4,708 6.71% Feb-08 4,056
Woodcreek (FL) ......................... 7,080 7,062 6.79% Sep-08 6,057
------------ ------------ ------------ -----------
220,167 213,627 7.48%(B) 162,095
------------ ------------ ------------ -----------
[This space intentionally left blank.]
16
17
TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES (Continued)
DECEMBER 31, 1998
(Dollars in thousands)
(Unaudited)
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1998 Rate Date Maturity
- ---------------- ---------- ---------- ---------- ---------- ----------
Office Buildings
1505 Highway 6 (A) ............ $ 2,000 $ 2,000 7.79% Nov -01 $ 2,000
Emerson Center (D) ............ 7,000 7,000 7.38% Nov -99 6,916
Northwest O'Hare (A) .......... 2,450 1,850 6.94% Jun -01 1,850
One Turtle Creek .............. 2,000 1,817 9.00% Feb -05 1,504
Park 20 West .................. 2,000 1,880 8.68% Mar -06 1,415
Rancho Sorrento ............... 3,750 2,643 9.00% Aug -00 2,400
Rancho Sorrento ............... 2,650 2,545 8.13% Mar -09 1,575
Tarzana Towne Plaza ........... 2,973 2,922 9.81% Nov -06 2,613
---------- ---------- ---------- ----------
24,823 22,657 8.20%(B) 20,273
---------- ---------- ---------- ----------
Shopping Centers
Briarwest (A) ................. 1,700 1,677 7.71% Nov -04 1,510
K-Mart - Charlotte (A) ........ 1,360 1,236 9.25% Oct -01 1,188
K-Mart - Temple Terrace ....... 1,750 858 8.50% May -05 70
K-Mart - Temple Terrace (A) ... 347 321 9.75% Oct -99 315
K-Mart - Thomasville .......... 1,300 676 9.63% Sep -05 --
K-Mart - Thomasville (A) ...... 290 268 9.75% Oct -99 264
Mariner Plaza ................. 1,725 1,725 7.15% Jan -09 1,467
Midland Plaza (A) ............. 305 278 10.00% Oct -99 272
Midway Mills .................. 4,200 4,043 8.64% Dec -05 3,465
Northside Center .............. 3,100 1,554 9.00% Nov -05 --
Stewart Square (A) ............ 2,250 2,221 7.44% Dec -04 2,054
---------- ---------- ---------- ----------
18,327 14,857 8.38%(B) 10,605
---------- ---------- ---------- ----------
Total ............................. $ 263,317 $ 251,141 7.60%(B) $ 192,973
========== ========== ========== ==========
(A) For loans with variable interest rates, the rate in effect for the month of
March 1999 is presented.
(B) Represents weighted average interest rate for the month of March 1999.
(C) Construction loan.
(D) Both retail and office portions of Emerson Center secure a mortgage with a
December 31, 1998, balance of $7 million.
17
18
ITEM 2. PROPERTIES (Continued)
Partnership Properties
The Company holds noncontrolling interests in 14 partnerships accounted for
using the equity method. Following is a discussion of these partnerships and the
properties they own.
Partnerships with affiliates of Robert C. Rohdie.
The Company has formed seven partnerships with affiliates of Robert C. Rohdie.
These partnerships were formed for the purpose of constructing luxury apartment
communities. In forming these partnerships, the Company has capitalized on the
experience of a seasoned developer. Mr. Rohdie has been actively involved in
development of residential and commercial properties in Florida and New York for
over 25 years and has been a principal in the development of over 10,000
apartments units. The Company has provided substantially all of the equity for
these construction projects as interest-bearing priority loans to the
partnerships. The Company's partners hold interests in the partnerships that are
subordinate to the Company's priority loans. Affiliates of Mr. Rohdie have
personally guaranteed each of the construction loans, which are non-recourse to
the Company. The following list of the Company's partnerships with Mr. Rohdie
provides information about the properties constructed by each.
Company's
Partnership Name Date Formed Interest Property Name Location
- ---------------- ----------- -------- -------------- --------
RI Windsor, Ltd. Jan 97 50% Mayfaire at Windsor Parke Jacksonville, FL
RI Panama City, Ltd. Jun 97 50% Harbour Green Panama City, FL
Danforth National Apartments,
Ltd. Sep 97 80% Club at Danforth Jacksonville, FL
Tarragon Savannah, L.P. Dec 97 50% Links at Georgetown Savannah, GA
Links Phase II Savannah, GA
Orange National Partners, L.P. Mar 98 50% Vineyard at Eagle Harbor Orange Park, FL
Tarragon Stoneybrook Apartments,
L.L.C. Jun 98 50% Stoneybrook Apartments Orlando, FL
Tarragon Huntsville Apartments,
L.L.C. Nov 98 50% (1) Huntsville, AL
Number Total Cost of Construction
Partnership Name Of Units Development(3) Loan
- ---------------- ------ -------------- --------------
RI Windsor, Ltd. 324 $18.7 million $16 million
RI Panama City, Ltd. 200 $10.1 million $8.8 million
Danforth National Apartments,
Ltd. 288 $16 million $13.7 million
Tarragon Savannah, L.P. 250 $14.5 million $12 million
110 $7.4 million (6)
Orange National Partners, L.P. 328 $20 million $15.8 million
Tarragon Stoneybrook Apartments,
L.L.C. 396 $27.6 million $22 million
Tarragon Huntsville Apartments,
L.L.C. 178 $10.4 million (2)
Date of Initial Date of (3)
Partnership Name Property Name Operations Completion
- ---------------- ------------- ---------- ----------
RI Windsor, Ltd. Mayfaire at Windsor Parke Aug 97 Mar 98
RI Panama City, Ltd. Harbour Green Jan 98 May 98
Danforth National Apartments,
Ltd. Club at Danforth Mar 98 Sep 98
Tarragon Savannah, L.P. Links at Georgetown Aug 98 Mar 99
Links Phase II (4) Second Quarter 2000
Orange National Partners, L.P. Vineyard at Eagle Harbor Dec 98 Third Quarter 1999
Tarragon Stoneybrook Apartments,
L.L.C. Stoneybrook Apartments (4) Second Quarter 2000
Tarragon Huntsville Apartments,
L.L.C. (1) (4) (5)
- ----------------
(1) This partnership is expected to build a property (not yet named) on land
acquired in November 1998.
(2) The partnership plans to obtain an $8.8 million construction loan.
(3) Total cost of development and dates of completion for projects not yet
complete are estimated.
(4) Property has not begun operating.
(5) Construction of this property is expected to begin in the second quarter of
1999.
(6) The partnership plans to obtain a construction loan.
18
19
ITEM 2. PROPERTIES (Continued)
Partnership Properties (Continued)
Ansonia Apartments, L.P. In December 1997, the Company formed Ansonia
Apartments, L.P. ("Ansonia") with two unrelated entities to acquire and
reposition or renovate older suburban apartment properties in central and
eastern Connecticut. The Company formed this partnership to take advantage of
the acquisition and management skills of the principals of the outside partners,
Richard Frary, Joel Mael, Robert Rothenberg, and Saul Spitz, who have been
involved in the management and renovation of apartment and commercial properties
in the northeastern United States for over ten years. The Company has a 70%
interest in this partnership. The outside partners have a 30% interest in the
partnership, subject to their obligation to pay the Company 30% of the amounts
contributed to the partnership by the Company plus interest. Between December
1997 and August 1998, Ansonia purchased ten properties in separate transactions.
The cash portion of the purchase price of each acquisition was contributed to
Ansonia by the Company. Funds contributed by the Company constitute priority
loans to the partnership.
The following table sets forth information about the properties owned by Ansonia
as of December 31, 1998.
Date Number
Property Name Acquired Location Of Units Purchase Price Mortgage
- --------------------------- -------- ---------- -------- -------------- -------------
Meriden East Dec 97 Meriden, CT 66 $1.8 million $1.4 million
Autumn Ridge Dec 97 East Haven, CT 116 $2.0 million $1.5 million
Lakeview Apr 98 Waterbury, CT 88 $3.0 million $2.4 million
Parkview Jul 98 Naugatuck, CT 160 $5.5 million $4.6 million
Sagamore Hills Jul 98 Middletown, CT 212 $6.6 million $4.4 million
Prescott Glen Jul 98 East Hartford, CT 562 $16.7 million $13.6 million
Groton Towers Aug 98 Groton, CT 114 $4.4 million $4.2 million
Whalers' Point/Nutmeg Woods Aug 98 New London, CT 382 $14.6 million $13.8 million
Fox Run Aug 98 Ledyard, CT 172 $7.3 million $5.9 million
Foxon Woods Aug 98 East Haven, CT 78 $2.7 million $2.0 million
Sacramento Nine. The Company owns two fully leased office buildings in the
vicinity of Sacramento, California, as a 70% tenant-in-common with Continental
Mortgage and Equity Trust.
801 Pennsylvania Avenue. In June 1995, the Company acquired a 50% economic
interest in an office building located at 801 Pennsylvania Avenue, Washington,
D.C., through purchase of a first lien mortgage note with a face value of $8.5
million for $3 million. In accordance with terms of the note, the Company's $3
million investment, as well as any additional advances made to the property, was
to be repaid from property cash flow after operating expenses with interest at
11% per annum. The $5.5 million remaining balance of the note plus accrued
interest entitled the Company to 50% of all funds available after property
operating expenses plus 50% of the proceeds from any sale and any refinancing.
In June 1998, new first mortgage financing of $4.2 million was obtained. The
Company received $3.8 million of the proceeds, $2.9 million of which represented
the balance of its original investment, $606,000 of which was accrued interest,
and $267,000 representing the Company's 50% participation in excess financing
proceeds.
19
20
ITEM 2. PROPERTIES (Continued)
Partnership Properties (Continued)
National Omni Associates, Ltd. In December 1997, the Company acquired 55% of
National Omni Associates, Ltd., which purchased 5600 Collins, a 289-unit high
rise waterfront apartment building in Miami Beach, Florida, in February 1998.
The purchase price of $32 million was partially funded through $26 million of
first and second lien mortgages. The remainder of the purchase price was paid
with funds contributed by the Company. In connection with the merger of the
Company with NIRT, the Company's interest in this partnership increased to 70%.
Larchmont Associates, L.P. The Company holds a 57% interest in Larchmont
Associates, L.P., which owns Larchmont West Apartments, a 504-unit operating
property presently under repositioning and located in Toledo, Ohio. The
Larchmont interest was initially acquired by Vinland in December 1995 for a cash
investment of $418,000. The Company's investment plus additional advances to the
partnership are subject to repayment with simple interest at 18% prior to any
distributions to the partners.
Antelope Pines Estates, L.P., and Woodcreek Garden Apartments, L.P. In December
1998, the Company purchased general partner interests in Antelope Pines Estates,
L.P., which owns Antelope Pines, a 314-unit operating apartment property in
Lancaster, California, and in Woodcreek Garden Apartments, L.P., which owns
Woodcreek Garden Apartments, a 416-unit operating apartment property, also in
Lancaster, California. The Company has made investments in and advances to the
partnerships of $1 million in connection with the purchase of its interests.
The following table sets forth information about operating properties owned by
Company partnerships as of December 31, 1998. The properties owned by Antelope
Pines Estates, L.P., and Woodcreek Garden Apartments, L.P., are stabilized and
fully operational, but they are excluded from the table because operations after
their purchase in December 1998 were not significant.
Average Rent Physical
Per Square Foot(a) Occupancy(b)
Property Number Square ---------------------- -----------------
Partnership Location of Units Footage 1998 1997 1998 1997
--------------------- -------------- -------- ----------- ---------- --------- ------ -------
Sacramento Nine Rancho Cordova, CA - 103,764 $13.91 $13.15 100% 90%
801 Pennsylvania Washington, D.C. - 62,229 12.71 11.63 88% 65%
RI Windsor, Ltd. Jacksonville, FL 324 339,886 3.52 .60 71% 27%
RI Panama City, Ltd. (c) Panama City, FL 200 201,480 3.80 - 62% -
Danforth National Apartments, Ltd. (c) Jacksonville, FL 288 295,620 1.25 - 57% -
Tarragon Savannah, L.P. (c) Savannah, GA 250 260,294 .90 - 52% -
National Omni Associates, L.P. (c) Miami Beach, FL 289 333,552 11.50 - 88% -
Ansonia Apartments, L.P. (d) Connecticut 1,950 1,391,048 3.78 - 80% -
Orange National Partners, L.P. (c) Orange Park, FL 328 354,136 .01 - 1% -
Larchmont Associates, L.P. (e) Toledo, OH 504 339,654 5.56 4.94 91% 86%
- ---------------------
(a) Amounts represent rental revenue per square foot on an annual basis. Rental
revenue is equal to gross potential rent after giving effect to all rental
losses including bad debts, vacancies, and discounts and concessions. Gross
potential rent equals actual lease rates on leased units/space and market
rates on vacant units/space.
(b) Represents actual physical occupancy as of the end of the last week of the
years ended December 31, 1998 and 1997.
(c) Property was constructed or purchased and began operating during 1998.
Therefore, there is no 1997 information.
(d) Partnership owned two properties that operated for less than one month in
1997.
(e) Average rent per square foot for the year ended December 31, 1997, and for
the period from January 1, 1998, through November 23, 1998, and physical
occupancy as of December 31, 1997, relate to this partnership prior to the
merger and therefore are not reflected in the Consolidated Financial
Statements included elsewhere in this Form 10-K.
20
21
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various claims and routine litigation arising in the
ordinary course of business. Management of the Company does not believe that the
results of these claims and litigation, individually or in the aggregate, will
have a material adverse effect on its business, financial position, or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 10, 1998, the Company's Registration Statement on Form S-4 No.
333-60527 was declared effective by the Securities and Exchange Commission. This
Registration Statement covered the issuance of up to 7,586,000 shares of Company
common stock in connection with the Merger Agreement between the Company and
NIRT and the Stock Purchase Agreement between the Company, TRA, William S.
Friedman, and Lucy N. Friedman.
A Joint Proxy Statement/Prospectus was included in the Registration Statement
and was mailed to the respective shareholders of the Company and NIRT in
connection with separate Special Meetings of the shareholders of the Company and
NIRT held on October 20, 1998.
At the Special Meetings, the shareholders of the Company and NIRT voted to
approve and adopt the Merger Agreement and the transactions contemplated by the
Merger Agreement, including the issuance of shares of Company common stock and
the conversion of the shares of beneficial interest of NIRT into the right to
receive 1.97 shares of Company common stock.
As of September 4, 1998, the record date for the Special Meeting, there were
1,272,180 shares of Company common stock outstanding and entitled to vote. At
the Company's Special Meeting on October 20, 1998, a total of 714,508 votes were
cast FOR (93.4% of the total of 765,050 shares voted or 56.16% of those entitled
to vote), 11,084 shares were voted AGAINST such proposal, and 39,458 shares
ABSTAINED from voting. As of September 4, 1998, there were 3,737,171 shares of
beneficial interest of NIRT issued and outstanding and entitled to vote. At the
NIRT Special Meeting on October 20, 1998, a total of 2,245,673 votes were cast
FOR (94.01% of the total of 2,388,803 shares voted or 60.09% of those entitled
to vote), 64,210 shares were voted AGAINST such proposal, and 78,920 shares
ABSTAINED from voting.
[This space intentionally left blank.]
21
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value, is listed on the NASDAQ SmallCap
Market and is traded in the NASDAQ over-the-counter market under the symbol
"TARR." The following table sets forth the high and low bid quotations of the
common stock as reported by the NASDAQ System for the periods indicated. The
following information gives retroactive effect to the exchange of each share of
beneficial interest of NIRT for 1.97 shares of the Company's common stock in
connection with the merger of the Company and NIRT in November 1998 and a 10%
stock dividend paid by NIRT in September 1997. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commissions, and may not necessarily represent actual transactions.
1998 1997
------------------------- -------------------------
High Low High Low
---------- ---------- ---------- ----------
First quarter $ 9.14 $ 7.99 $ 7.04 $ 5.65
Second quarter 10.85 8.88 7.38 7.04
Third quarter 14.02 10.66 7.93 7.15
Fourth quarter 12.31 10.00 8.63 7.74
According to the transfer agent's records, at April 5, 1999, the Company's
common stock was held by approximately 12,400 holders, including beneficial
holders.
Cash dividends per share paid to shareholders in 1998 and 1997 were as follows
(restated to give effect to the November 1998 merger and the September 1997 10%
stock dividend):
1998 1997
---------- ----------
First quarter $ .102 $ .092
Second quarter .102 .092
Third quarter .102 .092
Fourth quarter .105 .102
[This space intentionally left blank.]
22
23
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with all of the
financial statements and notes thereto and with the discussion set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. Dollar amounts are in
thousands, except per share amounts.
On November 24, 1998, the Company and NIRT merged, with the Company as the
survivor, on the basis of 1.97 shares of the Company's common stock for each
share of beneficial interest of NIRT. The merger has been accounted for as a
reverse acquisition of the Company by NIRT using purchase method accounting.
Therefore, historical balances and operating information presented below for
periods prior to the merger are those of NIRT.
For the Years Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
OPERATING DATA
Revenue ............................... $ 58,700 $ 52,017 $ 49,962 $ 45,240 $ 40,135
Expenses .............................. (61,095) (51,749) (49,176) (46,214) (40,915)
------------ ------------ ------------ ------------ ------------
Income (loss) before net gain on sale
of real estate, gain on sale of
investments, gain on insurance
settlement, and extraordinary items .. (2,395) 268 786 (974) (780)
Net gain on sale of real estate ....... 2,108 4,350 3,700 533 385
Gain on sale of investments ........... 123 913 -- 412 141
Gain on insurance settlement .......... -- -- 451 -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations .......................... (164) 5,531 4,937 (29) (254)
Extraordinary items ................... (1,231) 61 -- 737 --
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................... $ (1,395) $ 5,592 $ 4,937 $ 708 $ (254)
============ ============ ============ ============ ============
PER SHARE DATA (1)
EARNINGS PER SHARE
Income (loss) from continuing
operations .......................... $ (.02) $ .72 $ .60 $ -- $ (.03)
Extraordinary items ................... (.16) .01 -- .09 --
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................... $ (.18) $ .73 $ .60 $ .09 $ (.03)
============ ============ ============ ============ ============
Weighted average shares (2) .............. 7,619,604 7,693,031 8,161,197 8,222,799 8,539,220
- ---------------------------------------------
(1) Share and per share data have been restated to give effect to the merger of
the Company with NIRT on the basis of 1.97 shares of the Company's common
stock for each share of beneficial interest of NIRT and 10% stock dividends
paid by NIRT in September of each of 1995 through 1997.
(2) Represents the weighted average shares of common stock used in the
computation of earnings per share.
23
24
ITEM 6. SELECTED FINANCIAL DATA (Continued)
For the Years Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
PER SHARE DATA (CONTINUED)(1)
EARNINGS PER SHARE - ASSUMING DILUTION
Income (loss) from continuing
operations .......................... $ (.02) $ .71 $ .60 $ -- $ (.03)
Extraordinary items ................... (.16) .01 -- .09 --
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................... $ (.18) $ .72 $ .60 $ .09 $ (.03)
============ ============ ============ ============ ============
Weighted average shares -
assuming dilution (2) ............... 7,619,604 7,769,296 8,197,049 8,223,800 8,539,220
Dividends (3) ............................ $ .41 $ .38 $ .34 $ .31 $ .24
December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA
Real estate ........................... $ 293,975 $ 233,936 $ 193,722 $ 195,675 $ 184,658
Notes and interest receivable (4) ..... -- -- -- 6,388 9,997
Investments in and advances to
partnerships ....................... 37,356 13,839 4,739 10,780 11,026
Total assets .......................... 357,060 265,640 211,341 222,038 217,040
Notes, debentures, and
interest payable ................... 263,361 184,126 134,270 144,497 138,316
Shareholders' equity .................. 76,685 71,091 69,063 69,627 73,360
Book value per share .................. $ 9.06 $ 9.47 $ 9.95 $ 10.42 $ 11.58
For the Years Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
OTHER DATA
Cash flows provided by (used in):
Operating activities ................ $ 2,533 $ 3,261 $ 3,795 $ 2,030 $ 1,852
Investing activities ................ (43,828) (43,813) (436) (5,436) (1,409)
Financing activities ................ 39,475 40,952 (1,171) 1,596 1,981
- ---------------------------------------------
(1) Share and per share data have been restated to give effect to the merger of
the Company with NIRT on the basis of 1.97 shares of the Company's common
stock for each share of beneficial interest of NIRT and 10% stock dividends
paid by NIRT in September of each of 1995 through 1997.
(2) Represents the weighted average shares of common stock used in the
computation of earnings per share - assuming dilution.
(3) Dividends in 1995 through 1998 represented return of capital. Dividends in
1994 were taxable to shareholders as ordinary income.
(4) Notes and interest receivable at December 31, 1998, 1997, and 1996, are
classified with other assets.
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25
ITEM 6. SELECTED FINANCIAL DATA (Continued)
For the Years Ended December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
OTHER DATA (CONTINUED)
Calculation of funds from operations:
Net income (loss) ........................ $ (1,395) $ 5,592 $ 4,937 $ 708 $ (254)
Extraordinary items ...................... 1,231 (61) -- (737) --
Gain on insurance settlement (1) ......... -- -- (451) -- --
Net gain on sale of real estate .......... (2,108) (4,350) (3,700) (533) (385)
Gain on sale of investments .............. -- (215) -- -- --
Depreciation and amortization
of real estate assets .................. 7,602 7,225 5,374 5,959 4,992
Depreciation and amortization
of real estate assets of partnerships .. 1,892 356 305 882 1,086
Distributions from partnerships
in excess of the Company's
investments in the partnerships ........ (338) (41) (899) -- --
---------- ---------- ---------- ---------- ----------
Funds from operations (2) ..................... $ 6,884 $ 8,506 $ 5,566 $ 6,279 $ 5,439
========== ========== ========== ========== ==========
- ----------------------
(1) The gain on insurance settlement represents the Company's share of gain
realized by a partnership in which the Company held a 40% interest. The
insurance proceeds from the destruction of a partnership property which was
not rebuilt exceeded the basis of the property.
(2) The Company generally considers funds from operations ("FFO") to be an
appropriate measure of the performance of an equity real estate investment
trust ("REIT"). FFO, as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), equals net income (loss), computed in
accordance with generally accepted accounting principles ("GAAP"),
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments
for unconsolidated partnerships and joint ventures are calculated to
reflect FFO on the same basis. The amortization of deferred financing costs
is not added back to net income (loss) in the Company's calculation. This
treatment is consistent with the Company's historical calculation of FFO.
The Company believes that FFO is useful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, investing activities, and financing activities, it provides
investors an understanding of the ability of the Company to incur and
service debt and to make capital expenditures. The Company believes that in
order to facilitate a clear understanding of its operating results, FFO
should be examined in conjunction with net income (loss) as presented in
the financial statements included elsewhere in this report. FFO does not
represent cash generated from operating activities in accordance with GAAP
and therefore should not be considered an alternative to net income as an
indication of the Company's operating performance or to cash flow as a
measure of liquidity and is not necessarily indicative of cash available to
fund cash needs and dividends. The Company's calculation of FFO may differ
from the methodology for calculating FFO utilized by other REITs and,
accordingly, may not be comparable to such other REITs.
Effective January 1, 1997, the Company modified its calculation of FFO to
include the add back of amortization of leasing commissions associated with
its commercial properties. The Company believes that this treatment is
consistent with a majority of other REITs. If the Company had calculated
FFO in the same manner for each of the years ended December 31, 1996, 1995,
and 1994, FFO would have been higher by $262,000, $272,000, and $235,000,
respectively.
Included in FFO for the years ended December 31, 1998, 1997, 1995, and
1994, are gains totaling $123,000, $698,000, $412,000, and $141,000,
respectively, resulting from the Company's sale of investments in
marketable equity securities.
Included in FFO for the year ended December 31, 1996, is a provision for
loss of $300,000. Included in FFO for the year ended December 31, 1995, is
a provision for loss credit of $425,000. See NOTE 3. "ALLOWANCE FOR
ESTIMATED LOSSES AND PROVISIONS FOR LOSSES" in the Notes to Consolidated
Financial Statements for a description of the 1996 provision for loss. The
1995 provision for loss credit was comprised of the reversal of a $700,000
allowance provided in 1993 against Pepperkorn Office Building and a
provision of $275,000 to reduce the carrying value of K-Mart Shopping
Center in Kansas City, Missouri, to the net sale proceeds received in July
1995.
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26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes thereto.
Introduction
Tarragon Realty Investors, Inc. (the "Company"), a Nevada corporation
incorporated on April 2, 1997, is the successor in interest to National Income
Realty Trust ("NIRT") and Vinland Property Trust ("Vinland"). NIRT was a
California business trust organized on October 31, 1978. It commenced operations
as a real estate investment trust ("REIT") on March 27, 1979. NIRT invested in
income-producing real estate through acquisitions, leases, and partnerships.
Vinland was established on July 18, 1973, and commenced operations on April 2,
1974, as a REIT. Vinland was formed as a California business trust to invest in
commercial and multifamily real estate. In July 1997, Vinland merged with the
Company, its wholly-owned subsidiary.
Effective November 23, 1998, NIRT incorporated as a California corporation and
on November 24, 1998, merged with and into the Company, with the Company as the
survivor. Pursuant to the terms of the Agreement and Plan of Merger entered into
by the Company and NIRT, each share of beneficial interest of NIRT was converted
into 1.97 shares of common stock of the Company. As a result, the shareholders
of NIRT became the owners of 85% of the Company's common stock.
FOR ACCOUNTING PURPOSES THE MERGER IS TREATED AS A REVERSE ACQUISITION OF THE
COMPANY BY NIRT USING THE PURCHASE METHOD OF ACCOUNTING, AND HISTORICAL BALANCES
AND OPERATIONS OF THE COMPANY FOUND IN THIS FORM 10-K ARE THOSE OF NIRT. SHARE
AND PER SHARE INFORMATION HAS BEEN RESTATED RETROACTIVELY TO GIVE EFFECT TO THE
1.97 TO 1 EXCHANGE RATIO IN THE MERGER. REFERENCES TO THE COMPANY IN RELATION TO
DATES PRIOR TO NOVEMBER 24, 1998, ARE INTENDED TO INCLUDE BOTH OF THE COMPANY'S
PREDECESSORS, NIRT AND VINLAND.
Immediately following the merger, the Company acquired Tarragon Realty Advisors,
Inc. ("TRA"), the Company's advisor since March 1, 1994, and NIRT's advisor
since April 1, 1994, from William S. Friedman and his wife, Lucy N. Friedman,
for 100,000 shares of the Company's common stock and options to acquire 350,000
additional shares of the Company's common stock at prices ranging between $13
and $16 per share.
At December 31, 1998, the Company's directly-owned real estate portfolio was
comprised of 78 properties (25 held for sale) located throughout the United
States, with concentrations in the Southeast and Southwest. These properties
include 51 apartment complexes, 14 shopping centers, four office buildings, one
office park, one combination office building and shopping center, one
combination office/retail/medical facility, five parcels of land, and one
single-family residence.
In 1997, the Company began a program of acquiring and developing income
producing real estate, primarily apartment communities, through joint ventures.
At the end of 1997, these joint ventures had purchased two operating apartment
properties and had four apartment properties under construction. During 1998,
construction was completed on three of the four started in 1997 and begun on one
more. Eleven operating apartment properties were purchased in 1998. As a result
of the merger of the Company with NIRT, the Company now holds an additional
operating apartment property owned through a partnership, and the Company's
ownership interest in a second partnership was increased. Construction began on
another apartment community during first quarter 1999. As part of the Company's
normal operating procedures, other properties are under review for purchase or
development including three for which land has been acquired. At December 31,
1998, the Company held interests in 14 joint ventures or partnerships accounted
for using the equity method.
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27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Introduction (Continued)
Through its investments in these entities, the Company has ownership interests
in 21 apartment communities, three of which are under construction and one on
which construction is expected to begin in mid-1999, and three office buildings.
All of the Company's directly-owned real estate, except for 11 properties, and
all properties held in joint ventures, are encumbered by mortgages. In the past,
the Company held mortgage loans, but such loans are now made only in connection
with, and to facilitate, the sale or acquisition of real estate. As a result of
the payoff of existing mortgages, the portfolio of loans has declined so that it
is no longer a significant part of the Company's operations.
The Company's long term objective is to increase the value of its real estate
portfolio through increased operating income, resulting in higher equity values
for and increased dividends to shareholders. Intensive management of and
consistent capital improvements to the existing portfolio are aimed at achieving
increased operating income.
Inflation works both for and against the Company's operations. A benefit of
inflation is that revenue from rentals of its real estate properties generally
tracks increases in inflation. The same is true, however, for property operating
expenses. A benefit of the present low rate of inflation is that interest rates
on new borrowings are now lower than previously experienced. This allows for
larger loans and/or lower debt service payments, thus improving the Company's
liquidity.
The Company places additional focus on enhancing the quality of its portfolio
with selective and opportunistic acquisitions, concentrated on older,
under-managed, and under-performing multifamily projects in geographic regions
where the Company presently operates. Properties that the Company's management
believes have peaked in value or do not provide operating efficiencies within
the Company's portfolio have been placed on the market for sale. While the
Company has identified the properties it desires to sell, market conditions will
determine which of them will actually be sold.
The Company intends to continue investing in new construction of apartment
properties, either directly or through joint ventures, relying on the strength
and experience of its partners in regions or property types where the Company
has little or no experience. To the extent it invests in construction projects,
the Company is subject to business risks, such as cost overruns and delays,
associated with development activities.
In addition to raising capital through operating income and the selective
disposition of certain assets, the Company expects to continue generating funds
for investment through new borrowings and refinancings.
Liquidity and Capital Resources
During the last three years, the Company has produced positive cash flow from
operating activities. Cash and cash equivalents were maintained at about $4
million between 1996 and 1997, declining to $2.4 million at December 31, 1998.
The principal source of cash since 1996 has been proceeds from borrowings,
including refinancing of existing debt and new debt incurred as part of property
acquisitions. Borrowings provided more than $193.4 million during the last three
years and resulted in establishing relationships with lenders that are
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28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
expected to continue. Sale of real estate has been an important source of cash,
raising approximately $14.6 million in the same period. Cash flow from operating
activities provided a steady and increasing part of the Company's needs, about
$9.6 million during that time. In 1998, advances from affiliates became a more
important source of cash; those advances amounted to $5.9 million under a
two-year line of credit arrangement.
Borrowings likewise were the primary source of cash for joint ventures in which
the Company holds interests. At the end 1998, partnership debt was $176 million,
of which $142 million was from financing of 1998 or 1997 acquisition or
development. The balance of the joint venture indebtedness was incurred prior to
1997.
Cash from the Company's new borrowings can be linked most closely to the payment
of existing debt ($106.5 million since 1996), to the acquisition of additional
properties ($23.4 million), for improvements to properties ($58.2 million), and,
in the last two years, loans and equity advances to partnerships ($34.2 million)
used in acquisition and development of apartment properties. Affiliate advances
were also used to facilitate property acquisitions by the Company and the joint
ventures.
Net cash provided by or used in the Company's operating activities, investing
activities, and financing activities for the last three years is reported in the
Consolidated Statements of Cash Flows included in Item 8 "FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA." The following discussion will assist in understanding
the information presented therein.
Sources of cash projected in 1999 include net financing proceeds upon the
refinancing of 20 properties of $30 million, $5.6 million of which was received
in the first quarter of 1999 upon the refinancing of three properties. The
Company also expects to receive $13 million comprising repayment of advances and
accrued interest from the refinancing of four partnership properties.
Additionally, the Company plans to obtain $8 million from new line of credit
facilities during 1999. Sources of cash projected in 1999 also include proceeds
from the sale of eight properties, including one partnership property, of $40
million. The Company expects these sources will continue to be sufficient to
meet projected cash requirements, including debt service obligations, property
maintenance and improvements, development costs on construction properties, and
continuation of regular cash dividends. Although the Company expects sources of
cash to be more than sufficient to fund planned uses of cash, there can be no
assurance that the expected sales and refinancings of properties will be
consummated when anticipated.
Operating Activities
The Company's principal operating activity is the active operation of its
directly-owned real estate largely through its wholly-owned subsidiary Tarragon
Management, Inc.
The Company's cash flow from real estate operations before payment of interest
on mortgage debt continues to increase to $27.8 million in 1998 from $20.7
million in 1997 and $19.3 million in 1996. Properties held for all three years
show increases to $23 million in 1998 from $17 million in 1997 and $16 million
in 1996. The remainder of the increases is primarily due to acquisitions made in
1998, 1997, and 1996. Properties acquired in those years contributed $4.2
million in operating cash flow in 1998, $2.5 million in 1997, and $540,000 in
1996. Property sales likewise affected cash flow from property operations.
Mountain View Shopping Center and Spring Pines Apartments, sold in 1998,
contributed cash flow from operations of $251,000 in 1998 prior to
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29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Operating Activities (Continued)
their sale, $375,000 in 1997, and $300,000 in 1996. Plaza Hills Apartments,
Huntington Green Apartments, and Pheasant Pointe Apartments, sold in 1997,
contributed cash flow from operations of $544,000 in 1997 prior to their sale
and $1.1 million in 1996. In 1996, Century Centre II Office Building contributed
$1.5 million of operating cash flow prior to its sale. See NOTE 4. "REAL ESTATE
AND DEPRECIATION" in the Notes to Consolidated Financial Statements for
discussion of the sales.
Interest paid on mortgages and other debt and related costs of obtaining new
mortgages have increased as the Company's debt level has increased. Interest and
deferred borrowing costs paid were $19.6 million in 1998, $14.5 million in 1997,
and $12.8 million in 1996. See "Financing Activities" for a discussion of the
Company's mortgages and other debt.
Prior to November 24, 1998, the Company paid TRA an advisory fee of 16% per
annum of adjusted funds from operations, as defined in the advisory agreement
and, in accordance with the terms of the advisory agreement, reimbursed TRA for
expenses related to certain services provided by TRA, including, but not limited
to, legal, accounting, investor relations, data processing, and the related
departmental overhead. Since the Company's acquisition of TRA, the advisory
agreement is no longer in place, and expenses previously borne by TRA, including
payroll and other general and administrative costs, are now borne directly by
the Company. Therefore, in the future, advisory fees will not be incurred, and
general and administrative expenses will increase.
Investing Activities
Investing activities are primarily associated with the Company's direct real
estate acquisitions and developments and those made through partnerships.
The expansion of the Company's activities over the past two years has required
increased investments, $43.8 million in each of 1998 and 1997 funded through
outside financing sources. In 1996, net cash used was $436,000, as the bulk of
cash required was generated from other investing sources. Discussion of the
components of cash provided by and used in investing activities during the last
three years follows.
Investments in real estate
The Company used $3.3 million in 1998, $13.7 million in 1997, and $3.2 million
in 1996 in the direct purchase of operating real estate. The Company purchased
three apartment communities in 1998 prior to the merger, five in 1997, and two
in 1996, increasing the Company's multifamily portfolio by 1,629 units. The
Company also purchased a 52,288 square foot shopping center in 1997 and a 62,934
square foot office building in 1998 prior to the merger. The aggregate purchase
prices for the 1998, 1997, and 1996 direct purchases of operating real estate
were $8.5 million, $23.4 million, and $9.4 million respectively. Of the
aggregate costs of acquisition, $6 million in 1998, $9.7 in 1997, and $6.2
million in 1996 was financed through mortgages on certain of the properties.
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30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Investing Activities (Continued)
In April 1998, the Company purchased a 43-acre tract of land adjacent to The
Vistas at Lake Worth, in Fort Worth, Texas for $707,000 in cash. The Company
intends to build an apartment property known as The Observatory on a portion of
this land and to sell the balance to one or more home builders. In May 1998, the
Company purchased a 33-acre tract of land in Frisco, Texas, for $4.5 million,
paying $1.6 million in cash and financing the remainder with a short-term
mortgage. Construction is now underway on a 320-unit luxury apartment community
known as The Vintage at Legacy Lakes which occupies a portion of this site. The
balance of this site is slated for future development.
As part of the merger, the Company acquired 13 properties, nine apartment
complexes with 1,293 units and four commercial properties with 234,407 square
feet. Except for two, all properties are held for investment. The properties'
new cost basis of $39 million was determined by allocating the purchase
consideration based on the properties' relative fair values. The properties
secure debt with balances totaling $26.6 million.
In July 1997, the Company added 300 units to its multifamily portfolio through
its acquisition of an additional 40% interest in English Village Partners, L.P.,
increasing its total ownership to 90%, for $1 million. As a result, English
Village is now a consolidated entity.
During 1998, 1997, and 1996, the Company made real estate improvements totaling
$17.3 million, $27.3 million, and $13.5 million, respectively, to its
properties, including $3.4 million, $9.7 million, and $5.9 million,
respectively, on construction at development properties. Construction at The
Vistas at Lake Worth was completed in the first quarter of 1998. The Company
expects to spend approximately $22.7 million on construction of The Vintage at
Legacy Lakes during 1999 and 2000, $20.9 million of which is expected to be
provided by the construction loan. The Company expects to spend approximately $9
million on capital improvement to its other properties in 1999.
In addition to real estate improvements noted above, payments for property
operating expenses in 1998, 1997, and 1996 include property replacements of $2.3
million, $2.1 million, and $2.8 million, respectively. Property replacements
include such items as plumbing replacements, landscaping, exterior painting,
parking lot improvements, and, in 1996, carpet and appliances. In 1997, the
Company began capitalizing carpet, appliances, and heating, ventilation, and air
conditioning replacements. See discussion below under "Implementation of Change
in Accounting Estimate."
In 1998, the Company sold two properties, Mountain View Shopping Center in Las
Vegas, Nevada, for $2 million, receiving net cash proceeds of $972,000, and
Spring Pines Apartments in Houston, Texas, for $2.7 million, receiving net cash
proceeds of $1.1 million. In 1997, the Company sold three properties, Plaza
Hills Apartments in Kansas City, Missouri, Huntington Green Apartments in
Philadelphia, Pennsylvania, and Pheasant Pointe Apartments in Sacramento,
California, the only properties owned in each of those cities, in separate
transactions for an aggregate sale price of $14 million, receiving net cash
proceeds of $6.4 million. In 1996, the Company sold Century Centre II Office
Building in San Mateo, California, for $28.2 million, receiving net cash
proceeds of $6.2 million.
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31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Investing Activities (Continued)
The Company expects to pay cash of $1.5 million in the second quarter of 1999 to
close the acquisition of a 134,760 square foot office building in Orlando,
Florida. The remainder of the $9.3 million purchase price less earnest money
deposits made through December 31, 1998, is expected to be provided by mortgage
financing.
Investments in partnerships
Investments in partnerships increased due to the Company's increased emphasis on
investing in real estate through partnerships. The funds invested in these
partnerships bear interest at market rates and are to be repaid from the
operation, refinancing, sale, or other disposition of the properties owned by
the partnerships.
During 1997 and 1998, the Company and Robert C. Rohdie formed seven partnerships
to build and own luxury apartment communities in Florida, Georgia, and Alabama.
The Company has provided substantially all of the equity portion of the total
development costs. In 1997, the Company made capital contributions and
interest-bearing priority loans totaling $8.7 million to these partnerships.
During 1998, the Company made capital contributions and interest-bearing
priority loans to these partnerships of $7.4 million.
In 1997, the Company formed Ansonia Apartments, L.P., ("Ansonia") with Richard
Frary, Joel Mael, Robert Rothenberg, and Saul Spitz. Ansonia purchased two
apartment properties in 1997 and eight apartment properties in 1998 with an
aggregate 1,950 units, all located in Connecticut. The cash required to purchase
these properties was provided by the Company in the form of capital
contributions that earn a preferred return and have a priority over any
distributions to the partners. Such contributions totaled $970,000 in 1997 and
$12 million in 1998.
In 1997, the Company formed National Omni Associates, L.P., which purchased a
289-unit high rise apartment building in Miami Beach, Florida, for $32 million
in February 1998. The Company invested $721,000 in 1997 and $4.4 million in 1998
in this partnership.
In 1998, the Company acquired interests in two partnerships that owned separate
operating apartment properties in Lancaster, California, with a total of 730
units. The Company made contributions and loans of $1 million to these
partnerships in 1998.
In June 1995, the Company acquired a 50% economic interest in an office building
in Washington, D.C., through the purchase of a first lien mortgage note with a
face value of $8.5 million for $3 million. In accordance with terms of the
agreement with the property owner, the Company's $3 million investment was to be
repaid with interest at 11% per annum from cash flow after operating expenses.
The remaining $5.5 million balance of the mortgage note plus accrued interest
was to be satisfied by payment of 50% of all funds available after property
operating expenses plus 50% of the proceeds from any sale or refinancing. In
June 1998, new first mortgage financing of $4.2 million was obtained on the
property. The Company received $3.8 million of the proceeds, $2.9 million of
which represented the balance of its original investment, $606,000 of which was
accrued interest, and $267,000 represented the Company's 50% participation in
excess financing proceeds.
Until November 1997, the Company had a 40% interest in a partnership which owned
industrial warehouses. During the first half of 1996, this partnership sold 27
warehouses for $41.2 million, receiving net cash proceeds
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32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Investing Activities (Continued)
of $16.8 million after the payoff of the existing $23.5 million mortgage loan
and related closing costs. The Company received $6.8 million as its
proportionate share of the sale proceeds plus an allowance for brokerage
commissions. In November 1997, the Company sold its interest in the partnership
for $1.6 million in cash.
The Company expects to fund approximately $7.4 million in the first half of 1999
and $4 million in the second half of 1999 of development cost for current and
planned properties under construction owned through partnerships.
Financing Activities
Significant financing activities consist of proceeds from borrowings, principal
payments on notes payable, advances from or repayment of advances from
affiliates, dividends paid to shareholders, and repurchases of the Company's
common stock.
Proceeds from borrowings and principal payments on notes payable
During 1998, the Company obtained mortgage financing (including advances under
revolving credit facilities) totaling $77.7 million secured by 20 properties and
received net cash proceeds of $32.7 million after the payoff of $40.2 million in
existing mortgage debt on such properties, establishing required escrows, and
paying associated closing costs. The Company also made $1.8 million of other
principal payments.
During 1997, the Company obtained mortgage financing (including advances under
revolving credit facilities) totaling $77.3 million secured by 15 properties and
received $38.5 million of net cash proceeds after the payoff of $32.9 million in
existing mortgage debt on such properties, establishing required escrows, and
paying associated closing costs. In addition, the Company paid off a $1.3
million mortgage loan secured by University Center (formerly known as Southgate
Shopping Center), scheduled to mature in 2003, for $850,000. In connection with
the payoff, the Company recognized a $431,000 extraordinary gain on forgiveness
of debt. The Company also made $2.5 million of other principal payments in 1997.
During 1996, the Company obtained mortgage financing totaling $34.3 million
secured by nine properties and received net cash proceeds of $7.3 million after
the payoff of $24.4 million in existing mortgage debt on such properties,
establishing required escrows, and paying associated closing costs. The Company
also paid off mortgage loans scheduled to mature in 1996 totaling $689,000 and
made $3.4 million of other principal payments.
Mortgage principal payments totaling $15.2 million are due in 1999, including
$13.7 million of balloon payments. The Company intends to either pay off the
maturing mortgages or extend the due dates while seeking to obtain long term
refinancing. However, while management expects to be able to arrange new
financing or loan extensions as needed, there is no assurance of success or that
the results can be timed to coincide with the debt maturities.
Advances from and repayment of advances from affiliates
The Company received net advances from affiliates of TRA of $5.9 million in
1998. No advances were
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33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Financing Activities (Continued)
received or repaid in 1997, but, in 1996, the Company repaid $583,000 of
advances received in 1995. The advances received in 1998 were made by parties
related to William S. Friedman, President, Chief Executive Officer, and Director
of the Company, or affiliates of his under a two-year line of credit arrangement
approved by the Board of Directors. The funds were used to facilitate
investments by the Company and the partnerships in which it holds interests.
Dividends paid to shareholders
Cash dividends paid to shareholders totaled $3.4 million, $2.1 million, and $2.7
million in 1998, 1997, and 1996, respectively. The Company also paid 10% stock
dividends in September of each of 1997 and 1996.
Repurchase of common stock
Pursuant to authorization granted by the Board of Directors, the Company has
repurchased shares of its common stock in open market and negotiated
transactions. The numbers of shares in the following discussion have been
restated to give effect to the merger of the Company and NIRT on the basis of
1.97 shares of the Company's common stock for each share of beneficial interest
of NIRT. The Company repurchased 504,059 in 1998, 95,490 in 1997, and 561,822 in
1996 of its outstanding common stock at a cost of $5.9 million, $748,000, and
$3.7 million, respectively. The 1997 and 1996 share repurchases, as well as
449,505 of the 1998 share repurchases, were made in accordance with the
authorization provided by NIRT's Board of Trustees prior to the merger. In
September 1998, the Board of Directors of the Company authorized repurchase of
up to an additional 120,000 shares, of which 74,460 have been purchased as of
December 31, 1998.
Results of Operations
1998 COMPARED TO 1997. The Company reported a net (loss) of $1.4 million in 1998
and net income of $5.6 million in 1997, a decrease of $7 million. The major
components of the change in net income (loss) between years are discussed in the
following paragraphs.
Income from real estate operations
Net rental income (rental revenue less property operating expenses) increased to
$25.8 million in 1998 from $22.1 million 1997, an increase of $3.7 million, or
17%.
Multifamily Properties: The Company's directly owned multifamily portfolio,
which represented 76% of the Company's real estate and included 9,588 operating
apartments at December 31, 1998, reported an increase in net rental income of
$3.1 million, or 17%, for 1998 compared to 1997. Of this increase, $1.7 million
is related to properties acquired in 1998 and 1997, including nine properties
consolidated since the merger of the Company and NIRT. The portfolio of 32
apartment properties with 6,581 units owned for all of 1998 and 1997 generated
an increase of $1.9 million or 12%. Net rental income as a percentage of rental
revenue for the 6,581 units increased to 45% from 43%. Rental revenue for the
same store multifamily properties increased $2.5 million, or 7%, chiefly due to
higher rental rates at certain properties. Average monthly rental revenue per
unit for the same store properties increased 7% to $506 from $475. Property
operating expenses on a same store basis increased $617,000, or 3%. Overall
occupancy levels for multifamily properties held in both years increased
slightly in 1998 compared to 1997.
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34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (Continued)
Commercial Properties: The Company's directly owned commercial portfolio
included 1.9 million square feet at December 31, 1998. An increase in net rental
income of $337,000 resulted from the addition of Mariner Plaza Shopping Center,
acquired in August 1997, 1505 Highway 6, acquired in October 1998, and four
commercial properties with an aggregate 234,407 square feet consolidated since
the merger of the Company and NIRT. A decrease of $153,000 is due to the sale of
Mountain View Shopping Center in 1998. Commercial properties held in both years
reported an overall increase in net rental income of $339,000 principally due to
higher rents at certain properties. Overall occupancy levels for commercial
properties held in both years remained relatively stable in 1998 compared to
1997.
Equity in income (loss) of partnerships
Equity in income (loss) of partnerships was $(889,000) for 1998 compared to
$643,000 in 1997. A decrease of $2 million resulted from start-up losses at five
partnership properties with a total of 1,390 units which are either still under
construction or only recently completed. As of March 21, 1999, occupancy at
these five properties was as follows:
Partnership Name Property Name Location Number of Units Occupancy
- ---------------- ------------- -------- --------------- ---------
RI Windsor, Ltd. Mayfaire at Windsor Parke Jacksonville, FL 324 76%
RI Panama City, Ltd. Harbour Green Panama City, FL 200 67%
Danforth National Apartments, Ltd. The Club at Danforth Jacksonville, FL 288 66%
Tarragon Savannah, L.P. The Links at Georgetown Savannah, GA 250 80%
Orange National Partners, L.P. The Vineyard at Eagle Harbor Orange Park, FL 328 18%
A decrease of $600,000 resulted from the operations of 5600 Collins Avenue, the
sole property of National Omni Associates. These decreases are partially offset
by an increase of $873,000 resulting from the refinancing of 801 Pennsylvania
Avenue. $606,000 of this amount represented accrued interest on the Company's
original investment and additional advances, and $267,000 represented the
Company's 50% participation in the excess financing proceeds. The properties
owned by Ansonia Apartments, L.P., contributed $400,000 to operations in 1998,
even though four of the properties are undergoing substantial renovation.
Interest expense
Interest expense was $16.6 million for 1998 compared to $12.6 million in 1997.
An increase of $1.4 million resulted from interest on mortgage loans obtained or
assumed in connection with 1998 and 1997 property acquisitions. In addition,
long term and interim mortgage financing, including advances under revolving
credit facilities, obtained on existing properties during 1998 and 1997
increased mortgage loans by $37 million and the related interest expense by $2.3
million for this period.
Advisory fee to affiliate
The advisory fee to TRA was $1 million in 1998 for the eleven months prior to
the Company's acquisition of TRA and $1.4 million for the full year of 1997. The
advisory fee was an incentive fee equal to 16% per annum of adjusted funds from
operations, as defined in the advisory agreement approved by the Board and
shareholders. Funds from operations ("FFO"), as defined by the National
Association of Real Estate Investment Trusts, decreased to $6.9 million for 1998
from $8.5 million for 1997. Since the Company's acquisition of TRA, advisory fee
expense is no longer being incurred. See ITEM 6. "SELECTED FINANCIAL DATA" for
the calculation and definition of FFO.
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35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (Continued)
General and administrative expenses
General and administrative expenses increased to $3.1 million in 1998 from $2.1
million in 1997. A significant portion of the increase is due to the Company
paying all costs previously borne by TRA in lieu of paying the advisory fee (see
above) subsequent to the Company's acquisition of TRA. Additional costs have
been incurred in connection with upgrading the Company's computer equipment and
software in preparation for the Year 2000 change.
See the discussion under "Impact of the Year 2000 Issue" below.
Net gain on sale of real estate
During 1998, the Company recognized gains totaling $2.1 million on the sale of
Mountain View Shopping Center and Spring Pines Apartments. In 1997, the Company
recognized gains totaling $4.4 million on the sale of Plaza Hills Apartments,
Huntington Green Apartments, and Pheasant Pointe Apartments and a $54,000 loss
related to the sale of a warehouse owned through partnership.
Gain on sale of investments
During 1998, a gain of $123,000 was recognized from sale of investments in
securities. In 1997, the Company recognized gains of $698,000 from sale of
investments in securities and $215,000 on the sale of the Company's investment
in a partnership.
Extraordinary items
Extraordinary expenses in 1998 of $1.2 million resulted from prepayment
penalties and write-off of deferred financing expenses in connection with 1998
refinancings. Extraordinary items in 1997 included a gain on debt forgiveness of
$431,000 in connection with the discounted payoff of the mortgage loan on
University Center and expenses of $370,000 from prepayment penalties and
deferred financing expenses written off in connection with 1997 refinancings.
1997 COMPARED TO 1996. The Company reported net income of almost $5.6 million in
1997 compared to just over $4.9 million in 1996; the increase was approximately
$650,000. This increase primarily resulted from increased net rental income.
This and other components of the change in net income between years are
discussed in the following paragraphs.
Income from real estate operations
Net rental income increased to $22.1 million in 1997 from $19.4 million 1996, an
increase of $2.7 million, or 14%.
Multifamily Properties: The Company's multifamily portfolio, which represented
79% of its real estate and included 7,987 operating apartments at December 31,
1997, reported an increase in net rental income of $3.5 million, or 24%, for
1997 compared to 1996. Of this increase, $1.3 million was from properties
acquired in 1996 and 1997. A decrease of $511,000 resulted from the sale of
three multifamily properties in 1997. The portfolio of 30 apartment properties
with 5,935 units owned for all of 1996 and 1997 generated an increase of $2.7
million, or 21%. Net rental income as a percentage of rental revenue for the
5,935 units increased to 44% from 38%. Rental revenue for the same store
multifamily properties increased $1.6 million, or 5%, chiefly due to higher
rental rates at certain properties. Average monthly rental revenue per unit for
the same store properties increased 5% to $496 from $474. Property operating
expenses on a same store basis decreased $1.1 million, or 5%, $957,000 of which
is due to a decrease in replacements resulting from the change in accounting
35
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (Continued)
estimate pursuant to which the Company began capitalizing carpet, appliances,
and heating, ventilation, and air conditioning replacements in 1997. See
discussion below under "Implementation of Change in Accounting Estimate."
Overall occupancy levels for multifamily properties held in both years increased
slightly in 1997 compared to 1996.
Commercial Properties: The Company's commercial portfolio included 1.6 million
square feet at December 31, 1997. An increase in net rental income of $112,000
resulted from the addition of Jackson Square and Mariner Plaza Shopping Centers,
acquired in January 1996 and August 1997, respectively. A decrease of $1.2
million resulted from the sale of Century Centre II Office Building in September
1996. Commercial properties held in both years reported an overall increase in
net rental income of $598,000, principally due to higher rents coupled with
lower economic vacancies resulting from improved overall physical occupancy
levels.
Equity in income of partnerships
Equity in income of partnerships was $643,000 in 1997 compared to $1.5 million
in 1996. The 1996 income included distribution of financing proceeds by
Sacramento Nine and English Village in excess of the Company's investments in
those partnerships.
Interest expense
Interest expense was $12.6 million in 1997 compared to $12 million in 1996. An
increase of $1.1 million resulted from interest on mortgage loans obtained or
assumed in connection with 1996 and 1997 property acquisitions. In addition,
long term and interim mortgage financing, including advances under revolving
credit facilities, obtained on existing properties during 1996 and 1997
increased mortgage loans by $35.8 million and the related interest expense by
$1.7 million for this period. A $1.4 million decrease resulted from the sale of
four properties during 1996 and 1997. The remaining decrease is due to interest
capitalized to the carrying values of unencumbered development properties during
1996 and 1997.
Depreciation expense
Depreciation expense increased to $7 million in 1997 from $5.4 million in 1996
due to additional depreciation associated with the 1996 and 1997 property
acquisitions and capital improvements to its existing real estate between 1995
and 1997.
Advisory fee to affiliate
The advisory fee to TRA was $1.4 million in 1997 and $1.1 million in 1996. The
advisory fee was an incentive fee equal to 16% per annum of adjusted funds from
operations, as defined in the advisory agreement approved by the Board and
shareholders. FFO, as defined by the National Association of Real Estate
Investment Trusts, increased from $5.6 million for the year ended December 31,
1996, to $8.5 million for the year ended December 31, 1997. See ITEM 6.
"SELECTED FINANCIAL DATA" for the calculation and definition of FFO. For
purposes of calculating the advisory fee, the effect of the accounting change
implemented in 1997 was excluded from FFO. See discussion below under
"Implementation of Change in Accounting Estimate."
Net gain on sale of real estate
During 1997, the Company recognized gains totaling $4.4 million on the sale of
Plaza Hills Apartments, Huntington Green Apartments, and Pheasant Pointe
Apartments and a $54,000 loss related to the sale of a warehouse owned through
partnership. During 1996, the Company recognized a gain of $3.7 million on the
sale of Century Centre II Office Building.
36
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (Continued)
Gain on sale of investments
During 1997, the Company recognized gains totaling $698,000 related to the sale
of investments in marketable equity securities and a gain of $215,000 on the
sale of the Company's investment in Indcon.
Gain on insurance settlement
In 1996, the Company recognized a $451,000 gain on insurance settlement
representing the Company's share of gain realized by a partnership in which the
Company held a 40% interest. The insurance proceeds from the destruction of a
partnership property which was not rebuilt exceeded the basis of the property.
Extraordinary items
Extraordinary items in 1997 include a gain on debt forgiveness of $431,000 in
connection with the discounted payoff of the mortgage loan secured by University
Center and prepayment penalties and the write-off of deferred financing expenses
totaling $370,000 in connection with certain 1997 refinancings.
Implementation of Change in Accounting Estimate
Effective January 1, 1997, the Company implemented prospectively a change in
accounting estimate whereby capital expenditures for carpet, appliances, and
heating, ventilation, and air conditioning (HVAC) replacements are capitalized
rather than expensed. The Company believes that capitalizing these expenditures
and depreciating them over lives ranging from three to five years more
appropriately reflects the timing of the economic benefits to be received from
these expenditures. Additionally, the Company believes this treatment is
consistent with policies currently being used by a majority of other REITs.
However, comparability of FFO between REITs is affected by the method of
accounting for these items. For the years ended December 31, 1998 and 1997, the
effect of this change in accounting estimate was to decrease property operating
expenses and increase net income by $1.5 million and $957,000, respectively. Had
the Company implemented this change on January 1, 1996, property operating
expenses for the year ended December 31, 1996, would have been reduced by $1.1
million. This change had no effect on the advisory fee as TRA waived any fee
resulting from this change in accounting estimate.
For the years ended December 31, 1998 and 1997, capitalized expenditures for
these items resulting from the change in accounting estimate were as follows
(dollars in thousands):
1998 1997
---------- ----------
Carpet ............. $ 852 $ 561
Appliances ......... 418 143
HVAC ............... 267 253
---------- ----------
$ 1,537 $ 957
========== ==========
Allowance for Estimated Losses and Provisions for Losses
The Company's management periodically evaluates the carrying values of the
Company's properties held for sale. Generally accepted accounting principles
require that the carrying value of a property held for sale not exceed the lower
of its cost or its estimated fair value less estimated costs to sell. In those
instances in which estimates of fair value less estimated selling costs are less
than the carrying values thereof at the time of
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38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Allowance for Estimated Losses and Provisions for Losses (Continued)
evaluation, an allowance for loss is provided by a charge against operations.
The evaluation generally includes selective site inspections, a review of the
property's current rents compared to market rents, a review of the property's
expenses, a review of maintenance requirements, discussions with the manager of
the property, and a review of the surrounding area. Future evaluations could
cause the Company's management to adjust current estimates of fair value.
The Company's management also evaluates whether events or changes in
circumstances indicate that the carrying value of any of the Company's
properties held for investment may not be recoverable. This evaluation generally
consists of a review of the property's cash flow and current and projected
market conditions, as well as any changes in general and local economic
conditions. If an impairment loss exists based on the results of this
evaluation, a loss is recognized by a charge against current earnings and a
corresponding reduction in the respective asset's carrying value. The amount of
this impairment loss is equal to the amount by which the carrying value of the
property exceeds its estimated fair value.
Environmental Matters
Under various federal, state, and local environmental laws, ordinances, and
regulations, the Company may be potentially liable for removal or remediation
costs, as well as certain other potential costs (including governmental fines
and injuries to persons and property) relating to hazardous or toxic substances
where property-level managers have arranged for the removal, disposal, or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the air,
and third parties may seek recovery from the Company for personal injury
associated with such materials.
The Company's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Company's
business, financial position, or results of operations.
Tax Matters
For the years ended December 31, 1998, 1997, and 1996, the Company elected, and
in the opinion of the Company's management qualified, to be taxed as a REIT, as
defined under Sections 856 through 860 of the Internal Revenue Code of 1986. A
REIT is required to distribute at least 95% of its REIT taxable income plus 95%
of its net income from foreclosure property, as defined in Section 857 of the
Internal Revenue Code, on an annual basis to shareholders.
Impact of Year 2000 Issues
The Year 2000 Issue is the result of electronic devices storing the applicable
year as a two-digit field rather than four. Consequently, any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, process invoices,
or engage in similar normal business activities. Following is a discussion of
the status of the Company's assessment of its exposure to Year 2000 Issues.
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39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Impact of Year 2000 Issues (Continued)
State of Readiness
With regard to the Company's Information Technology Systems, certain computer
equipment and software were found not to be Year 2000 compliant. The Company
has begun to replace the computer equipment with Year 2000 compliant
equipment and to upgrade the software to Year 2000 compliant versions. These
upgrades were planned regardless of Year 2000 Issues, but they were
accelerated in order to ensure compliance. These upgrades are on schedule to
be completed by July 1999. With regard to embedded technology issues, such as
with elevators in commercial buildings, sprinkler systems, security gates,
and security alarms, the Company is currently assessing the potential risks.
The Company believes that such risks will not materially affect the Company's
business.
The Company is completing assessment of its external property management
companies' state of readiness and is actively involved with their Year 2000
readiness programs to ensure the business impact is minimal to non-existent.
The Company is currently assessing potential risks related to third parties,
including utility companies, banks, and phone companies. The Company believes
there is minimal risk that these third parties will not be Year 2000
compliant.
Costs to Address Year 2000 Issues
To date, the Company has expended approximately $11,000 for replacing
noncompliant hardware and approximately $11,000 for purchasing upgraded
accounting software. The bulk of these costs represent the Company's
allocation of expenditures incurred by TRA prior to the Company's acquisition
of TRA. The Company is also upgrading the accounting/management software at
its properties. This upgraded property software is being provided free of
charge by the software manufacturer. Expected remaining costs are $10,000 for
software conversion, including consulting fees, and $20,000 for additional
hardware.
Risks of Year 2000 Issues
Potential material risks related to the Year 2000 include the following. If
the Company's computer systems and software are not successfully upgraded
prior to 2000, the ability of the Company to provided timely financial
information may be impaired. However, the Company is confident that these
upgrades will be completed in a timely manner. Similarly, the Company's
ability to provide financial information could be adversely affected if
computer systems of banks with which the Company does business do not become
Year 2000 compliant. Also, if the computer systems of utility companies which
provide services to the Company do not become Year 2000 compliant, tenants of
the Company's properties could be inconvenienced or even harmed. However, the
Company believes it is unlikely that these banks and utility companies will
not become Year 2000 compliant.
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40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Impact of Year 2000 Issues (Continued)
Contingency Plans
The Company has not fully completed contingency plans. However, one focus of
the plans will be to source alternate third party vendors that are likely to
successfully become Year 2000 compliant. The Company anticipates having the
contingency plans in place by mid-year 1999.
Risks Associated with Forward-Looking Statements Included in this Form 10-K
This Form 10-K contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that are intended to be covered by the safe harbors created
thereby. These statements include the plans and objectives of management for
future operations, including plans and objectives relating to capital
expenditures on the Company's properties. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive, and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate, and, therefore, there can be no assurance that the forward-looking
statements included in this Form 10-K will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates which may
adversely affect its financial position, results of operations, and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through its regular operating and financing activities. The
Company does not use financial instruments for trading or other speculative
purposes.
At December 31, 1998, the Company had approximately $89.1 million of variable
rate debt. Based upon this balance of variable rate debt, if the indexes upon
which these rates are based, primarily the 30-day London Interbank Offered Rate
("LIBOR"), increased 100 basis points, the Company's earnings and cash flows
would decrease by $891,000. Conversely, if interest rates decreased by 100 basis
points, the Company's earnings and cash flows would increase by $891,000.
The estimated fair value of the Company's variable rate debt at December 31,
1998, is $82.9 million. See NOTE 1. "SIGNIFICANT ACCOUNTING POLICIES" in the
Notes to Consolidated Financial Statements for the methodology used by the
Company in calculating fair values of notes payable. A 100 basis point increase
in interest rates would result in a $1.4 million decrease in the fair value of
the Company's variable rate debt, and a 100 basis point decrease in interest
rates would result in a $1.5 million increase in the fair value of the
Company's variable rate debt.
The Company has entered into reverse repurchase agreements with an investment
bank for three mortgage-backed securities ("MBSs") secured separately by
mortgages on three of the Company's properties. See NOTE 7. "NOTES, DEBENTURES,
AND INTEREST PAYABLE" in the Notes to Consolidated Financial Statements for a
detailed discussion of the reverse repurchase agreements. Increases in market
interest rates generally cause decreases in the value of the MBSs, requiring the
Company to deposit additional funds with the investment bank (assuming no change
in the investment bank's margin requirements). Decreases in market interest
rates generally cause increases in the value of the MBSs, resulting in the
release of margin funds to the Company by the investment bank (assuming no
change in the investment bank's margin requirements). Additionally, the
repurchase price bears interest at a variable rate based on LIBOR. An increase
in interest rates of 100 basis points would result in a decrease of $125,000 in
the Company's earnings and a decrease of $1.1 million in the Company's cash
flow. A 100 basis point decrease in interest rates would result in an increase
of $137,000 in the Company's earnings and an increase of $1 million in the
Company's cash flow.
[This space intentionally left blank.]
41
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Reports of Independent Public Accountants.....................................................................43
Consolidated Balance Sheets -
December 31, 1998 and 1997..................................................................................44
Consolidated Statements of Operations -
Years Ended December 31, 1998, 1997, and 1996...............................................................45
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1998, 1997, and 1996...............................................................47
Consolidated Statements of Cash Flows -
Years Ended December 31, 1998, 1997, and 1996...............................................................48
Notes to Consolidated Financial Statements....................................................................51
Schedule III - Real Estate and Accumulated Depreciation......................................................75
All other schedules are omitted because they are not required or are not
applicable or because the information required is included in the Consolidated
Financial Statements or the notes thereto.
42
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Tarragon Realty Investors, Inc.
We have audited the accompanying consolidated balance sheets of Tarragon Realty
Investors, Inc., and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tarragon Realty Investors,
Inc., and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedule III is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
April 12, 1999
43
44
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1998 1997
---------- ----------
(dollars in thousands)
Assets
Real estate held for sale (net of accumulated depreciation
of $20,884 in 1998 and $593 in 1997) ................................... $ 79,801 $ 5,123
Less - allowance for estimated losses .................................... (1,194) (1,194)
---------- ----------
78,607 3,929
Real estate held for investment (net of accumulated
depreciation of $31,718 in 1998 and $45,440 in 1997) ................... 215,368 230,007
Investments in and advances to partnerships .............................. 37,356 13,839
Cash and cash equivalents ................................................ 2,442 4,262
Restricted cash .......................................................... 7,368 4,300
Other assets, net (including $42 in 1997 due from affiliates) ............ 15,919 9,303
---------- ----------
$ 357,060 $ 265,640
========== ==========
Liabilities and Shareholders' Equity
Liabilities
Notes, debentures, and interest payable (including $5,891 in
1998 due to affiliates) ................................................ $ 263,361 $ 184,126
Other liabilities (including $67 in 1997 due to affiliates) .............. 17,014 10,423
---------- ----------
280,375 194,549
Commitments and contingencies.............................................
Shareholders' equity
Common stock, $0.01 par value; authorized shares, 20,000,000; shares
outstanding, 8,467,260 in 1998 and 7,510,436 in 1997 (after deducting
2,418,384 shares in
1998 and 1,767,015 shares in 1997 held in treasury) .................... 85 11,446
Special stock, $0.01 par value; authorized shares,
10,000,000; shares outstanding, none ................................... -- --
Paid-in capital .......................................................... 305,098 281,638
Accumulated dividends in excess of
accumulated earnings ................................................... (228,408) (222,126)
Accumulated other comprehensive income (loss) ............................ (90) 133
---------- ----------
76,685 71,091
---------- ----------
$ 357,060 $ 265,640
========== ==========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
44
45
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
(dollars in thousands, except per share data)
Revenue
Rentals .............................................................. $ 58,798 $ 50,745 $ 47,831
Interest ............................................................. 739 629 631
Management fees ...................................................... 52 -- --
Equity in income (loss) of partnerships .............................. (889) 643 1,500
---------- ---------- ----------
58,700 52,017 49,962
Expenses
Property operations (including $1,895 in 1998,
$1,648 in 1997, and $1,014 in 1996 to affiliates) ................. 32,963 28,596 28,411
Interest ............................................................. 16,599 12,602 12,042
Depreciation ......................................................... 7,349 7,022 5,374
Amortization of goodwill ............................................. 41 -- --
Advisory fee to affiliate ............................................ 1,048 1,438 1,117
General and administrative (including $1,562 in 1998,
$1,411 in 1997, and $1,176 in 1996 to affiliates) ................ 3,095 2,091 1,932
Provision for losses ................................................. -- -- 300
---------- ---------- ----------
61,095 51,749 49,176
---------- ---------- ----------
Income (loss) before net gain on sale of real estate, gain on sale of
investments, gain on insurance settlement,
and extraordinary items .............................................. (2,395) 268 786
Net gain on sale of real estate ........................................ 2,108 4,350 3,700
Gain on sale of investments ............................................ 123 913 --
Gain on insurance settlement ........................................... -- -- 451
---------- ---------- ----------
Income (loss) from continuing operations ............................... (164) 5,531 4,937
Extraordinary items .................................................... (1,231) 61 --
---------- ---------- ----------
Net income (loss) ...................................................... $ (1,395) $ 5,592 $ 4,937
========== ========== ==========
Other comprehensive income (loss):
Unrealized gains (losses) on
marketable equity securities ....................................... (100) 831 --
Realized gains on marketable equity securities ....................... (123) (698) --
---------- ---------- ----------
Net income (loss) recognized in
other comprehensive income (loss) .................................... (223) 133 --
---------- ---------- ----------
Comprehensive income (loss) ............................................ $ (1,618) $ 5,725 $ 4,937
========== ========== ==========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
45
46
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
For the Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(dollars in thousands, except per share data)
Earnings per share
Income (loss) from continuing operations ............... $ (.02) $ .72 $ .60
Extraordinary items .................................... (.16) .01 --
-------------- -------------- --------------
Net income (loss) ...................................... $ (.18) $ .73 $ .60
============== ============== ==============
Weighted average shares of common stock
used in computing earnings per share ................. 7,619,604 7,693,031 8,161,197
============== ============== ==============
Earnings per share - assuming dilution
Income (loss) from continuing operations ............... $ (.02) $ .71 $ .60
Extraordinary items .................................... (.16) .01 --
-------------- -------------- --------------
Net income (loss) ...................................... $ (.18) $ .72 $ .60
============== ============== ==============
Weighted average shares of common stock used
in computing earnings per share - assuming dilution .. 7,619,604 7,769,296 8,197,049
============== ============== ==============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
46
47
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Dividends Accumulated
Common Stock in Excess of Other
------------------------ Paid-in Accumulated Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Equity
---------- ---------- ---------- ---------- ------------- -------------
(dollars in thousands)
Balance, December 31, 1995 ...................... 6,679,732 $ 10,181 $ 276,716 $ (217,270) $ -- $ 69,627
Repurchase of common stock ...................... (561,822) (856) (2,812) -- -- (3,668)
Conversion of convertible subordinated
debenture .................................... 183,360 279 721 -- -- 1,000
Cash dividends ($0.34 per share) ................ -- -- -- (2,833) -- (2,833)
Stock dividends ................................. 640,476 975 3,170 (4,145) -- --
Net income ...................................... -- -- -- 4,937 -- 4,937
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 ...................... 6,941,746 10,579 277,795 (219,311) -- 69,063
Repurchase of common stock ...................... (95,490) (145) (603) -- -- (748)
Cash dividends ($0.38 per share) ................ -- -- -- (2,949) -- (2,949)
Stock dividends ................................. 664,179 1,012 4,446 (5,458) -- --
Unrealized gains on marketable equity
securities ................................... -- -- -- -- 831 831
Realized gains on marketable equity
securities ................................... -- -- -- -- (698) (698)
Net income ...................................... -- -- -- 5,592 -- 5,592
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 ...................... 7,510,435 11,446 281,638 (222,126) 133 71,091
Repurchase of common stock ...................... (504,059) (685) (5,223) -- -- (5,908)
Adjustment for change in par value .............. -- (10,828) 10,828 -- -- --
Cash dividends ($0.41 per share) ................ -- -- -- (3,198) -- (3,198)
Stock dividends ................................. 142,937 108 1,581 (1,689) -- --
Common stock issued in connection with merger ... 1,196,556 12 14,048 -- -- 14,060
Common stock issued in connection with
acquisition of TRA ........................... 100,000 1 2,116 -- -- 2,117
Stock options exercised ......................... 21,391 31 110 -- -- 141
Unrealized losses on marketable equity securities -- -- -- -- (100) (100)
Realized gains on marketable equity
securities ................................... -- -- -- -- (123) (123)
Net (loss) ...................................... -- -- -- (1,395) -- (1,395)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 ...................... 8,467,260 $ 85 $ 305,098 $ (228,408) $ (90) $ 76,685
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
47
48
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(dollars in thousands)
Cash Flows from Operating Activities
Rentals collected ....................................... $ 59,108 $ 50,578 $ 48,054
Interest collected ...................................... 175 634 553
Interest paid ........................................... (16,610) (11,564) (11,336)
Payments for property operations (including
$1,895 in 1998, $1,648 in 1997, and $1,014
in 1996 to affiliates) ............................... (31,277) (29,886) (28,752)
General and administrative expenses paid
(including $2,215 in 1998, $1,914 in 1997, and
$1,176 in 1996 to affiliates) ......................... (4,441) (2,134) (2,117)
Advisory fee paid to affiliate .......................... (1,154) (1,452) (1,168)
Organizational costs paid ............................... (286) -- --
Deferred borrowing costs paid ........................... (2,982) (2,915) (1,439)
---------- ---------- ----------
Net cash provided by operating activities ............. 2,533 3,261 3,795
---------- ---------- ----------
Cash Flows from Investing Activities
Acquisition of real estate .............................. (5,495) (14,656) (3,199)
Proceeds from sale of real estate ....................... 2,099 6,378 6,156
Earnest money deposits paid ............................. (307) (245) --
Real estate improvements ................................ (17,343) (27,349) (13,547)
Collections of notes receivable ......................... 352 187 2,140
Investments in marketable equity securities ............. (81) (2,462) --
Proceeds from sale of marketable equity securities ...... 580 2,606 --
Distributions from partnership's investing
activities ............................................ -- -- 6,817
Distribution of partnership's insurance settlement
proceeds .............................................. -- -- 760
Proceeds from sale of partnership interest .............. -- 1,600 --
Cash and cash equivalents acquired in connection
with merger of the Company and NIRT
and acquisition of TRA ................................ 658 -- --
Net (contributions and advances to) distributions
and repayment of advances from partnerships ........... (24,291) (9,872) 437
---------- ---------- ----------
Net cash (used in) investing activities ............... (43,828) (43,813) (436)
---------- ---------- ----------
The accompanying notes are an integral part of these
Consolidated Financial Statements.
48
49
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
(dollars in thousands)
Cash Flows from Financing Activities
Proceeds from borrowings .................................................... $ 79,586 $ 79,477 $ 34,323
Payments on notes payable ................................................... (41,977) (36,034) (28,500)
Repair escrow deposits, net ................................................. (784) (847) (292)
Dividends to shareholders ................................................... (3,388) (2,105) (2,731)
Distribution from partnership's financing activities ........................ 3,758 -- --
Repurchase of common stock .................................................. (5,893) (748) (3,668)
Proceeds from the exercise of stock options ................................. 28 -- --
Borrowings on margin account ................................................ 2,254 1,209 280
Advances (repayment of advances) from
affiliates ................................................................ 5,891 -- (583)
---------- ---------- ----------
Net cash provided by (used in) financing activities ....................... 39,475 40,952 (1,171)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ........................... (1,820) 400 2,188
Cash and cash equivalents, beginning of year ................................... 4,262 3,862 1,674
---------- ---------- ----------
Cash and cash equivalents, end of year ......................................... $ 2,442 $ 4,262 $ 3,862
========== ========== ==========
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss) ......................................................... $ (1,395) $ 5,592 $ 4,937
Net gain on sale of real estate ........................................... (2,108) (4,350) (3,700)
Gain on sale of investments ............................................... (123) (913) --
Gain on insurance settlement .............................................. -- -- (451)
Write-off of deferred borrowing costs in connection
with refinancings ...................................................... 431 299 --
Extraordinary gain on debt forgiveness .................................... -- (431) --
Depreciation and amortization ............................................. 8,587 7,938 6,333
Provision for losses ...................................................... -- -- 300
Equity in (income) loss of partnerships ................................... 889 (643) (1,500)
Interest on advances to partnerships ...................................... (566) -- --
Non-cash compensation related to stock options exercised .................. 107 -- --
Changes in other assets and other liabilities, net of effects of noncash
investing and financing activities:
(Increase) decrease in interest receivable ............................. 3 5 (55)
(Increase) in other assets ............................................. (4,802) (6,608) (2,665)
Increase in other liabilities .......................................... 1,673 1,962 543
Increase (decrease) in interest payable ................................ (163) 410 53
---------- ---------- ----------
Net cash provided by operating activities ...................................... $ 2,533 $ 3,261 $ 3,795
========== ========== ==========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
49
50
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(dollars in thousands)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the
purchase or foreclosure
of real estate:
Real estate ................................................................. $ 13,751 $ 30,762 $ 14,954
Notes and interest receivable ............................................... -- -- (8,568)
Allowance for estimated losses .............................................. -- -- 3,000
Other assets ................................................................ 1,157 416 44
Notes and interest payable .................................................. (9,030) (15,756) (6,157)
Other liabilities ........................................................... (383) (766) (74)
---------- ---------- ----------
Cash paid ................................................................. $ 5,495 $ 14,656 $ 3,199
========== ========== ==========
Assets disposed of and liabilities released in
connection with the sale of real estate:
Real estate
................................................................................ $ 2,283 $ 9,572 $ 23,221
Other assets ................................................................ 111 29 596
Notes and interest payable .................................................. (2,356) (7,493) (21,127)
Other liabilities ........................................................... (47) (134) (212)
Net gain on sale ............................................................ 2,108 4,404 3,678
---------- ---------- ----------
Cash received ............................................................. $ 2,099 $ 6,378 $ 6,156
========== ========== ==========
Assets acquired and liabilities assumed in connection
with the merger of the Company and NIRT and
the acquisition of TRA
Real estate ................................................................. $ 38,988 $ -- $ --
Cash ........................................................................ 658 -- --
Other assets ................................................................ 9,598 -- --
Notes, debentures, and interest payable ..................................... (29,260) -- --
Other liabilities ........................................................... (3,807) -- --
---------- ---------- ----------
Purchase consideration .................................................... $ 16,177 $ -- $ --
========== ========== ==========
Real estate written off pursuant to
condemnation .............................................................. $ -- $ 2,210 $ --
Note payable written off pursuant to the
condemnation of the collateral property ................................... $ -- $ 1,725 $ --
Allowance for estimated losses charged off
in connection with the write-off of real estate ........................... $ -- $ 485 $ --
The accompanying notes are an integral part of these
Consolidated Financial Statements.
50
51
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Tarragon Realty Investors,
Inc., its subsidiaries, and consolidated partnerships have been prepared in
conformity with generally accepted accounting principles ("GAAP"), the most
significant of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES." The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The Notes to Consolidated Financial Statements are an
integral part of the Consolidated Financial Statements. The data presented in
the Notes to Consolidated Financial Statements are as of December 31 of each
year and for the year then ended unless otherwise indicated. Dollar amounts in
tables are in thousands, except per share amounts. Certain balances for 1997 and
1996 have been reclassified to conform to the 1998 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Company business. Tarragon Realty Investors, Inc., (the
"Company") is a Nevada corporation incorporated April 2, 1997, and the successor
in interest to National Income Realty Trust ("NIRT") and Vinland Property Trust
("Vinland"). NIRT, a California business trust, was organized on October 31,
1978, and commenced operations on March 27, 1979, investing in income-producing
real estate through acquisitions, leases, and partnerships. Vinland was a
California business trust established July 18, 1973, and commenced operations
April 2, 1974. Vinland was formed to invest in commercial and multifamily real
estate. In July 1997, Vinland merged with the Company, its wholly-owned
subsidiary.
Effective November 23, 1998, NIRT incorporated as a California corporation and
on November 24, 1998, merged with and into the Company, with the Company as the
survivor. Pursuant to the terms of the Agreement and Plan of Merger entered into
by the Company and NIRT, each share of beneficial interest of NIRT was converted
into 1.97 shares of the Company's common stock. As a result, the shareholders of
NIRT became the owners of 85% of the Company's common stock.
FOR ACCOUNTING PURPOSES, THE MERGER IS TREATED AS A REVERSE ACQUISITION OF THE
COMPANY BY NIRT USING THE PURCHASE METHOD OF ACCOUNTING, AND HISTORICAL BALANCES
AND OPERATIONS OF THE COMPANY FOUND IN THIS FORM 10-K ARE THOSE OF NIRT. SHARE
AND PER SHARE INFORMATION HAS BEEN RESTATED RETROACTIVELY TO GIVE EFFECT TO THE
1.97 TO 1 EXCHANGE RATIO IN THE MERGER. REFERENCES TO THE COMPANY IN RELATION TO
DATES PRIOR TO NOVEMBER 24, 1998, ARE INTENDED TO INCLUDE BOTH OF THE COMPANY'S
PREDECESSORS, NIRT AND VINLAND.
Immediately following the merger, the Company acquired Tarragon Realty Advisors,
Inc. ("TRA"), the Company's advisor since March 1, 1994, and NIRT's advisor
since April 1, 1994, from William S. Friedman and his wife, Lucy N. Friedman,
for 100,000 shares of the Company's common stock and options to acquire 350,000
additional shares of the Company's common stock at prices ranging between $13
and $16 per share. William S. Friedman is the President, Chief Executive
Officer, and a Director of the Company and also served as President, Chief
Executive Officer, and a Trustee of NIRT and as Director and Chief Executive
Officer of TRA. The Friedman family owns approximately 34% of the outstanding
shares of common stock of the Company. In addition to the options to acquire
350,000 additional shares received in connection with the Company's purchase of
TRA discussed above, Mr. Friedman also holds options to acquire 450,000
additional shares of the Company's common stock at prices ranging between $12
and $15 per share.
51
52
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of consolidation. The Consolidated Financial Statements include the
accounts of the Company, its subsidiaries, and partnerships it controls. All
significant intercompany transactions and balances have been eliminated.
Real estate and depreciation. Real estate held for sale is carried at the lower
of cost or estimated fair value less estimated costs to sell. Real estate held
for investment is carried at cost unless an impairment is determined to exist,
as discussed below. Impaired properties are written down to their estimated fair
values. Foreclosed real estate is initially recorded at new cost, defined as the
lower of the Company's note receivable carrying amount or the fair value of the
collateral property less estimated costs of sale. The Company capitalizes
property improvements and major rehabilitation projects that increase the value
of the respective property and have useful lives greater than one year, except
for individual expenditures less than $10,000 that are not part of a planned
renovation project. Under this policy, during 1998, expenditures of $16.9
million were capitalized, including $3.4 million related to development
properties, and property replacements of $2.3 million were expensed.
Property replacements include, but are not limited to, such items as
landscaping, exterior painting, and parking lot improvements. Depreciation is
provided against real estate held for investment by the straight-line method
over the estimated useful lives of the assets, ranging from three to 40 years.
The Company capitalizes interest on funds used in constructing property from the
date of initiation of construction activities through the time the property is
ready for leasing. The Company also capitalizes property taxes and insurance
costs during the construction period. Interest, property taxes, and insurance
expenditures of $662,000 and $945,000 were capitalized during 1998 and 1997,
respectively.
Effective January 1, 1997, the Company implemented prospectively a change in
accounting estimate whereby capital expenditures for carpet, appliances, and
heating, ventilation, and air conditioning (HVAC) replacements are capitalized
rather than expensed. The Company believes that capitalizing these expenditures
and depreciating them over lives ranging from three to five years more
appropriately reflects the timing of the economic benefits to be received from
these expenditures. Additionally, the Company believes this treatment is
consistent with policies currently being used by other real estate investment
trusts. This change had no effect on the advisory fee as TRA waived any fee
resulting from this change in accounting estimate.
The Company's management evaluates whether events or changes in circumstances
indicate that the carrying value of any of the Company's properties held for
investment may not be recoverable. This evaluation generally consists of a
review of the property's cash flow and current and projected market conditions,
as well as any changes in general and local economic conditions. If an
impairment loss exists based on the results of this review, a loss is recognized
by a charge against current earnings and a corresponding reduction in the
respective asset's carrying value. The amount of this impairment loss is equal
to the amount by which the carrying value of the property exceeds the estimated
fair value.
At least annually, all properties held for sale are reviewed by the Company's
management, and a determination is made if the held for sale classification
remains appropriate. Following are among the factors considered in determining
that a change in classification to held for investment is appropriate: (i) the
property has been held for at least one year; (ii) Company management has no
intent to dispose of the property within the next twelve months; (iii) the
property is a "qualifying asset" as defined in the Internal Revenue Code of
1986; (iv) property
52
53
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
improvements have been funded; and (v) the Company's financial resources are
such that the property can be held long-term.
Allowance for estimated losses. Valuation allowances are provided for estimated
losses on notes receivable and properties held for sale to the extent that the
investment in the notes or properties exceeds the Company's estimate of fair
value less estimated selling costs of the collateral securing the notes or the
properties. The provisions for losses are based on estimates, and actual losses
may vary from current estimates. Such estimates are reviewed periodically. Any
additional provision determined to be necessary or the reversal of any existing
allowance no longer required is recorded by a charge or credit to current
earnings.
Cash equivalents. The Company considers all highly liquid debt instruments
purchased with maturities of three months or less to be cash equivalents.
Restricted cash. Restricted cash represents escrow accounts, generally held by
the lenders of certain of the Company's mortgage notes payable, for taxes,
insurance, property repairs and replacements.
Other assets. Other assets consist primarily of notes and interest receivable,
marketable equity securities, tenant accounts receivable, deferred borrowing
costs, prepaid leasing commissions, and goodwill. Marketable equity securities
are considered to be available-for-sale and are carried at fair value, defined
as year end closing market value. Net unrealized holding gains and losses are
included in other comprehensive income (loss). Deferred borrowing costs are
amortized on the straight-line method (which approximates the effective interest
method) over the related loan terms, and such amortization is included in
interest expense. Prepaid leasing commissions are amortized to leasing
commission expense, included in property operating expenses, on the
straight-line method over the related lease terms. Goodwill was recorded in
connection with the Company's acquisition of TRA and is being amortized on the
straight-line method over five years. For a more detailed discussion of
goodwill, see NOTE 2. "MERGER TRANSACTION."
Revenue recognition on the sale of real estate. 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.
Investments in noncontrolled partnerships. The Company uses the equity method to
account for investments in partnerships it does not control. Under the equity
method, the Company's initial investments are increased by its proportionate
share of the partnerships' operating income and additional advances and
decreased by the Company's proportionate share of the partnerships' operating
losses and distributions received.
Earnings per share. Net income (loss) per share of common stock is computed
based upon the weighted average number of shares outstanding during each year.
All share and per share data have been restated to give effect to the merger of
the Company with NIRT on the basis of 1.97 shares of the Company's common stock
for each share of beneficial interest of NIRT and a 10% stock dividend paid in
September 1997 by NIRT.
On December 31, 1997, the Company adopted SFAS No. 128 - "Reporting Earnings Per
Share," which superseded the Accounting Principles Board's Opinion No. 15 ("APB
No. 15") - "Earnings Per Share." This statement requires business enterprises
with other than simple capital structures to report both basic and diluted
53
54
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
earnings per share for each period for which a statement of operations is
presented. There was no cumulative effect nor any impact on the Company's
financial position as a result of the adoption.
Fair value of financial instruments. SFAS No. 107 - "Disclosures About Fair
Value of Financial Instruments" requires the Company to disclose the estimated
fair values of its financial instrument assets and liabilities.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1998 and 1997.
Considerable judgment is necessary to interpret market data and develop
estimated fair values. Accordingly, the estimated fair values presented do not
purport to present amounts to be ultimately realized or paid by the Company,
which may vary significantly from the estimated fair values presented. The use
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair values.
As of December 31, 1998 and 1997, the Company's management estimates that the
carrying amounts for cash and cash equivalents and restricted cash approximate
fair value because of the short maturities of those instruments. In addition,
the carrying amounts of notes receivable and other liabilities approximate fair
value. The fair values of the Company's notes payable are estimated by
discounting future expected cash flows using current rates for loans with
similar terms and maturities.
Stock option plans. The Company measures any compensation costs associated with
the issue of stock options using the guidance provided by APB No. 25. Under APB
No. 25, compensation costs related to stock options issued pursuant to
compensatory plans are measured based on the difference between the quoted
market price of the stock at the measurement date (ordinarily the date of grant)
and the exercise price and should be charged to expense over the periods during
which the grantee performs the related services. All stock options issued to
date by the Company have exercise prices equal to the market price of the stock
at the dates of grant. See NOTE 10. "STOCK OPTIONS."
Recent Accounting Pronouncements. On January 1, 1998, the Company adopted SFAS
No. 130 - "Reporting Comprehensive Income." SFAS No. 130 requires the reporting
of comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income. Accumulated other comprehensive
income (loss) presented in the accompanying Consolidated Balance Sheets and
Consolidated Statements of Shareholders' Equity represents unrealized holding
gains and losses on marketable equity securities.
On December 31, 1998, the Company adopted SFAS No. 131 - " Disclosures about
Segments of an Enterprise and Related Information." The provisions of this
pronouncement had no effect on the Company's financial statements as the Company
considers rental real estate to be its only operating segment and manages its
business as such.
[This space intentionally left blank.]
54
55
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. MERGER TRANSACTION
As described in NOTE 1. "SIGNIFICANT ACCOUNTING POLICIES," the Company and NIRT
merged in November 1998 with the Company as the survivor. Immediately following
the merger, the Company acquired TRA. TRA is the sole owner of Tarragon
Management, Inc., ("TMI") that provides property management services for most of
the Company's properties. The merger was accounted for as a reverse acquisition
by NIRT of the Company using the purchase method of accounting.
The consideration given by NIRT, the accounting acquirer, in the acquisition of
the Company was the market value of the 1,196,556 shares of outstanding common
stock of the Company on November 24, 1998, or $14.1 million. The excess of the
market value of the Company's common stock over its book value on the date of
merger of approximately $5.6 million was allocated to the Company's real estate
properties on the basis of their relative fair values.
The consideration given in the acquisition of TRA was the market value of the
100,000 shares of the Company's common stock issued, or $1.2 million, plus the
fair value of the options to purchase 800,000 additional shares of the Company's
common stock over a period of ten years at prices ranging between $12 and $16
per share, or $942,000. The fair value of the options was estimated using the
Black Scholes pricing model. See NOTE 10. "STOCK OPTIONS" for assumptions used
in the calculation of fair value. The excess of the consideration over the net
assets of TRA of $2.5 million was recorded as goodwill. Goodwill is included in
other assets in the accompanying December 31, 1998, Balance Sheet and is being
amortized using the straight-line method over five years.
Pro forma results of operations for the combined entities for 1998 and 1997 are
presented as if the merger of the Company and NIRT and the acquisition of TRA
had occurred as of January 1, 1997. For purposes of the pro forma presentation,
depreciation and amortization, including amortization of goodwill, have been
adjusted to their accounting bases recognized in recording the merger and the
acquisition of TRA.
For the Years Ended December 31,
--------------------------------
1998 1997
------------- ---------------
(Unaudited)
Revenue ...................................... $ 68,673 $ 62,197
Income (loss) from continuing operations ..... (2,119) 3,776
Net income (loss) ............................ (3,087) 3,837
Earnings per share
Income (loss) from continuing operations ..... $ (0.28) $ 0.49
Net income (loss) ............................ (0.41) 0.50
Earnings per share - assuming dilution
Income (loss) from continuing operations ..... $ (0.28) $ 0.49
Net income (loss) ............................ (0.41) 0.49
55
56
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. ALLOWANCE FOR ESTIMATED LOSSES AND PROVISIONS FOR LOSSES
Activity in the allowance for estimated losses was as follows:
1998 1997
--------- ----------
Balance January 1...................................... $ 1,194 $ 1,529
Reclassified from other assets......................... -- 150
Amounts charged off.................................... -- (485)
--------- ----------
Balance December 31.................................... $ 1,194 $ 1,194
========= ==========
Amounts charged off in 1997 relate to the write-off of K-Mart Shopping Center in
Indianapolis, Indiana, in March 1997 due to its condemnation.
During 1996, the Company recorded a provision for loss of $300,000 to write down
Mariposa Manor Apartments to its then estimated fair value.
NOTE 4. REAL ESTATE AND DEPRECIATION
Since the merger, the Company has consolidated 13 properties comprised of nine
apartment complexes with 1,293 units and four commercial properties with 234,407
square feet. Except for two, all properties are held for investment. The bases
of the properties were determined by allocating the purchase consideration based
on the properties' relative fair values. See NOTE 2. "MERGER TRANSACTION." The
following table depicts the 13 properties consolidated since the merger.
Acquisition Costs
Square ---------------------------
Property Location Units Footage Basis Debt
-------- -------- --------- --------- ----------- ----------
PROPERTIES HELD FOR INVESTMENT
Apartments
Aspentree Dallas, TX 296 212,864 $ 4,382 $ 3,839
The Brooks Addison, TX 104 94,176 2,788 1,282
Collegewood Tallahassee, FL 162 83,700 2,779 2,020
French Villa Tulsa, OK 101 104,720 2,233 1,882
Holly House North Miami, FL 57 45,417 1,987 1,760
Mission Trace Tallahassee, FL 96 104,400 2,815 2,060
Riverside Austin, TX 145 110,868 3,950 4,163
Southern Elms Tulsa, OK 78 65,159 1,520 1,311
--------- --------- ----------- ----------
1,039 821,304 22,454 18,317
--------- --------- ----------- ----------
Commercial
Briarwest Houston, TX -- 25,323 1,874 1,679
Park 20 West Tallahassee, FL -- 69,065 3,442 1,884
Tarzana Towne Plaza Tarzana, CA -- 37,208 3,355 2,924
--------- --------- ----------- ----------
-- 131,596 8,671 6,487
--------- --------- ----------- ----------
PROPERTIES HELD FOR SALE
Apartments
Phoenix Tulsa, OK 254 208,726 1,966 --
Commercial
One Turtle Creek Dallas, TX -- 102,811 5,897 1,820
--------- --------- ----------- ----------
254 311,537 7,863 1,820
--------- --------- ----------- ----------
1,293 1,264,437 $ 38,988 $ 26,624
========= ========= =========== ==========
56
57
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
During 1998 (prior to the merger), 1997, and 1996, the Company purchased ten
multifamily properties comprising 1,629 units and two commercial properties with
115,222 square feet as presented below. In connection with these acquisitions,
the Company paid TRA real estate acquisition fees totaling $393,000 and a
financing fee of $20,000 prior to the Company's acquisition of TRA. These
properties are located in the same geographic areas where the Company currently
operates and were acquired in separate transactions from unaffiliated sellers.
Cost of Acquisition
Date Square ----------------------------
Property Location Acquired Units Footage Cash Debt
-------- -------- -------- ----- ------- ------------ ----------
1998 Acquisitions:
Desert Winds Jacksonville, FL Jun-98 152 121,056 $ 603 $ 1,375
Palm Grove Orlando, FL Jun-98 142 99,684 447 1,333
Silver Creek Jacksonville, FL Jun-98 152 144,240 490 1,312
1505 Hwy 6 Houston, TX Oct-98 -- 62,934 1,695 2,000
---------- ---------- ------------ ----------
446 427,914 3,235 6,020
---------- ---------- ------------ ----------
1997 Acquisitions:
Morningside Jacksonville, FL Feb-97 112 89,200 521 1,641
Newport Plantation, FL Jun-97 152 139,364 1,526 5,058
Fountainhead Kissimmee, FL Jun-97 184 172,578 7,690 --
Courtyard at the Park Miami, FL Jul-97 127 117,250 728 2,973
Mariner Plaza Tallahassee, FL Aug-97 - 52,288 1,458 --
Landmark Tallahassee, FL Oct-97 128 113,720 1,822 --
---------- ---------- ----------- ----------
703 684,400 13,745 9,672
---------- ---------- ----------- ----------
1996 Acquisitions:
Woodbrier Oklahoma City, OK Apr-96 128 114,900 1,277 1,230
River City Landing Jacksonville, FL Jun-96 352 356,800 1,922 4,930
---------- ---------- ----------- ----------
480 471,700 3,199 6,160
---------- ---------- ----------- ----------
1,629 1,584,014 $ 20,179 $ 21,852
========== ========== =========== ==========
In March 1998, the Company completed reconstruction and expansion of The Vistas
at Lake Worth in Fort Worth, Texas, to 265 apartment units at a cost of $16.5
million, $13.9 million of which had been expended at December 31, 1997. Initial
operations at the property began in December 1997.
In April 1998, the Company purchased a 43-acre tract of land adjacent to The
Vistas at Lake Worth in Fort Worth, Texas, for $707,000, including an
acquisition fee to TRA of $7,000. The Company plans to build a luxury apartment
community known as The Observatory on a portion of this tract and sell the
balance to a single family home builder. In May 1998, the Company purchased a
33-acre tract of land in Frisco, Texas, for $4.5 million, paying $1.6 million in
cash and financing the remainder with a short-term mortgage. In connection with
this transaction, the Company paid TRA an acquisition fee of $45,000 and a
financing fee of $30,000. Construction is presently underway on a portion of the
site for a 320-unit luxury apartment community known as The Vintage at Legacy
Lakes.
The Company added 300 units to its multifamily portfolio in July 1997 when it
acquired an additional 40% interest in English Village Partners, L.P., for $1
million. As the Company now holds a 90% interest in the partnership, the
operations of English Village Apartments, located in Memphis, Tennessee, and
subject to a mortgage with a present balance of $5.9 million, have been
consolidated since July 1997.
57
58
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
In connection with the acquisition of River City Landing in 1996, the seller
paid Bruce A. Schnitz, former Chief Operating Officer of the Company and TRA, a
commission of $82,563 pursuant to a brokerage agreement entered into prior to
Mr. Schnitz's affiliation with TRA and the Company.
The Company sold Mountain View Shopping Center in Las Vegas, Nevada, and Spring
Pines Apartments in Houston, Texas, during 1998 for an aggregate sale price of
$4.7 million, receiving net cash proceeds of $2.1 million and recognizing gains
on the sales totaling $2.1 million.
The Company sold Plaza Hills Apartments in Kansas City, Missouri, Huntington
Green Apartments in Philadelphia, Pennsylvania, and Pheasant Pointe Apartments
in Sacramento, California, during 1997 for an aggregate sale price of $14
million, receiving net cash proceeds of $6.4 million and recognizing gains on
the sales totaling $4.4 million.
In September 1996, the Company sold Century Centre II Office Building in San
Mateo, California, for $28.2 million in cash. After closing costs, prorations,
and the payoff of the $21 million mortgage secured by the property, the Company
received net cash proceeds of $6.2 million and recognized a gain of $3.7
million.
In November 1995, the city of Indianapolis, Indiana, initiated condemnation
proceedings against the Company's K-Mart Shopping Center acquired through a deed
in lieu of foreclosure in December 1994. The shopping center was vacant at the
time the Company acquired it, although leased to K-Mart under a net lease
expiring in 1999. The lease was assigned by K-Mart to the city of Indianapolis
in September 1995. In March 1996, the Company ceased payments on the $1.7
million non-recourse mortgage loan secured by the shopping center. In March
1997, the Company wrote off the property and related debt. No loss was
recognized in excess of amounts previously provided.
In October 1995, the Company and the borrower on an $8.6 million first mortgage
receivable that matured in December 1995 negotiated a settlement of the
outstanding balance whereby the borrower agreed to relinquish the collateral
property, Jackson Square Shopping Center, a 342,000 square foot property in
Jackson, Mississippi, through a deed in lieu of foreclosure. The Company took
possession of the property in January 1996. As the estimated fair value of the
property exceeded the Company's net carrying value of the mortgage loan, the
Company recognized no loss in excess of amounts previously provided.
In the second quarter of 1998, the Company identified 12 multifamily properties
with an aggregate 3,406 units and aggregate net carrying value of $56.8 million
that it would pursue marketing for a possible bulk sale and, accordingly,
reclassified these properties to real estate held for sale. The Company ceased
depreciating these properties in April 1998. In September 1998, the Company
removed from consideration for sale two of the properties identified in April
1998 with an aggregate 320 units and aggregate net carrying value of $5.7
million, and reclassified them to held for investment; depreciation resumed in
October 1998. Also in September 1998, the Company identified four other
properties that it would pursue marketing for sale, three commercial properties
with total square footage of 216,777 and aggregate net carrying value of $7.7
million and one multifamily property with 136 units and a net carrying value of
$1.6 million. These four properties were reclassified to held for sale, and
depreciation ceased as of October 1, 1998. In December 1998, the Company added
three properties to its held for sale portfolio (one commercial property with
39,600 square feet and a net carrying value of $1.6 million and two apartment
properties with 360 units and an aggregate net carrying value of $5.1 million).
Depreciation on these properties will cease in January 1999.
58
59
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. REAL ESTATE AND DEPRECIATION (Continued)
As the estimated fair values of these properties exceeded their carrying values
at the time of determination to reclassify, no losses were recognized upon their
reclassification. Results of operations for real estate held for sale for the
years ended December 31, 1998, 1997, and 1996, were $2.4 million, $1.5 million,
and $675,000, respectively. Operations for these properties include rental
revenue, property operating expenses, interest expense, and depreciation expense
(prior to their reclassification to held for sale). For a listing of properties
held for sale, see Schedule III.
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Investments in and advances to partnerships consisted of the following at
December 31:
1998 1997
------------ ------------
801 Pennsylvania Avenue ..................... $ 10 $ 2,936
Ansonia Apartments, L.P. .................... 13,383 970
Antelope Pines Estates, L.P. ................ 109 --
Danforth National Apartments, Ltd. .......... 2,695 2,892
Larchmont Associates, L.P. .................. 1,837 --
National Omni Associates, L.P. .............. 5,902 721
Orange National Partners, Ltd. .............. 4,203 --
RI Panama City, Ltd. ........................ 1,460 1,677
RI Windsor, Ltd. ............................ 2,898 2,697
Sacramento Nine ............................. 555 557
Tarragon Huntsville Apartments, L.L.C........ 677 --
Tarragon Savannah, L.P. ..................... 2,511 1,389
Tarragon Stoneybrook Apartments, L.L.C....... 209 --
Woodcreek Garden Apartments, L.P. ........... 907 --
------------ ------------
$ 37,356 $ 13,839
============ ============
The Company holds noncontrolling interests in each of the above partnerships as
the outside partners participate in the decision-making activities of the
partnerships. Therefore, the Company accounts for its investments in these
partnerships using the equity method.
Partnerships with affiliates of Robert C. Rohdie
In 1997 and 1998, the Company formed seven partnerships with affiliates of
Robert C. Rohdie. These partnerships include Danforth National Apartments, Ltd.,
Orange National Partners, Ltd., RI Panama City, Ltd., RI Windsor, Ltd., Tarragon
Huntsville Apartments, L.L.C., Tarragon Savannah, L.P., and Tarragon Stoneybrook
Apartments, L.L.C. Except for Danforth, the Company holds 50% interests in each
of these partnerships. The Company holds an 80% interest in Danforth. Each of
these partnerships was formed to construct, own, and operate a luxury apartment
community in Florida, Georgia, or Alabama. These properties, with an aggregate
2,066 units, are in various stages of construction and/or lease-up. Generally,
the partnerships have obtained construction loans (guaranteed by Mr. Rohdie) to
finance the construction. The remaining costs were primarily funded by
interest-bearing priority loans from the Company. Such loans together with
interest thereon will be repaid from the operation, refinancing, sale, or other
disposition of the property. Mr. Rohdie has provided extensive development
experience to the partnerships and, in return, has received interests in the
partnerships that are subordinate to repayment of the Company's priority loans
and interest thereon. The
59
60
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
Company has made capital contributions to these partnerships of $830,000, and
the aggregate balance of interest-bearing priority loans at December 31, 1998,
is $15.3 million. In 1997, in connection with the acquisition of the land on
which The Club at Danforth was constructed, Danforth paid an acquisition fee of
$30,000 to TRA.
Ansonia Apartments, L.P.
In December 1997, the Company formed Ansonia Apartments, L.P., with two
unrelated entities to invest in the renovation and repositioning of older,
suburban apartment properties in central and eastern Connecticut. The Company
formed this partnership to take advantage of the acquisition and management
skills of Robert Rothenberg, Saul Spitz, Richard Frary, and Joel Mael,
affiliates of the outside partners. The Company has a 70% interest in this
partnership. The outside partners have a 30% interest in the partnership,
subject to their obligation to pay the Company 30% of the amounts contributed to
the partnership by the Company plus interest. Between December 1997 and August
1998, Ansonia purchased ten operating properties with 1,950 apartment units at
an aggregate cost of $64.6 million, $53.8 million of which was financed through
mortgages on each property. The remainder of the aggregate purchase price was
paid with funds contributed by the Company to Ansonia. The Company's
contributions, with a balance of $12.6 million at December 31, 1998, earn a
preferred return and are to be repaid through preferential returns from
operation, refinancing, sale or other disposition of the properties. In
connection with the acquisition and financing of these properties, Ansonia paid
TRA fees of $38,000 in 1997 and $54,000 in 1998.
Antelope Pines Estates, L.P., and Woodcreek Garden Apartments, L.P.
In December 1998, the Company purchased a 49% general partner interest in
Antelope Pines Estates, L.P., which owns a 314-unit operating apartment property
and in Woodcreek Garden Apartments, L.P., which owns a 416-unit operating
apartment property, both located in Lancaster, California. The Company has made
investments in and advances to the partnerships of $1 million, which are
expected to be repaid from operation, refinancing, sale, or other disposition of
the properties, subject to preferential returns to the other partners.
801 Pennsylvania Avenue
In June 1995, the Company acquired a 50% economic interest in an office building
located at 801 Pennsylvania Avenue, Washington, D.C. This interest was acquired
through purchase of a first lien mortgage note with a face value of $8.5 million
for $3 million. In accordance with the terms of the note, the Company's $3
million investment, as well as any additional advances made to the property,
were to be repaid from property cash flow after operating expenses, with
interest at a rate of 11% per annum. The $5.5 million remaining balance of the
note plus accrued interest was to be satisfied by payment of 50% of all funds
available after property operating expenses plus 50% of the proceeds from any
sale or refinancing. In June 1998, new first mortgage financing in the amount of
$4.2 million secured by the property was obtained. The Company received $3.8
million of the financing proceeds, $2.9 million of which represented the balance
of its original investment, $606,000 of which was accrued interest, and $267,000
was the Company's 50% participation in excess financing proceeds.
Larchmont Associates, L.P.
The Company holds a 57% interest in Larchmont Associates, L.P., which owns a
504-unit apartment complex in Toledo, Ohio. The Larchmont interest was initially
acquired by Vinland in December 1995 in return for a cash investment of
$418,000. In 1997 and in 1998 prior to the merger of the Company and NIRT,
additional advances were made to Larchmont, largely to fund capital
improvements. The $1.8 million aggregate balance
60
61
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
is expected to be repaid with interest at 18% from the operation, refinancing,
sale, or other disposition of the property.
National Omni Associates, L.P.
In December 1997, the Company formed Omni in which it held a 55% interest. Omni
purchased 5600 Collins Avenue, a 289-unit high rise waterfront apartment
building in Miami Beach, Florida, in February 1998. The purchase price of $32
million was partially funded through $26 million of first and second lien loans.
The remainder of the purchase price was paid with funds contributed by the
Company. In connection with the merger of the Company with NIRT, the Company's
interest increased to 70%. The Company's investment balance of $5.9 million at
December 31, 1998, is to be repaid with interest at rates between 10% and 18%
through preferential returns from operation, refinancing, sale, or other
disposition of the property.
Sacramento Nine ("SAC 9")
The Company and Continental Mortgage and Equity Trust are partners in SAC 9, a
tenancy-in-common that currently owns two office buildings in the vicinity of
Sacramento, California. The Company has a 70% undivided interest in SAC 9.
In August 1995, SAC 9 obtained first mortgage financing in the amount of $3.5
million secured by a previously unencumbered office building. Net financing
proceeds of $3.4 million were distributed, of which the Company's proportionate
share was $2.4 million. In connection with the financing, SAC 9 paid a mortgage
brokerage fee of $35,000 to TRA. Distribution of the financing proceeds to the
Company resulted in cumulative distributions exceeding the Company's investment
in SAC 9. Accordingly, during 1996, the Company recorded income of $129,000
representing the excess of cumulative distributions over the Company's
investment in SAC 9.
Other partnerships
Until July 1997, the Company held a 50% interest in English Village Partners,
L.P. In November 1995, this partnership refinanced the mortgage debt secured by
English Village Apartments, its sole property, increasing the first mortgage
loan balance to $6.2 million. Net refinancing proceeds were $1.3 million, of
which the Company's portion was $619,000. Distribution of the refinancing
proceeds resulted in cumulative distributions exceeding the Company's investment
in this partnership. Also, during 1996, distributions to the Company from the
operations of English Village Apartments exceeded the Company's share of the
partnership's net income. Accordingly, during 1996, the Company recorded income
of $771,000 representing the excess of cumulative distributions over the
Company's investment in English Village.
In July 1997, the Company acquired an additional 40% interest in English
Village, increasing its total interest to 90%, in exchange for a capital
contribution of $1 million. As the Company now holds a controlling interest, the
operations of English Village, have been consolidated since July 1997. See NOTE
3. "REAL ESTATE AND DEPRECIATION."
Until November 1997, the Company had a 40% interest in Indcon, L.P., which owned
industrial warehouses. In August 1997, Indcon sold a warehouse for $60,000
receiving net cash proceeds of $54,000 of which the Company's proportionate
share was $22,000. In connection with the sale, Indcon recorded a loss on the
sale totaling $134,000, and the Company recorded a $54,000 loss representing its
proportionate share of the loss on
61
62
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
sale. In November 1997, the Company sold its interest in the partnership for
$1.6 million cash. In connection with this sale, the Company recognized a gain
of $215,000.
During the first half of 1996, Indcon sold 27 warehouses for $41.2 million,
receiving net cash proceeds of $16.8 million after the payoff of the existing
$23.5 million mortgage loan and closing costs. The Company's share of the sale
proceeds was $6.7 million plus $130,000 representing an allowance for brokerage
commissions that the Company retained and that offset the Company's share of
Indcon's loss on the sale, resulting in a net gain on sale of $22,000.
In September 1995, one of Indcon's warehouses was destroyed in a fire. An
insurance settlement totaling $2.2 million was reached by the partnership in
March 1996 resulting in a $1.1 million gain, of which the Company's
proportionate share was $451,000. The Company received cash proceeds of $760,000
representing its proportionate share of the insurance settlement proceeds.
Set forth below are summarized financial data for the partnerships accounted for
using the equity method as of and for the periods indicated (unaudited):
Other
December 31, 1998 Other Construction/
Ansonia Danforth Omni Windsor Operating Lease-Up Other Total
--------- --------- --------- --------- --------- --------- --------- ---------
Real estate .................... $ 69,271 $ 15,949 $ 32,576 $ 18,688 $ 18,420 $ 35,280 $ 35,874 $ 226,058
Accumulated depreciation ....... (675) (196) (614) (387) (3,721) (227) -- (5,820)
Other assets ................... 1,472 430 853 205 864 698 833 5,355
Notes and interest payable ..... (54,530) (13,295) (26,050) (15,962) (13,102) (27,030) (26,500) (176,469)
Other liabilities .............. (2,163) (3,809) (935) (3,765) (2,597) (8,676) (2,099) (24,044)
--------- --------- --------- --------- --------- --------- --------- ---------
Partners' capital (deficit) .... $ 13,375 $ (921) $ 5,830 $ (1,221) $ (136) $ 45 $ 8,108 $ 25,080
========= ========= ========= ========= ========= ========= ========= =========
The Company's proportionate
share of capital (deficit) .. $ 13,375 $ (744) $ 5,830 $ (611) $ 945 $ 221 $ 119 $ 19,135
Advances ....................... 8 3,439 72 3,509 1,457 7,953 1,783 18,221
--------- --------- --------- --------- --------- --------- --------- ---------
Investments in and advances to
partnerships ................ $ 13,383 $ 2,695 $ 5,902 $ 2,898 $ 2,402 $ 8,174 $ 1,902 $ 37,356
========= ========= ========= ========= ========= ========= ========= =========
Year ended December 31, 1998
Rental revenue ................. $ 5,558 $ 419 $ 3,945 $ 1,338 $ 2,496 $ 1,088 $ -- $ 14,844
Property operating expenses .... (2,762) (384) (2,163) (1,071) (751) (621) -- (7,752)
Interest expense ............... (1,788) (776) (1,931) (1,496) (562) (898) -- (7,451)
Depreciation expense ........... (668) (196) (614) (348) (449) (228) -- (2,503)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) .............. $ 340 $ (937) $ (763) $ (1,577) $ 734 $ (659) $ -- $ (2,862)
========= ========= ========= ========= ========= ========= ========= =========
Equity in income (loss) of
partnerships ................ $ 340 $ (750) $ (648) $ (789) $ 1,362 $ (404) $ -- $ (889)
========= ========= ========= ========= ========= ========= ========= =========
December 31, 1997
Real estate .................... $ 3,829 $ 2,892 $ -- $ 15,933 $ 10,090 $ 7,123 $ -- $ 39,867
Accumulated depreciation ....... (6) -- -- (38) (2,854) -- -- (2,898)
Other assets ................... 214 -- 721 474 675 505 -- 2,589
Notes and interest payable ..... (2,925) -- -- (13,402) (4,131) (4,301) -- (24,759)
Other liabilities .............. (142) (2,886) -- (2,661) (137) (2,823) -- (8,649)
--------- --------- --------- --------- --------- --------- --------- ---------
Partners' capital .............. $ 970 $ 6 $ 721 $ 306 $ 3,643 $ 504 $ -- $ 6,150
========= ========= ========= ========= ========= ========= ========= =========
The Company's proportionate
share of capital ............ $ 970 $ 6 $ 721 $ 153 $ 3,126 $ 400 $ -- $ 5,376
Advances ....................... -- 2,886 -- 2,544 367 2,666 -- 8,463
--------- --------- --------- --------- --------- --------- --------- ---------
Investments in and advances to
partnerships ................ $ 970 $ 2,892 $ 721 $ 2,697 $ 3,493 $ 3,066 $ -- $ 13,839
========= ========= ========= ========= ========= ========= ========= =========
62
63
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS (Continued)
Year ended December 31, 1997 Other
Windsor Operating Total
---------- ---------- ----------
Rental revenue ..................... $ 225 $ 3,598 $ 3,823
Property operating expenses ........ (79) (1,340) (1,419)
Interest expense ................... (180) (649) (829)
Depreciation expense ............... (38) (481) (519)
---------- ---------- ----------
Income (loss) before loss on sale
of real estate .................. (72) 1,128 1,056
Loss on sale of real estate ........ -- (134) (134)
---------- ---------- ----------
Net income (loss) .................. $ (72) $ 994 $ 922
========== ========== ==========
Equity in income (loss) of
partnerships .................... $ (36) $ 679 $ 643
========== ========== ==========
Year ended December 31, 1996
Rental revenue ..................... $ -- $ 5,090 $ 5,090
Property operating expenses ........ -- (2,179) (2,179)
Interest expense ................... -- (1,421) (1,421)
Depreciation expense ............... -- (535) (535)
---------- ---------- ----------
Income before loss on sale of
real estate and gain on insurance
settlement ...................... -- 955 955
Loss on sale of real estate ........ -- (270) (270)
Gain on insurance settlement ....... -- 1,126 1,126
---------- ---------- ----------
Net income ......................... $ -- $ 1,811 $ 1,811
========== ========== ==========
Equity in income of partnerships ... $ -- $ 1,500 $ 1,500
========== ========== ==========
"Other Operating" partnerships include those with fully operational properties.
"Construction/lease-up" partnerships include those with properties under
construction or recently completed. "Other" in 1998 includes two partnerships
with construction of one property each beginning in 1999 and two partnerships
with one property each that had no operations in 1998. The Company's equity in
income of "Other Operating" partnerships for the year ended December 31, 1998,
includes $873,000 received from the refinancing of 801 Pennsylvania Avenue, as
described above, representing accrued interest on the Company's original
investment and additional advances plus a 50% participation in the excess
financing proceeds. The Company's equity in income of partnerships for the year
ended December 31, 1996, included $900,000 from SAC 9 and English Village
representing distributions in excess of the Company's investment in the
partnerships. The source of these distributions was primarily financing
proceeds. Interest, property taxes, and insurance expenditures of $1.7 million
and $631,000 in 1998 and 1997, respectively, were capitalized on properties
constructed by partnerships the Company accounts for on the equity method.
63
64
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INVESTMENTS IN MARKETABLE EQUITY SECURITIES
Investments in marketable equity securities consist of securities of
unaffiliated real estate companies and are available for sale. The investments
carried at fair value are included in "Other assets" in the accompanying
Consolidated Balance Sheets. Unrealized holding gains and losses are included in
other comprehensive income (loss).
Carrying value and cost basis of investments in marketable equity securities
were as follows:
December 31,
-------------------------
1998 1997
---------- ----------
Carrying value .......... $ 88 $ 687
Cost basis .............. 178 554
Unrealized holding gains and losses, securities sold, and realized gains on the
sale of marketable equity securities were as follows:
For the Years Ended December 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
Unrealized holding gains ............................ $ -- $ 831 $ --
Unrealized holding losses ........................... (100) -- --
Marketable equity securities sold ................... 580 2,606 --
Cost basis of marketable equity securities sold ..... 457 1,908 --
Realized gains on sale marketable equity securities . 123 698 --
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE
Notes, debentures, and interest payable consisted of the following at
December 31:
1998 1997
--------------------- ---------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
-------- -------- -------- --------
Mortgage notes payable ... $249,381 $251,141 $180,461 $182,498
Other notes payable ...... 9,399 9,590 -- --
Debentures payable ....... 873 928 -- --
Accrued interest ......... -- 1,702 -- 1,628
-------- -------- -------- --------
$259,653 $263,361 $180,461 $184,126
======== ======== ======== ========
Notes payable at December 31, 1998, bear interest at fixed rates from 5.99% to
9.81% per annum and variable rates currently ranging from 5.27% to 10% and
mature from 1999 through 2031. The mortgage notes are generally nonrecourse and
are collateralized by deeds of trust on real estate with an aggregate carrying
value of $280.2 million.
64
65
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)
Debentures are unsecured, bear interest at 9% per annum, mature June 30, 2003,
and are redeemable by the Company at any time at 100% of the principal amount
together with accrued but unpaid interest. Interest is payable semiannually in
June and December. Debentures were issued in 1993 by Vinland in connection with
a dividend to shareholders.
Other notes payable at December 31, 1998, include $5.9 million due to affiliates
of William S. Friedman, President, Chief Executive Officer, and a Director of
the Company. See NOTE 13. "RELATED PARTY TRANSACTIONS."
In connection with its acquisition of TRA, the Company assumed a $1.5 million
note payable to a bank. This loan bears interest at the London Interbank Offered
Rate ("LIBOR") plus 2% per annum, is secured by common stock of the Company
owned by the Friedman family, and matures in July 1999.
At December 31, 1998, scheduled principal payments on notes and debentures
payable are due as follows:
1999......................................... $ 18,293
2000......................................... 61,707
2001......................................... 23,618
2002......................................... 5,350
2003......................................... 6,049
Thereafter................................... 146,642
----------
$ 261,659
==========
During 1998, 1997, and 1996, the Company obtained permanent mortgage financing
on 26 properties totaling $113.9 million, receiving net cash proceeds of $29.7
million after the payoff of $73.2 million in existing debt. The remainder of the
financing proceeds was used to fund escrows for replacements and repairs and to
pay the associated closing costs. In connection with these financings, the
Company paid fees of $786,000 to TRA.
During 1998, 1997, and 1996, the Company obtained interim financing secured by
five properties totaling $18.5 million (excluding fundings under the $50 million
and $35 million revolving credit facilities discussed below), receiving net cash
proceeds of $13.3 million after the payoff of $4.4 million in existing debt. The
remainder of the proceeds was used to fund escrows for replacements and to pay
the associated closing costs. In connection with these financings, the Company
paid fees of $177,000 to TRA. Two of these properties were refinanced in 1998
with fundings under the $35 million revolving credit facility discussed below.
Permanent financing was obtained on another two of these properties in 1998 (see
discussion above).
In June 1996, the Company purchased the $3.1 million Fannie Mae mortgage backed
security ("Fannie Mae MBS") issued by the lender in connection with the
financing of Forest Oaks Apartments at a 1/2% discount and simultaneously
entered into a reverse repurchase agreement with an investment bank. The
investment bank purchased the Fannie Mae MBS from the Company for 92% of its
value, and the Company agreed to repurchase the MBS from the investment bank one
month later at the same price plus interest at LIBOR plus 1/2% per annum. In
July 1996, the Company purchased the $16.8 million Government National Mortgage
Association mortgage backed security ("GNMA MBS") issued by the lender in
connection with the financing of Heather Hills Apartments at a 2.7% discount and
added this MBS to the reverse repurchase transaction with the investment bank.
As provided for in the agreement, the Company and the investment bank extended
the repurchase date monthly, and the repurchase price fluctuated with changes in
the values of the MBSs. In January 1997, the Company entered into a similar
repurchase transaction with a government sponsored enterprise which purchased
the MBSs for 97% of their aggregate value, and the Company agreed to repurchase
them one month later at the same price plus interest at 5.4% per annum. The
Company and the government sponsored enterprise extended the repurchase date
monthly, establishing a new repurchase price each month. In November 1997, the
Company purchased the $2.7 million Fannie Mae MBS issued by the lender in
connection with the financing of Cross Creek Apartments at face value and added
this MBS to the reverse repurchase transaction. In July 1998, the Company
renewed the reverse repurchase
65
66
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)
agreement with the investment bank. Currently, the repurchase date is April
1999, the repurchase price is $22.6 million, and the interest rate is 5.05%.
The reverse repurchase transaction has resulted in effective interest rates as
of December 31, 1998, on the Forest Oaks, Heather Hills, and Cross Creek
financings of 6.73%, 6.07%, and 6.63%, respectively.
The Company is exposed to a demand for additional collateral or, in the
alternative, credit loss in the event the interest rate associated with the
repurchase transaction fluctuates in a manner that is unfavorable to the
Company's interest in the MBSs. However, the Company intends to either pay off
the mortgages or modify the mortgages to increase the interest rate prior to any
significant credit loss.
During 1997, the Company obtained a $2.2 million loan secured initially by
352,000 treasury shares of beneficial interest of NIRT. After a 10% stock
dividend paid in September 1997 and the merger, this loan is now secured by
762,784 shares of the Company's common stock. The proceeds of this loan were
advanced to RI Windsor, Ltd., a partnership in which the Company holds a 50%
interest. See NOTE 5. "INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS." This loan
matures in January 2000; however, the Company expects to repay the loan prior to
that date with funds to be provided by permanent financing on Mayfaire at
Windsor Parke, RI Windsor's sole property.
In May 1997, the Company accepted a commitment from GMAC Commercial Mortgage
Corporation ("GMAC") for a $50 million revolving credit facility. Advances under
the facility are available to finance properties currently owned by the Company
as well as new acquisitions. The outstanding balance is limited to the lesser of
75% of the value of the collateral properties or an amount supported by a debt
service coverage ratio of 1.25. The borrowing base may be increased by adding
new or existing properties to the collateral pool. Advances are limited to the
lesser of 75% of the appraised value of the property as stabilized or 80% of
total acquisition costs which include the purchase price of a newly acquired
property and the cost of improvements incurred between the date of acquisition
and the date that any mortgage secured by that property is recorded. A newly
acquired property is defined as a property owned by the Company for less than
one year. The outstanding balance under the facility bears interest at the 30
day LIBOR plus a variable spread of between 2% and 2.5% which is determined
based on the loan-to-value and debt service coverage maintained. Payment terms
include interest only monthly with the outstanding balance due at maturity,
which is 36 months from the date of the first advance. The Company may extend
the maturity by two six-month terms, but no new fundings may occur under the
facility during any extension period. The Company has obtained fundings under
this revolving credit facility totaling $47.5 million, $42 million of which were
obtained in 1997, secured by first mortgages against nine properties. The
Company received net cash proceeds of $31.7 million ($26.3 million in 1997) from
these fundings after the payoff of existing mortgages of $13.5 million in 1997,
establishing escrows for taxes, insurance, and repairs, and paying the
associated closing costs. In connection with these fundings, the Company paid
TRA financing fees totaling $475,425 ($420,000 in 1997).
In June 1998, the Company obtained a $35 million revolving credit facility from
GMAC with substantially the same terms as the $50 million revolving credit
facility obtained in 1997. The outstanding balance under the facility bears
interest at the 30-day LIBOR plus 2%. Payment terms include interest only
monthly with the outstanding balance due at maturity, which is June 2001.
Similar to the $50 million facility, the maturity of the $35 million facility
may be extended by two six-month terms, but no new fundings may occur under the
facility during any extension period. In June 1998, the Company obtained
fundings under this revolving credit facility of $9.5 million secured by first
mortgages on two properties. The Company received net cash proceeds of $4
66
67
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued)
million from these fundings after the payoff of existing mortgages totaling $5.1
million, establishing escrows for taxes, insurance, and repairs, and paying the
associated closing costs. In connection with these fundings, the Company paid
TRA financing fees totaling $95,000.
During 1998, the Company recognized $1.2 million of extraordinary expenses
resulting from prepayment penalties and the write-off of deferred financing
expenses associated with certain 1998 refinancings.
In December 1993, the Company issued a $1 million convertible subordinated
debenture to John A. Doyle, Chief Financial Officer of the Company until
September 1996, in exchange for his participation interest in the profits of the
Consolidated Capital Properties II assets, which the Company acquired in
November 1992. In February 1996, Mr. Doyle converted the debenture into 183,360
shares of the Company's common stock (restated to give effect to the merger). In
September 1996, the Company repurchased 98,500 of these shares from Mr. Doyle
for $700,000.
NOTE 8. DIVIDENDS TO SHAREHOLDERS
The Company paid cash dividends in 1998, 1997, and 1996 of $3.2 million, $2.9
million, and $2.8 million, respectively, all of which were reported to the
Internal Revenue Service as return of capital. Additionally, in September 1997
and 1996, the Company paid 10% stock dividends, resulting in the issuance of
1,447,592 shares (restated to give effect to the merger).
NOTE 9. EARNINGS PER SHARE
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 effect of stock options on weighted average shares of
common stock outstanding - assuming dilution for the year ended December 31,
1998, is not reflected below because their effect is anti-dilutive.
For the Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
Weighted average shares of
common stock outstanding .... 7,619,604 7,693,031 8,161,197
Stock options .................. -- 76,265 35,852
------------ ------------ ------------
Weighted average shares of
common stock outstanding -
assuming dilution ........... 7,619,604 7,769,296 8,197,049
============ ============ ============
NOTE 10. STOCK OPTIONS
With the approval of its shareholders, the Company adopted an Independent
Director Stock Option Plan and a Stock Option and Incentive Plan (collectively,
the "Company's Plans") in November 1995. The Company's predecessor, NIRT, also
adopted similar Independent Trustee Share Option and Stock Option and Incentive
Plans (the "NIRT Plans") in November 1995.
67
68
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK OPTIONS (Continued)
Pursuant to the terms of the Merger Agreement by and between the Company and
NIRT, the NIRT Plans were consolidated with and into the Company's Plans, with
the shares of common stock available under the consolidated plans for option
awards being increased by the number of NIRT shares of beneficial interest
available under the NIRT Plans multiplied by the exchange ratio of 1.97 to 1,
and the option awards authorized by the Company's Independent Director Stock
Option Plan (the "Director Plan") increased by the option awards authorized by
the NIRT Independent Trustee Share Option Plan multiplied by the exchange ratio.
Under the Company's consolidated Director Plan, Independent Directors receive
annual awards of options to purchase up to 2,000 shares of Company common stock
on January 1 of each year. The options are immediately exercisable and expire on
the earlier of the first anniversary of the date on which the director ceases to
serve as a director of the Company, or ten years from the date of grant.
Under the Company's consolidated Stock Option and Incentive Plan, incentive
stock options have been awarded to officers and employees of the Company and its
subsidiaries. These stock options vest between one and five years from the date
of grant and expire between five and ten years thereafter, unless the optionee's
relationship with the Company terminates earlier. Incentive stock options are
awarded by the Option Committee of the Board of Directors, which is currently
comprised of Michael E. Smith, Carl B. Weisbrod, and Lawrence G. Schafran.
The Company's Director Plan now provides for grants covering a total of 203,022
shares of common stock, and the Company's Stock Option and Incentive Plan now
provides for grants covering a total of 815,110 shares of common stock.
As discussed in NOTE 2. "MERGER TRANSACTION," the Company granted options to
purchase 350,000 shares of the Company's common stock over a period of ten years
at prices ranging between $13 and $16 per share to William S. Friedman and Lucy
N. Friedman in connection with the acquisition of TRA. Additionally, the Company
granted Mr. Friedman options to purchase 450,000 shares of the Company's common
stock over a period of ten years at prices ranging between $12 and $15 per share
in connection with a three year employment contract the Company entered into
with Mr. Friedman. The fair value of these options of $942,000 was estimated
using the Black Scholes pricing model and represented a portion of the purchase
consideration in the acquisition of TRA.
The following table summarizes stock option activity:
Exercise Price Outstanding Exercisable
--------------- ------------ -----------
December 31, 1995, balance............ $ 4.61 50,058 50,058
Options granted....................... 4.61 - 5.88 206,515 169,242
Options forfeited..................... 4.61 (37,273) --
--------------- ------------ -----------
December 31, 1996, balance............ 4.61 - 5.88 219,300 219,300
Options granted....................... 5.54 - 7.74 108,488 102,972
Options forfeited..................... 7.74 (788) --
--------------- ------------ -----------
December 31, 1997, balance............ 4.61 - 7.74 327,000 322,272
Options granted....................... 7.11 - 10.85 66,740 13,790
Options consolidated in merger........ 5.00 - 12.00 74,172 40,305
Options exercised..................... 4.61 - 7.74 (40,785) (40,785)
Options forfeited..................... 4.61 - 10.85 (76,249) (61,671)
Options granted in acquisition
of TRA........................... 12.00 - 16.00 800,000 800,000
--------------- ------------ -----------
December 31, 1998, balance............ $ 4.61 - 16.00 1,150,878 1,073,911
=============== ============ ===========
[This space intentionally left blank]
68
69
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK OPTIONS (Continued)
The following table summarizes information about the options outstanding at
December 31, 1998:
Outstanding Exercisable
----------------------------------------------------------- -----------------------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Options Contractual Life Exercise Price Options Exercise Price
---------------------- ------------ ------------------ -------------------- ---------- -------------------
$ 4.61 - $ 5.87 195,056 3.96 years $ 4.94 195,056 $ 4.94
7.00 - 10.00 97,722 5.43 years 8.32 78,855 7.95
10.80 - 15.00 758,100 9.91 years 13.32 700,000 13.50
16.00 100,000 9.91 years 16.00 100,000 16.00
---------------------- ------------ ------------------ -------------------- ---------- -------------------
$ 4.61 - $ 16.00 1,150,878 8.52 years $ 11.71 1,073,911 $ 11.77
====================== ============ ================== ==================== ========== ===================
Subsequent to year end, in January 1999, the Company granted options covering
16,000 shares, all of which were immediately exercisable, pursuant to the
Director Plan. Also, an additional 3,200 of the December 31, 1998, outstanding
options became exercisable in the first quarter 1999, and 35,421 of the December
31, 1998, outstanding options were forfeited in the first quarter of 1999.
The Company applies APB No. 25 and related Interpretations in accounting for its
plans. All stock options issued to date by the Company have exercise prices
equal to the market price at the dates of grant. Accordingly, no compensation
cost has been recognized for its stock option plans. Had compensation cost for
the Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
For the Years Ended December 31,
----------------------------------------------------------------
1998 1997
------------------------------ -----------------------------
As Reported Pro Forma As Reported Pro Forma
------------ ------------ ------------ ------------
Net income (loss) ................................... $ (1,395) $ (1,458) $ 5,592 $ 5,554
Earnings per share
Net income (loss) ................................... $ (.18) $ (.19) $ .73 $ .72
Earnings per share - assuming dilution
Net income (loss) ................................... $ (.18) $ (.19) $ .72 $ .71
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
For the Years Ended December 31,
-----------------------------------------------------
1998 1997
-------------------------------- --------------
Granted to Granted in Granted to
Employees connection with Employees
and Directors acquisition of TRA and Directors
-------------- ------------------ --------------
Dividend yield .................... 4% 4% 6%
Expected volatility ............... 14% 13% 20%
Risk-free interest rate ........... 5.60% 5.60% 6.21%
Expected lives (in years) ......... 8 8 3
Forfeitures ....................... 10% -- 10%
The weighted average fair value per share of options granted to employees and
directors in both 1998 and 1997 was $1.53. The weighted average fair value per
share of options granted in 1998 in connection with the Company's acquisition of
TRA was $1.18.
69
70
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. ADVISORY AGREEMENT
Although the Company's Board of Directors is directly responsible for managing
the affairs of the Company and setting the policies that guide it, prior to the
merger, the day-to-day operations of the Company were performed by TRA,
operating under the supervision of the Board pursuant to a written advisory
agreement approved by shareholders. Effective with the merger of the Company and
NIRT and the Company's acquisition of TRA, the advisory agreement was
terminated.
Prior to the merger, the duties of the advisor included, among other things,
locating, investigating, evaluating, and recommending real estate investment and
sale opportunities and financing and refinancing sources for the Company. The
advisor also served as a consultant in connection with the business plan and
investment policy decisions made by the Board.
Under the advisory agreement, the Company paid an incentive advisory fee equal
to 16% of the Company's adjusted funds from operations before deduction of the
advisory fee. Adjusted funds from operations is defined as funds from operations
("FFO"), as defined by the National Association of Real Estate Investment
Trusts, plus any loss due to the write-down or sale of any real property or
mortgage loan acquired prior to January 1, 1989. FFO represents net income
(loss), 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. Additionally, TRA received commissions of 1% based upon (i)
acquisition cost of real estate and (ii) mortgage loans obtained or refinanced.
Prior to the Company's acquisition of TRA, employees of TRA rendered services to
the Company, as the Company had no employees. In accordance with the terms of
the advisory agreements, certain services provided by the advisor, including,
but not limited to, accounting, legal, investor relations, data processing, and
the related departmental overhead, were reimbursed directly by the Company.
For additional information regarding compensation paid to the advisor, see NOTE
13. "RELATED PARTY TRANSACTIONS."
NOTE 12. PROPERTY MANAGEMENT
From April 1994 through November 1998, the Company paid property management fees
of 4.5% of the monthly gross rents collected on multifamily properties and 1.5%
to 5% of the monthly gross rents collected on commercial properties to TRA
and/or TMI, a wholly-owned subsidiary of TRA. TRA subcontracted with third
parties to provide property level management services to most of the retail and
office properties and the apartment properties located in California,
Connecticut, and Colorado. Since the Company acquired TRA in November 1998, the
Company is no longer required to pay management fees on the properties managed
in-house, although it continues to pay management fees on those properties under
contract with outside management companies. Since the Company's acquisition of
TRA, the Company earns management fee income from properties owned through
partnerships that are managed in-house and from five multifamily projects and
two shopping centers owned by entities affiliated with Mr. Friedman. Fees for
these services are comparable to the fees charged by TRA.
70
71
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. RELATED PARTY TRANSACTIONS
Fees and expense reimbursements to TRA and affiliates for 1998, 1997, and 1996
were as follows:
1998* 1997 1996
------ ------ ------
Fees
Advisory .......................... $1,048 $1,438 $1,117
Real estate acquisition ........... 105 234 106
Equity refinancing ................ 643 773 167
Property management** ............. 1,884 1,610 1,014
Commercial lease commissions ...... 12 39 --
------ ------ ------
$3,692 $4,094 $2,404
====== ====== ======
Expense reimbursements ............... $2,215 $1,914 $1,176
====== ====== ======
- ----------------
* Through the date of the Company's acquisition of TRA.
** Net of property management fees paid to subcontractors.
Notes payable at December 31, 1998, included $5.9 million advanced by parties
related to William S. Friedman, President, Chief Executive Officer, and Director
of the Company, or affiliates of his under a two year $6 million line of credit
arrangement approved by the Board of Directors. The funds were used to
facilitate investments by the Company and the partnerships in which it holds
interests. Advances under the line of credit bear interest at LIBOR plus 1% per
annum and are payable in January 2001.
NOTE 14. INCOME TAXES
For 1998, 1997, and 1996, the Company has elected and qualified to be treated as
a Real Estate Investment Trust ("REIT"), as defined in Sections 856 through 860
of the Internal Revenue Code of 1986 (the "Code"), and, as such, will not be
taxed for federal income tax purposes on that portion of its taxable income that
is distributed to shareholders, provided that at least 95% of its REIT taxable
income, plus 95% of its taxable income from foreclosure property as defined in
Section 857 of the Code, is distributed. See NOTE 8. "DIVIDENDS TO
SHAREHOLDERS." As a result of the Company's election to be treated as a REIT for
income tax purposes and of its intention to distribute its taxable income, no
deferred tax asset or liability or related valuation allowance was recorded.
No provision has been made for federal income taxes because the Company believes
it has qualified as a REIT and expects that it will continue to do so. The
Company's basis in its net assets for tax purposes differs from that for
financial statement purposes, principally due to the accounting for gains and
losses on property sales, the difference in the allowance for estimated losses,
depreciation on owned properties, and investments in partnerships. At December
31, 1998 and 1997, the Company's tax basis in its net real estate exceeded its
basis for financial statement purposes by $13.3 million and $22.8 million,
respectively. As a result, aggregate future income for income tax purposes will
be less than such amount for financial statement purposes, and the Company will
be able to maintain its REIT status without distributing 95% of its financial
statement income. Additionally, at December 31, 1998, the Company had a tax net
operating loss carry forward of $45 million expiring through 2016.
71
72
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. RENTALS UNDER OPERATING LEASES
The Company's rental operations include the leasing of office buildings and
shopping centers subject to leases with terms greater than one year. The leases
thereon expire at various dates through 2009. The following is a schedule of
future minimum rentals on non-cancelable operating leases as of December 31,
1998:
1999.............................................................................................. $ 10,460
2000.............................................................................................. 8,260
2001.............................................................................................. 6,509
2002.............................................................................................. 4,396
2003.............................................................................................. 2,560
Thereafter........................................................................................ 3,410
--------
$ 35,595
========
NOTE 16. COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims and routine litigation arising in the
ordinary course of business. Management of the Company does not believe that the
results of such claims and litigation, individually or in the aggregate, will
have a material adverse effect on its business, financial position, or results
of operations.
NOTE 17. SUBSEQUENT EVENTS
In January and February 1999, the Company obtained mortgage financing of $10.1
million on three properties. After the payoff of existing mortgages totaling
$4.2 million, establishing required escrows, and paying the associated closing
costs, the Company received net cash proceeds of $5.6 million.
[This space intentionally left blank]
72
73
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1998 and 1997:
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
1998
Revenue ............................................... $ 14,256 $ 14,340 $ 14,459 $ 15,645
Expenses .............................................. (14,242) (14,123) (15,075) (17,655)
----------- ----------- ----------- -----------
Income (loss) before net gain on sale
of real estate, gain on sale of investments,
and extraordinary items ............................. 14 217 (616) (2,010)
Net gain on sale of real estate ....................... -- 1,275 -- 833
Gain on sale of investments ........................... 117 -- 6 --
----------- ----------- ----------- -----------
Income (loss) from continuing operations .............. 131 1,492 (610) (1,177)
Extraordinary items ................................... (262) (68) (589) (312)
----------- ----------- ----------- -----------
Net income (loss) ..................................... $ (131) $ 1,424 $ (1,199) $ (1,489)
=========== =========== =========== ===========
Earnings per share
Income (loss) from continuing operations .............. $ 0.02 $ 0.20 $ (0.08) $ (0.15)
Extraordinary items ................................... (0.04) (0.01) (0.08) (0.04)
----------- ----------- ----------- -----------
Net income (loss) ..................................... $ (0.02) $ 0.19 $ (0.16) $ (0.19)
=========== =========== =========== ===========
Weighted average shares (1) ........................... 7,651,094 7,584,878 7,493,565 7,749,200
=========== =========== =========== ===========
Earnings per share - assuming dilution
Income (loss) from continuing operations .............. $ 0.02 $ 0.19 $ (0.08) $ (0.15)
Extraordinary items ................................... (0.04) (0.01) (0.08) (0.04)
----------- ----------- ----------- -----------
Net income (loss) ..................................... $ (0.02) $ 0.18 $ (0.16) $ (0.19)
=========== =========== =========== ===========
Weighted average shares - assuming dilution (2) ....... 7,651,094 7,710,905 7,493,565 7,749,200
=========== =========== =========== ===========
- --------------------------
(1) Represents weighted average shares of common stock used in computing
earnings per share and has been restated to give effect to the merger of the
Company and NIRT on the basis of 1.97 shares of the Company's common stock
for each share of beneficial interest of NIRT.
(2) Represents weighted average shares of common stock used in computing
earnings per share - assuming dilution and has been restated to give effect
to the merger of the Company and NIRT on the basis of 1.97 shares of the
Company's common stock for each share of beneficial interest of NIRT.
73
74
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. QUARTERLY RESULTS OF OPERATIONS
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
1997
Revenue .............................................. $ 12,180 $ 12,506 $ 13,399 $ 13,932
Expenses ............................................. (11,839) (12,141) (13,593) (14,176)
----------- ----------- ----------- -----------
Income (loss) before net gain on sale
of real estate, gain on sale of investments,
and extraordinary items ............................ 341 365 (194) (244)
Net gain on sale of real estate ...................... -- 1,576 2,774 --
Gain on sale of investments .......................... -- -- 686 227
----------- ----------- ----------- -----------
Income (loss) from continuing operations ............. 341 1,941 3,266 (17)
Extraordinary items .................................. -- -- 353 (292)
----------- ----------- ----------- -----------
Net income (loss) .................................... $ 341 $ 1,941 $ 3,619 $ (309)
=========== =========== =========== ===========
Earnings per share
Income (loss) from continuing operations ............. $ .04 $ .25 $ .42 $ --
Extraordinary items .................................. -- -- .05 (.04)
----------- ----------- ----------- -----------
Net income (loss) .................................... $ .04 $ .25 $ .47 $ (.04)
=========== =========== =========== ===========
Weighted average shares (1) .......................... 7,745,202 7,708,430 7,666,420 7,653,373
=========== =========== =========== ===========
Earnings per share - assuming dilution
Income (loss) from continuing operations ............. $ .04 $ .25 $ .42 $ --
Extraordinary items .................................. -- -- .05 (.04)
----------- ----------- ----------- -----------
Net income (loss) .................................... $ .04 $ .25 $ .47 $ (.04)
=========== =========== =========== ===========
Weighted average shares -
assuming dilution (2) .............................. 7,758,260 7,727,660 7,687,474 7,653,373
=========== =========== =========== ===========
- --------------------------------------
(1) Represents weighted average shares of common stock used in computing
earnings per share and has been restated to give effect to the merger of
the Company and NIRT on the basis of 1.97 shares of the Company's common
stock for each share of beneficial interest of NIRT and the September 1997
10% stock dividend.
(2) Represents weighted average share of common stock used in computing
earnings per share - assuming dilution and has been restated to give effect
to the merger of the Company and NIRT on the basis of 1.97 shares of the
Company's common stock for each share of beneficial interest of NIRT and
the September 1997 10% stock dividend.
74
75
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
-------------------------- TO ACQUISITION ---------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ ------ ------------- -------------- ------ ------------- ---------
PROPERTIES HELD FOR INVESTMENT
Apartments
Acadian Place.................... $ 3,250 $ 897 $ 2,608 $ 1,947 $ 897 $ 4,555 $ 5,452
Baton Rouge, LA
Aspentree........................ 3,835 876 3,506 104 876 3,610 4,486
Dallas, TX
Bayfront......................... 4,296 457 2,052 1,831 457 3,883 4,340
Houston, TX
The Brooks....................... 1,279 558 2,230 24 558 2,254 2,812
Addison, TX
Carlyle Towers................... 5,464 559 5,939 1,676 559 7,615 8,174
Southfield, MI
Collegewood...................... 2,018 556 2,223 4 556 2,227 2,783
Tallahassee, FL
Cornell.......................... 2,398 822 1,183 168 822 1,351 2,173
Los Angeles, CA
Courtyard at the Park............ 2,903 771 3,086 1,445 768 4,534 5,302
Miami, FL
Creekwood North.................. 2,980 532 2,127 941 532 3,068 3,600
Altamonte Springs, FL
Desert Winds..................... 1,355 351 1,399 166 351 1,565 1,916
Jacksonville, FL
Diamond Loch..................... 3,484 380 2,791 1,206 380 3,997 4,377
Fort Worth, TX
English Village.................. 5,918 1,382 5,525 2,266 1,372 7,801 9,173
Memphis, TN
Fenway Hall...................... 1,286 461 1,460 43 461 1,503 1,964
Los Angeles, CA
Fountainhead..................... (D) 5,650 1,573 6,291 311 1,573 6,602 8,175
Kissimmee, FL
French Villa..................... 1,925 447 1,786 21 447 1,807 2,254
Tulsa, OK
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------- ------------ ------------ -------- ------------
PROPERTIES HELD FOR INVESTMENT
Apartments
Acadian Place..................... $ 1,382 1922 Mar-84 5 - 40 years
Baton Rouge, LA
Aspentree......................... 11 1974 Nov-98 5 - 40 years
Dallas, TX
Bayfront.......................... 1,083 1971 Feb-87 5 - 40 years
Houston, TX
The Brooks........................ 5 1969 Nov-98 5 - 40 years
Addison, TX
Carlyle Towers.................... 1,909 1970 Nov-88 5 - 40 years
Southfield, MI
Collegewood....................... 5 1967 Nov-98 5 - 40 years
Tallahassee, FL
Cornell........................... 306 1929 Apr-90 5 - 40 years
Los Angeles, CA
Courtyard at the Park............. 214 1972 Jul-97 5 - 40 years
Miami, FL
Creekwood North................... 453 1973 Nov-92 5 - 40 years
Altamonte Springs, FL
Desert Winds...................... 23 1972 Jun-98 5 - 40 years
Jacksonville, FL
Diamond Loch...................... 1,336 1978 Oct-85 5 - 40 years
Fort Worth, TX
English Village................... 244 1973 Jul-97 5 - 40 years
Memphis, TN
Fenway Hall....................... 323 1929 Apr-90 5 - 40 years
Los Angeles, CA
Fountainhead...................... (D) 276 1988 Jun-97 5 - 40 years
Kissimmee, FL
French Villa...................... 5 1971 Nov-98 5 - 40 years
Tulsa, OK
75
76
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
-------------------------- TO ACQUISITION ---------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ ------ ------------- -------------- ------ ------------- ---------
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
Holly House .................. $ 1,758 $ 397 $ 1,590 $ 6 $ 397 $ 1,596 $ 1,993
North Miami, FL
Landmark ..................... 1,500 376 1,504 378 373 1,885 2,258
Tallahassee, FL
Marina Park .................. 3,731 657 2,625 1,211 671 3,822 4,493
Miami, FL
Mariposa Manor ............... 747 225 901 (292) 225 609 834
Los Angeles, CA
Meadowbrook .................. 3,700 307 1,230 170 306 1,401 1,707
Baton Rouge, LA
Mission Trace ................ 2,043 563 2,252 7 563 2,259 2,822
Tallahassee, FL
Morningside .................. 1,599 420 1,678 430 426 2,102 2,528
Jacksonville, FL
Mustang Creek ................ (B) 4,600 718 2,872 2,093 720 4,963 5,683
Arlington, TX
Newport ...................... 4,983 1,334 5,338 1,080 1,335 6,417 7,752
Plantation, FL
Palm Grove ................... 1,307 322 1,316 6 322 1,322 1,644
Orlando, FL
Park Norton .................. 536 144 576 461 142 1,039 1,181
Los Angeles, CA
Park Place ................... -- 76 304 152 82 450 532
Los Angeles, CA
Pinecrest .................... 14,291 3,612 8,427 6,036 3,612 14,463 18,075
Ft. Lauderdale, FL
Prado Bay .................... 4,756 614 3,482 1,286 614 4,768 5,382
North Bay Village, FL
The Regent ................... (B) 4,900 303 1,212 4,714 303 5,926 6,229
Jacksonville, FL
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------- ------------ ------------ -------- -----------
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
Holly House .................. $ 4 1968 Nov-98 5 - 40 years
North Miami, FL
Landmark ..................... 53 1967 Oct-97 5 - 40 years
Tallahassee, FL
Marina Park .................. 471 1974 Apr-95 5 - 40 years
Miami, FL
Mariposa Manor ............... 87 1924 Sep-94 5 - 40 years
Los Angeles, CA
Meadowbrook .................. 114 1968 Oct-95 5 - 40 years
Baton Rouge, LA
Mission Trace ................ 5 1989 Nov-98 5 - 40 years
Tallahassee, FL
Morningside .................. 133 1973 Feb-97 5 - 40 years
Jacksonville, FL
Mustang Creek ................ (B) 541 1974 May-95 5 - 40 years
Arlington, TX
Newport ...................... 289 1973 Jun-97 5 - 40 years
Plantation, FL
Palm Grove ................... 21 1971 Jun-98 5 - 40 years
Orlando, FL
Park Norton .................. 52 1924 Jun-95 5 - 40 years
Los Angeles, CA
Park Place ................... 34 1929 Sep-95 5 - 40 years
Los Angeles, CA
Pinecrest .................... 2,954 1965 Jul-90 5 - 40 years
Ft. Lauderdale, FL
Prado Bay .................... 1,161 1966 Oct-90 5 - 40 years
North Bay Village, FL
The Regent ................... (B) 429 1972 Sep-95 5 - 40 years
Jacksonville, FL
76
77
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
-------------------------- TO ACQUISITION ---------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ ------ ------------- -------------- ------ ------------- ---------
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
River City Landing ......... (D) $ 7,743 $ 1,236 $ 5,602 $ 6,577 $ 1,237 $ 12,178 $ 13,415
Jacksonville, FL
Riverside .................. 4,159 790 3,160 23 790 3,183 3,973
Austin, TX
Silver Creek ............... 1,283 301 1,206 63 302 1,268 1,570
Jacksonville, FL
Southern Elms .............. 1,310 304 1,216 5 304 1,221 1,525
Tulsa, OK
Summit on the Lake ......... 4,726 895 3,582 703 907 4,273 5,180
Fort Worth, TX
Vistas at Lake Worth ....... 9,500 752 92 15,677 752 15,769 16,521
Fort Worth, TX
Woodcreek .................. 4,708 913 3,193 (454) 690 2,962 3,652
Denver, CO
Woodcreek .................. 7,062 472 4,977 1,458 451 6,456 6,907
Jacksonville, FL
Office Buildings
1505 Highway 6 ............. 2,000 719 2,877 2 719 2,879 3,598
Houston, TX
Northwest O'Hare ........... 1,850 1,990 7,965 (2,170) 1,104 6,681 7,785
Des Plaines, IL
Park 20 West ............... 1,880 688 2,754 -- 688 2,754 3,442
Tallahassee, FL
Rancho Sorrento ............ 5,188 1,251 12,901 861 2,231 12,782 15,013
San Diego, CA
Tarzana Towne Plaza ........ 2,922 671 2,684 5 671 2,689 3,360
Tarzana, CA
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------- ------------ ------------ -------- -----------
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
River City Landing ......... (D) $ 519 1965 Jun-96 5 - 40 years
Jacksonville, FL
Riverside .................. 7 1991 Nov-98 5 - 40 years
Austin, TX
Silver Creek ............... 20 1972 Jun-98 5 - 40 years
Jacksonville, FL
Southern Elms .............. 4 1968 Nov-98 5 - 40 years
Tulsa, OK
Summit on the Lake ......... 545 1986 Mar-94 5 - 40 years
Fort Worth, TX
Vistas at Lake Worth ....... 250 1970 Dec-94 5 - 40 years
Fort Worth, TX
Woodcreek .................. 1,276 1980 Aug-86 5 - 40 years
Denver, CO
Woodcreek .................. 2,556 1975 Nov-86 5 - 40 years
Jacksonville, FL
Office Buildings
1505 Highway 6 ............. 22 1983 Oct-98 5 - 40 years
Houston, TX
Northwest O'Hare ........... 3,610 1972 Apr-86 5 - 40 years
Des Plaines, IL
Park 20 West ............... 5 1972 Nov-98 40 years
Tallahassee, FL
Rancho Sorrento ............ 5,509 1980 May-86 5 - 40 years
San Diego, CA
Tarzana Towne Plaza ........ 6 1985 Nov-98 5 - 40 years
Tarzana, CA
77
78
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
-------------------------- TO ACQUISITION ---------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ ------ ------------- -------------- ------ ------------- ---------
PROPERTIES HELD FOR INVESTMENT
Shopping Centers
Briarwest .................... $1,677 $ 375 $1,499 $ -- $ 375 $1,499 $1,874
Houston, TX
Jackson Square ............... -- 1,115 4,451 21 1,113 4,474 5,587
Jackson, MS
K-Mart Plaza, ................ 1,179 689 1,608 -- 689 1,608 2,297
Temple Terrace, FL
Lakeview Mall ................ -- 513 2,050 612 341 2,834 3,175
Manitowoc, WI
Mariner Plaza ................ (D) 1,725 295 1,180 58 295 1,238 1,533
Panama City, FL
Midland Plaza ................ 278 321 748 59 321 807 1,128
Midland, MI
Northside Center ............. 1,554 1,591 3,712 243 1,611 3,935 5,546
Gainesville, FL
University Center ............ -- 578 2,430 867 602 3,273 3,875
Waco, TX
Land
Vintage at Legacy Lakes ...... 3,521 4,545 -- 736 4,986 295 5,281
Frisco, TX
Vistas Observatory ........... -- 707 -- 48 734 21 755
Fort Worth, TX
------- ------ ------- ------ ------ ------- -------
162,757 42,401 149,400 55,285 42,613 204,473 247,086
------- ------ ------- ------ ------ ------- -------
PROPERTIES HELD FOR SALE
Apartments
Bay West....................... 4,759 891 3,566 964 891 4,530 5,421
Bradenton, FL
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------- ------------ ------------ -------- -----------
PROPERTIES HELD FOR INVESTMENT
Shopping Centers
Briarwest .................... $ 4 1971 Nov-98 5 - 40 years
Houston, TX
Jackson Square ............... 231 1970 Jan-96 5 - 40 years
Jackson, MS
K-Mart Plaza, ................ 283 1979 Dec-91 5 - 40 years
Temple Terrace, FL
Lakeview Mall ................ 1,347 1968 Apr-87 5 - 40 years
Manitowoc, WI
Mariner Plaza ................ (D) 45 1968 Aug-97 5 - 40 years
Panama City, FL
Midland Plaza ................ 144 1976 Dec-91 5 - 40 years
Midland, MI
Northside Center ............. 783 1977 Dec-91 5 - 40 years
Gainesville, FL
University Center ............ 629 1959 Jul-91 5 - 40 years
Waco, TX
Land
Vintage at Legacy Lakes ...... -- May-98 5 - 40 years
Frisco, TX
Vistas Observatory ........... -- Apr-98 5 - 40 years
Fort Worth, TX
------
31,718
------
PROPERTIES HELD FOR SALE
Apartments
Bay West....................... 736 1974 Nov-92 5 - 40 years
Bradenton, FL
78
79
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
-------------------------- TO ACQUISITION ---------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ ------ ------------- -------------- ------ ------------- ---------
PROPERTIES HELD FOR SALE
Apartments (Continued)
Bryan Hill ............... $ 3,467 $ 447 $ 1,803 $ 504 $ 496 $ 2,258 $ 2,754
Bethany, OK
Cross Creek .............. 2,691 221 883 361 225 1,240 1,465
Lexington, KY
Devonshire ............... (D) 15,900 1,048 3,162 2,931 827 6,314 7,141
Denver, CO
Forest Oaks .............. 2,971 691 2,685 535 691 3,220 3,911
Lexington, KY
Heather Hills ............ 17,254 643 14,562 7,066 766 21,505 22,271
Temple Hills, MD
Kirklevington ............ 2,388 490 1,961 656 490 2,617 3,107
Lexington, KY
Lake Point ............... (D) 9,000 2,075 6,225 2,487 2,075 8,712 10,787
Memphis, TN
Martins Landing .......... 4,776 1,038 4,201 533 1,041 4,731 5,772
Lakeland, FL
Palm Court ............... 2,861 599 2,393 904 599 3,297 3,896
Miami, FL
Park Dale Gardens ........ 2,858 354 1,416 755 531 1,994 2,525
Dallas, TX
Phoenix .................. -- 393 1,573 151 393 1,724 2,117
Tulsa, OK
Woodbrier ................ 2,198 508 2,034 308 507 2,343 2,850
Oklahoma City, OK
Office Buildings
Emerson Center ........... (E) 7,000 131 8,781 (185) 1,048 7,679 8,727
Atlanta, GA
One Turtle Creek ......... 1,817 1,179 4,718 -- 1,179 4,718 5,897
Dallas, TX
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------- ------------ ------------ -------- -----------
PROPERTIES HELD FOR SALE
Apartments (Continued)
Bryan Hill ............... $ 313 1970 Nov-94 5 - 40 years
Bethany, OK
Cross Creek .............. 170 1966 Nov-92 5 - 40 years
Lexington, KY
Devonshire ............... (D) 1,440 1969 Mar-89 5 - 40 years
Denver, CO
Forest Oaks .............. 263 1971 Nov-94 5 - 40 years
Lexington, KY
Heather Hills ............ 7,701 1976 May-86 5 - 40 years
Temple Hills, MD
Kirklevington ............ 404 1975 Nov-92 5 - 40 years
Lexington, KY
Lake Point ............... (D) 1,163 1974 May-93 5 - 40 years
Memphis, TN
Martins Landing .......... 430 1973 Nov-94 5 - 40 years
Lakeland, FL
Palm Court ............... 690 1971 Oct-89 5 - 40 years
Miami, FL
Park Dale Gardens ........ 335 1975 Dec-91 5 - 40 years
Dallas, TX
Phoenix .................. 6 1971 Nov-98 5 - 40 years
Tulsa, OK
Woodbrier ................ 184 1970 Apr-96 5 - 40 years
Oklahoma City, OK
Office Buildings
Emerson Center ........... (E) 4,469 1974 Jul-86 5 - 40 years
Atlanta, GA
One Turtle Creek ......... -- 1969 Nov-98 5 - 40 years
Dallas, TX
79
80
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
-------------------------- TO ACQUISITION ---------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ ------ ------------- -------------- ------ ------------- ---------
PROPERTIES HELD FOR SALE
Shopping Centers
Emerson Center .......... (E) $ -- $ 363 $ 18 $ -- $ 381 $ 381
Atlanta, GA
K-Mart Plaza ............ 1,236 571 1,333 12 571 1,345 1,916
Charlotte, NC
K-Mart Plaza ............ 944 497 1,159 -- 497 1,159 1,656
Thomasville, GA
Midway Mills ............ 4,043 588 2,365 1,489 1,227 3,215 4,442
Carrollton, TX
Stewart Square .......... 2,221 294 1,460 651 294 2,111 2,405
Las Vegas, NV
Times Square ............ -- 125 499 47 125 546 671
Lubbock, TX
Other
Snyder Residence ........ -- -- 39 -- 12 27 39
Gilbert, AZ
Land
Dallas, TX .............. -- 737 3,782 (4,420) (C) 99 -- 99
Kansas City, MO ......... -- 802 1,871 (2,360) 313 -- 313
Orangeburg, SC .......... -- 122 -- -- 122 -- 122
--------- --------- --------- --------- --------- --------- ---------
88,384 14,444 72,834 13,407 15,019 85,666 100,685
--------- --------- --------- --------- --------- --------- ---------
$ 251,141 $ 56,845 $ 222,234 $ 68,692 $ 57,632 $ 290,139 $ 347,771
========= ========= ========= ========= ========= ========= (1,194)
---------
$ 346,577
=========
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT
ACCUMULATED DATE OF DATE OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------- ------------ ------------ -------- -----------
PROPERTIES HELD FOR SALE
Shopping Centers
Emerson Center .......... $ 34 1974 Jul-86 5 - 40 years
Atlanta, GA
K-Mart Plaza ............ 135 1977 Dec-91 5 - 40 years
Charlotte, NC
K-Mart Plaza ............ 117 1974 Dec-91 5 - 40 years
Thomasville, GA
Midway Mills ............ 1,361 1986 Oct-91 5 - 40 years
Carrollton, TX
Stewart Square .......... 839 1971 Oct-87 5 - 40 years
Las Vegas, NV
Times Square ............ 93 1985 Jul-89 5 - 40 years
Lubbock, TX
Other
Snyder Residence ........ 1 -- -- --
Gilbert, AZ
Land
Dallas, TX .............. -- -- Jun-86
Kansas City, MO ......... -- -- Dec-91
Orangeburg, SC .......... -- -- Jun-89
---------
20,884
---------
$ 52,602
=========
Allowance for Estimated Losses
(A) Represents property improvements and write-down of properties due to
permanent impairment.
(B) Represents an advance under the $35 million revolving credit facility with
GMAC Commercial Mortgage.
(C) Basis charged against allowance previously provided.
(D) Represents an advance under the $50 million revolving credit facility with
GMAC Commercial Mortgage.
(E) Both the office and retail portions of and Emerson Center secure one
mortgage with a December 31, 1998, balance of $7 million.
80
81
SCHEDULE III
(Continued)
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
1998 1997 1996
--------- --------- ---------
(dollars in thousands)
Reconciliation of real estate
Balance at January 1, ................................. $ 281,163 $ 237,502 $ 240,822
Additions
Acquired through merger .......................... 46,312 -- --
Acquisitions and improvements .................... 23,349 58,683 22,896
Foreclosures ..................................... -- -- 5,575
Deductions
Sales ............................................ (3,053) (12,762) (31,491)
Write-offs ....................................... -- (2,260) --
Write-downs due to permanent impairment .......... -- -- (300)
--------- --------- ---------
Balance at December 31, ............................... $ 347,771 $ 281,163 $ 237,502
========= ========= =========
Reconciliation of accumulated depreciation
Balance at January 1, ................................. $ 46,033 $ 42,251 $ 45,147
Additions
Depreciation ..................................... 7,339 7,022 5,374
Deductions
Sale of real estate .............................. (770) (3,190) (8,270)
Write-offs ....................................... -- (50) --
--------- --------- ---------
Balance at December 31, ............................... $ 52,602 $ 46,033 $ 42,251
========= ========= =========
81
82
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The affairs of the Company are managed by a Board of Directors. Directors are
elected at the annual meeting of shareholders or appointed by the incumbent
Board and serve until the next annual meeting of shareholders or until a
successor has been elected or approved.
The Board presently consists of nine members, including William S. Friedman,
Willie K. Davis, Chester Beck, and Michael E. Smith, who were elected to the
Board at the Annual Meeting of Shareholders of Vinland held on July 10, 1997,
and Carl B. Weisbrod, Raymond V.J. Schrag, Lawrence G. Schafran, Lance Liebman,
and Sally Hernandez-Pinero, who were appointed to the Board on December 3,
1998, pursuant to the terms of the Merger Agreement. Messrs. Weisbrod, Schrag,
Schafran, and Liebman and Ms. Hernandez-Pinero were formerly members of the
Board of Trustees of NIRT, elected at the last annual meeting of shareholders
of NIRT held on March 20, 1997.
The Directors of the Company are listed below, together with their ages, terms
of service, all positions and offices held with the Company, its predecessors,
Vinland and NIRT, or its former advisor, TRA, and their principal occupations,
business experience, and directorships with other companies during the last five
years or more. The designation "Affiliated" means that the Director is an
officer, director, or employee of the Company. The designation "Independent"
means that the Director is not an officer of the Company nor were they an
officer, director, or employee of TRA, although the Company may have certain
business or professional relationships with such Director as discussed in ITEM
13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
CHESTER BECK: Age 69, Independent.
Director (since April 1997) of the Company; Trustee (May 1995 to July
1997) of Vinland; President (since March 1995) of Highland Funding Corp.,
a mortgage brokerage firm; National Sales Manager (January 1994 to March
1995) of Columbia Equities Limited, a real estate financing entity; Senior
Vice President (April 1992 to January 1994) of Peregine Mortgage Company,
Inc., an FHA approved mortgagee specializing in multi-family and
healthcare project financing.
WILLIE K. DAVIS: Age 67, Independent.
Director (since April 1997) of the Company; Trustee (October 1988 to July
1997) of Vinland; Trustee (October 1988 to March 1995) of NIRT; President
(1971 to 1985) and Chairman and 50% shareholder (since 1985) of Mid-South
Financial Corporation, holding company for Mid-South Mortgage Company and
Gibbs Mortgage Company; President (1978 to 1995) and Chairman and sole
shareholder (since December 1995) of FMS, Inc., a property management and
real estate development firm; Director (since 1987) of Southtrust Bank of
Middle Tennessee; Trustee and Treasurer (since 1986) of Baptist Hospital,
Inc., a Tennessee general welfare not-for-profit corporation; and Trustee
or Director (October 1988 to March 1995) of Continental Mortgage and
Equity Trust, Income Opportunity Realty Trust, and Transcontinental Realty
Investors, Inc.
82
83
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Directors (Continued)
WILLIAM S. FRIEDMAN: Age 55, Affiliated.
Director or Trustee (since March 1988), Chief Executive Officer (since
December 1993), President (since December 1988), Acting Chief Financial
Officer (May 1990 to February 1991), Treasurer (August to September 1989),
and Acting Principal Financial and Accounting Officer (December 1988 to
August 1989) of the Company and NIRT; Director and Chief Executive Officer
(since December 1990) of TRA; Trustee or Director (March 1988 to February
1994), Chief Executive Officer (December 1993 to February 1994), President
(December 1988 to February 1994), Acting Chief Financial Officer (May 1990
to February 1991), Treasurer (August to September 1989), and Acting
Principal Accounting Officer (December 1988 to August 1989) of Continental
Mortgage and Equity Trust, Income Opportunity Realty Trust, and
Transcontinental Realty Investors, Inc.; General Partner (1987 to March
1994) of Syntek Asset Management, L.P., the General Partner of National
Realty, L.P., and National Operating, L.P.; Director and President (March
1989 to February 1994) and Secretary (March 1989 to December 1990) of
Syntek Asset Management, Inc., the Managing General Partner of Syntek
Asset Management, L.P.; and Attorney at Law (since 1971).
SALLY HERNANDEZ-PINERO: Age 45, Independent.
Director (since December 1998) of the Company; Trustee (May 1994 to
November 1998) of NIRT; Managing Director (since July 1998) of Fannie Mae
American Communities Fund; Of Counsel (October 1994 to June 1998) at
Kalkines, Arky, Zall and Bernstein, New York City; Chairwoman (February
1992 to April 1994) of the New York City Housing Authority; Director
(since July 1994) of Consolidated Edison; Director (since April 1994) of
Dime Savings Bank; and Attorney at Law (since 1978).
LANCE LIEBMAN: Age 57, Independent.
Director (since December 1998) of the Company; Trustee (March 1995 to
November 1998) of NIRT; William S. Beinecke Professor of Law, Columbia Law
School; Director, Parker School of Foreign and Comparative Law; Director
Designate, American Law Institute; Dean (1991-1996) of Columbia Law
School; Assistant Professor, Professor, and Associate Dean (1970 to 1991)
of Harvard Law School; Director (since 1991) of Greater New York Insurance
Co. (both mutual and stock companies); Director (since 1995) of M & F
Worldwide; Director (since 1996) of Brookfield Financial Properties, Inc.;
and Attorney at Law (since 1968).
L. G. SCHAFRAN: Age 60, Independent.
Director (since December 1998) of the Company; Trustee (March 1995 to
November 1998) of NIRT; Managing General Partner (since 1984) of L. G.
Schafran & Associates, a real estate investment and development firm in
New York City; Director (since 1986) of Publicard., an Old Greenwich,
Connecticut, NYSE listed holding company that operates through
subsidiaries in manufacturing services; Director (1986 to December 1997)
of Capsure Holdings Corp., a Chicago, Illinois, NYSE listed property and
casualty insurer; Director (March 1993 to 1996) of Oxigene, Inc., a U.S.
and Swedish pharmaceutical developer; Director (January 1995 to July 1997)
of Glasstech, Inc., a Perrysberg, Ohio, manufacturer of glass bending and
tempering equipment; and Director (December
83
84
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Directors (Continued)
1993 to October 1997), Member (September 1994 to October 1997), and
Chairman (December 1994 to October 1997) of the Executive Committee of The
Dart Group Corporation, a Landover, Maryland, NASDAQ listed holding
company engaged with other publicly traded subsidiaries in discount
automotive parts and accessories (Trak Auto Corporation), discount
bookstores (Crown Books Corporation), discount supermarkets, beverages,
and real estate; Chairman (since January 1996) of Delta-Omega
Technologies, Inc., a Broussard, Louisiana, manufacturer and distributor
of environmentally safe fire foams, industrial cleaners and degreasers;
Director (since 1997) of Discovery Zone, Inc.; Director (since 1997) of
Kasper A.S.L. Ltd.; and Director (since 1997) of Comsat Corporation.
RAYMOND V. J. SCHRAG: Age 53, Independent.
Director (since December 1998) of the Company; Trustee (October 1988 to
May 1995) of Vinland; Trustee (October 1988 to November 1998) of NIRT;
Attorney, Law Offices of Raymond V. J. Schrag in New York, New York (since
January 1995); attorney, Law Offices of Paul J. Schrag in New York, New
York (since 1975); and Trustee or Director (October 1988 to August 1994)
of Continental Mortgage and Equity Trust, Income Opportunity Realty Trust,
and Transcontinental Realty Investors, Inc.
MICHAEL E. SMITH: Age 56, Independent.
Director (since April 1997) of the Company; Trustee (October 1988 to
August 1991 and from May 1995 to July 1997) of Vinland; Lawyer and
Assistant Professor of Law (since August 1995), University of Wisconsin,
Madison, Wisconsin; Research Director of the Remington Center at the
University of Wisconsin Law School (since 1997); President (1988 to 1995)
and Director (1978 to 1994) of the Vera Institute of Justice, a New York
not-for-profit corporation concerned with the administration of justice;
Trustee of Prosecuting Attorney's Research Council, Inc., (1987 to 1995),
New York Lawyers for the Public Interest (1986 to 1990), Housing and
Services, Inc. (1986 to 1993), Manhattan Bowery Corporation, Inc. (1978 to
1995), Center for Alternative Sentencing and Employment Services, Inc.,
formerly the Court Employment Project, Inc. (1978 to 1995), and New York
City Criminal Justice Agency, Inc. (since 1978); and Attorney at Law
(since 1971).
CARL B. WEISBROD: Age 54, Independent.
Chairman of the Board and Director (since December 1998) of the Company;
Trustee (February 1994 to May 1995) of Vinland; Chairman of the Board
(March 1995 to November 1998) and Trustee (February 1994 to November 1998)
of NIRT; Trustee (since 1996) of the Ford Foundation; President (since
1994) of Alliance for Downtown New York, Inc.; and President and Chief
Executive Officer (April 1990 to 1994) of New York City Economic
Development Corporation.
84
85
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Directors (Continued)
Involvement in Certain Legal Proceedings
In November 1994, William S. Friedman consented to an order prohibiting him from
participating in an insured depository institution without the prior written
approval of the Director of the Office of Thrift Supervision. Mr. Friedman has
been released from any liability arising from his association with the former
San Jacinto Savings Association, a savings institution placed under
conservatorship of the Resolution Trust Corporation on November 30, 1990.
Meetings and Committees of the Board
The Board of Directors reviews the business plan of the Company to determine
that it is in the best interest of the shareholders, supervises the performance
of management and reviews the reasonableness of the compensation which the
Company pays to its executive officers, reviews the reasonableness of the total
fees and expenses of the Company, and selects, when necessary, a qualified
independent real estate appraiser to appraise properties acquired by the
Company. In 1998 and historically, the Independent Directors on the Board also
reviewed the Company's agreement with the advisor, supervised the performance of
the advisor, and reviewed the reasonableness of the compensation which the
Company paid to the advisor in terms of the nature and quality of services
performed.
During the fiscal year ended December 31, 1998, the Board held three regular
meetings and two special meetings and acted once by written consent. Each of the
Directors attended at least 75% of the aggregate of all meetings held by the
Board and all meetings held by the committees of the Board, if any, upon which
such Director served during the period of time that such person served on the
Board or such committee.
The Board has an Audit Committee, an Option Committee, and an Executive
Compensation Committee.
The Audit Committee, which met once during 1998, reviews the Company's
operating and accounting procedures. The Audit Committee currently consists of
Messrs. Schrag, Davis, and Beck.
The Option Committee administers the Company's Stock Option and Incentive Plan
and authorizes option grants thereunder. The Option Committee, which currently
consists of Messrs. Weisbrod, Smith, and Schafran, acted by written consent
three times during 1998.
The Executive Compensation Committee was created by the Board in December 1998
to make recommendations to the Board for the compensation of the Company's
executive officers. The Committee, which did not meet in 1998, consists of
Messrs. Liebman, Weisbrod, and Schrag.
Independent Director Compensation.
Following the merger, Independent Directors shall receive annual compensation of
$15,000 per year plus reimbursement of expenses for their service on the Board.
The Chairman of the Board shall receive an additional $25,000 per year as
compensation for his services as Chairman. Independent Directors shall also
receive $2,000 per year for each committee of the Board on which they serve,
$1,000 per year for each committee that they chair, and $1,000 per day for any
special services rendered to the Company at the request of the Board, plus
reimbursement of expenses. Directors who are also officers of the Company shall
receive no separate compensation for their services as director.
85
86
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Directors (Continued)
Messrs. Beck, Davis, Smith, Weisbrod, Liebman, and Schrafran each earned $10,000
for special services rendered to the Company or its predecessor, NIRT, in
connection with the Merger Agreement and the transactions consummated in
connection therewith.
The Company's Independent Director Stock Option Plan (the "Company's Director
Plan") provides Independent Directors who are serving as directors on the first
day of the Company's fiscal year with automatic annual grants of options to
purchase Company Common Stock. The exercise price of all options granted under
the Company's Director Plan is equal to the market price on the grant date. The
options expire on the earlier of the first anniversary of the date on which a
director ceases to be a director of the Company or ten years from the date of
grant and are immediately exercisable. Pursuant to the Company's Director Plan,
Messrs. Smith, Beck, and Davis received options to acquire 300 shares of Company
Common Stock on January 1, 1998. Messrs. Weisbrod, Liebman, Schrag, and Schafran
and Ms. Hernandez-Pinero each received options to acquire 1,000 shares of
beneficial interest of NIRT on January 1, 1998, in accordance with NIRT's
Independent Trustee Share Option Plan (the "NIRT Plan").
Pursuant to the terms of the Merger Agreement, the NIRT Plan was consolidated
with and into the Company's Director Plan, with the shares of Company Common
Stock available under the consolidated plan for option awards being increased by
the number of NIRT shares of beneficial interest available under the NIRT Plan
multiplied by the exchange ratio of 1.97 to 1, and the option awards authorized
by the Company's Director Plan increased by the option awards authorized by the
NIRT Plan, as adjusted by the exchange ratio. Following the consolidation of the
NIRT Plan into the Company's Director Plan, each of the incumbent Independent
Directors received options to purchase 2,000 shares of Company Common Stock on
January 1, 1999. The consolidated Company's Director Plan now provides for
grants covering a total of 203,022 shares of Company Common Stock.
Executive Officers
Mr. Friedman and the individuals listed below currently serve as the executive
officers of the Company. Their positions with the Company are not subject to a
vote of shareholders. Except for Mr. Friedman, their age, term of service, all
positions and offices held with the Company, its predecessors, Vinland and NIRT,
and its former advisor, TRA, as well as their business experience during the
last five years or more, are set forth below. Such information for Mr. Friedman
is set forth above in the discussion under "Directors."
PENNY D. BARBER: Age 34, Senior Vice President and Director of Property
Management.
Senior Vice President and Director of Property Management (since December
1998) of the Company; Executive Vice President (since November 1998) of
Tarragon Management, Inc. ("TMI"), a wholly owned subsidiary of the
Company; Vice President and Director of Marketing (since May 1998) of TRA;
National Director of Marketing & Education (October 1996 to May 1998),
Galesi Management Corporation; National Marketing Director (February 1995
to September 1996), Anne Sadovsky & Co.; Regional Marketing and Training
Director (February 1990 to January 1995), Lincoln Property Company.
86
87
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Executive Officers (Continued)
CHRIS CLINTON: Age 51, Senior Vice President - Commercial Asset Management.
Senior Vice President - Commercial Asset Management (since March 1994) and
Vice President (October 1988 to March 1994) of the Company and NIRT; Senior
Vice President (since March 1994) of TRA; Vice President (October 1988 to
March 1994) of American Realty Trust, Continental Mortgage and Equity
Trust, Income Opportunity Realty Trust, Transcontinental Realty Investors,
Inc., and Basic Capital Management, Inc.
ERIN D. DAVIS: Age 37, Executive Vice President and Chief Financial Officer.
Executive Vice President and Chief Financial Officer (since December 1998)
of the Company; Vice President and Chief Accounting Officer (September 1996
to November 1998) and Accounting Manager (June 1995 to August 1996) of the
Company, NIRT, and TRA; Senior Associate (January 1993 to June 1995), BDO
Seidman; and Certified Public Accountant (since 1990).
PETER LARSEN: Age 56, Senior Vice President - Acquisitions.
Senior Vice President - Acquisitions (since July 1997) and Vice President -
Acquisitions (April 1996 to June 1997) of the Company, NIRT, and TRA;
Independent Real Estate Consultant (January 1995 to April 1996); and Vice
President (May 1992 to December 1994) of Basic Capital Management, Inc.,
and Carmel Realty Services Inc.
KATHRYN MANSFIELD: Age 38, Executive Vice President, Secretary and Corporate
Counsel.
Executive Vice President (since December 1998), Secretary and Corporate
Counsel (since May 1998), and Vice President (May 1998 to December 1998)
of the Company, NIRT, and TRA; Vice President and Senior Counsel (October
1994 to May 1998) of CB Richard Ellis, Inc., formerly CB Commercial Real
Estate Group, Inc.; Litigation Counsel (March 1990 to October 1994), Basic
Capital Management, Inc.; and Attorney at Law (since 1984).
LORI D. MEYER: Age 38, Senior Vice President and Deputy Director of Property
Management.
Senior Vice President and Deputy Director of Property Management (since
December 1998) of the Company; Senior Vice President (since November 1998),
Controller (since February 1996), and Vice President (February 1996 to
November 1998) of TMI; Assistant Controller (February 1990 to January 1995)
of South West Property Trust, Inc.; and Certified Public Accountant (since
1996).
TODD C. MINOR: Age 40, Senior Vice President and Treasurer.
Senior Vice President (since December 1998) and Treasurer (since December
1996), Senior Vice President - Mortgage Servicing and Financing (May 1995
to November 1996), Senior Vice President Finance (March 1994 to April 1995
and July 1993 to January 1994), and Vice President (April 1991 to July
1993) of the Company and NIRT; Senior Vice President (since March 1994) of
TRA; Senior Vice President - Finance (July 1993 to March 1994), Basic
Capital Management, Inc., American
87
88
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Executive Officers (Continued)
Realty Trust, Continental Mortgage and Equity Trust, Income Opportunity
Realty Trust, and Transcontinental Realty Investors, Inc.
CHARLES RUBENSTEIN: Age 40, Executive Vice President and General Counsel.
Executive Vice President (since December 1998), General Counsel (since
September 1998), and Senior Vice President (September 1998 to December
1998) of the Company, NIRT, and TRA; General Counsel (January 1996 to
February 1998), Simpson Housing Limited Partnership, Denver, Colorado; Real
Estate Attorney (October 1987 to November 1995), Andrews & Kurth, LLP, New
York, New York; and Attorney at Law (since 1984).
JOHN C. STRICKLIN: Age 52, Managing Director - Real Estate Transactions.
Managing Director - Real Estate Transactions (since November 1998) for the
Company; Special Assistant to the President (April 1996 to November 1998),
Basic Capital Management, Inc.; Executive Vice President (May 1995 to
April 1996) of NIRT; Senior Vice President - Real Estate (May 1994 to
April 1995) and Vice President - Real Estate (February 1994 to April 1994)
of Vinland.
In addition to the foregoing, the Company has other officers who are not listed
herein.
ITEM 11. EXECUTIVE COMPENSATION
The Company had no employees and paid no compensation to its executive officers
prior to its acquisition of TRA on November 24, 1998. The directors and
executive officers of the Company who were also officers or employees of TRA
were compensated solely by TRA until that date. They performed a variety of
services for TRA, and the amount of their compensation was determined solely by
TRA. Following the acquisition of TRA on November 24, 1998, the Company began
paying compensation to its executive officers.
Employment Agreement with Chief Executive Officer
In connection with the Company's acquisition of TRA from William S. Friedman and
Lucy N. Friedman, Mr. Friedman entered into an employment agreement with the
Company for a term of four years, at a salary of $300,000 per year. In addition,
Mr. Friedman received immediately exercisable stock options to purchase 250,000
shares of Company common stock at an exercise price of $12 per share and 200,000
shares of Company common stock at an exercise price of $15 per share. Mr.
Friedman's employment agreement includes a broad covenant not to compete with
the Company and a right of first refusal in favor of the Company with regard to
any real estate investment opportunity that comes to Mr. Friedman's attention.
Summary Compensation Table
None of the executive officers of the Company earned or received compensation in
excess of $100,000 from the Company in fiscal year 1998. The Summary
Compensation Table below sets forth information with respect
88
89
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
Summary Compensation Table (Continued)
to the compensation of the Chief Executive Officer of the Company (the "named
executive officer") for services rendered in all capacities to the Company and
its subsidiaries during 1998.
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------
Annual Long Term Compensation
Compensation Awards
----------------- ----------------------
Securities Underlying
Options/
SARs
(Number
of
Name and Principal Position Year Salary Shares)
- --------------------------- ---- ------- -------
William S. Friedman 1998 $28,846 450,000
Director
President
Chief Executive Officer
- ------------------------------------------------------------------------------------
Option / SAR Grants
The Option / SAR Grants Table below shows all grants of stock options made
during 1998 to the named executive officer of the Company.
OPTION / SAR GRANTS IN FISCAL YEAR 1998
- -----------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options /
Underlying SARs Exercise or Grant
Options / Granted to Base Price Date
SARs Employees in (Dollars per Expiration Present
Name Granted (1) 1998 Share) Date Value (3)
- ----------------------- ----------- ------------ ------------ ---------- ---------
William S. Friedman 250,000 29% $12 11/23/08 $414,394
200,000 23% 15 11/23/08 171,989
75,000(2) 9% 13 11/23/08 100,577
50,000(2) 6% 15 11/23/08 42,997
50,000(2) 6% 16 11/23/08 34,161
- -----------------------------------------------------------------------------------------------------
(1) Options granted to the named executive officer in 1998 represent all of
the exercisable options held by him as of fiscal year end 1998.
(2) These options were granted to Mr. Friedman in connection with the
Company's purchase of TRA.
(3) The present value of the options granted during 1998 was estimated using
the Black-Scholes pricing model using the following assumptions:
Expected volatility 13.12%
Risk-free rate of return 5.60%
Dividend yield 4.00%
Expected life 8 years
89
90
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
Compensation Committee Interlocks and Insider Participation
Until November 24, 1998, the executive officers of the Company were compensated
solely by TRA, and the amount of their compensation was determined solely by
TRA. Following the acquisition of TRA, the Board of Directors established an
Executive Compensation Committee to review TRA's compensation policies and the
compensation paid to the executive officers of the Company by TRA and to make
recommendations to the Board regarding the adoption of executive compensation
policies and programs for the Company in fiscal year 1999. The Executive
Compensation Committee, which did not meet in 1998, consists of Messrs. Liebman,
Weisbrod, and Schrag. None of the members of the committee are former or current
employees of the Company.
ITEM 12. SECURITY OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth the ownership of the Company's common stock, both
beneficially and of record, both individually and in the aggregate, for those
persons known by the Company to be beneficial owners of more than five percent
of its common stock as of the close of business on April 5, 1999.
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
------------------- ----------------- ----------
Lucy N. Friedman 3,030,718 (2)(3)(4) 35%
280 Park Avenue (5)(6)
East Building, 20th Floor
New York, New York 10017
(1) Percentages are based upon 8,391,632 shares of Common Stock outstanding
at April 5, 1999.
(2) Includes 1,889,061 shares owned by Mrs. Friedman directly and 175,000
shares covered by a presently exercisable option.
(3) Includes 92,674 shares owned by Lucy N. Friedman's spouse, William S.
Friedman.
(4) Includes 74,298 shares owned by Mrs. Friedman's minor sons, Gideon and
Samuel Friedman. Mrs. Friedman disclaims beneficial ownership of such
shares.
(5) Includes 124,735 shares owned by Tarragon Capital Corporation, of which
Mrs. Friedman and Mr. Friedman are executive officers and directors;
131,343 shares owned by Tarragon Partners, Ltd., of which Mrs. Friedman
and Mr. Friedman are limited partners and Tarragon Capital Corp. is the
general partner; and 543,607 shares owned by Beachwold Partners, L.P., in
which Mrs. Friedman and Mr. Friedman are the general partners and their
four children are the limited partners.
(6) Does not include 90,504 shares owned by Mrs. Friedman's adult son, Ezra
Friedman, and 66,343 shares owned by Mrs. Friedman's adult daughter, Tanya
Friedman. Mrs. Friedman disclaims beneficial ownership of such shares.
90
91
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
Security Ownership of Management
The following table sets forth the ownership of the Company's common stock, both
beneficially and of record, both individually and in the aggregate, for the
Directors and executive officers of the Company as of the close of business on
April 5, 1999.
Amount and Nature
of Beneficial Percent of
Name of Beneficial Owner Ownership Class (1)
------------------------ ----------------- ----------
William S. Friedman 3,480,718 (2)(3)(4)(5)(6) 39%
Sally Hernandez-Pinero 15,672 (7) *
Lance Liebman 17,848 (8) *
L. G. Schafran 15,672 (9) *
Raymond V.J. Schrag 52,920 (10) *
Carl B. Weisbrod 17,777 (11) *
Chester Beck 13,007 (12) *
Willie K. Davis 6,200 (13) *
Michael E. Smith 4,500 (14) *
Penny D. Barber -0- *
Chris L. Clinton 12,035 (15) *
Erin D. Davis 10,085 (16) *
Peter Larsen 18,859 (17) *
Kathryn Mansfield 3,333 (18) *
Lori D. Meyer 1,875 (19) *
Todd C. Minor 15,498 (20) *
Charles D. Rubenstein -0- *
John Stricklin 6,794 (21) *
91
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
Security Ownership of Management (Continued)
All Directors and Executive 3,692,793 (2)(3)(4)(5)(6) 40%
Officers as a group (7)(8)(9)(10)(11)
(18 individuals) (12)(13)(14)(15)(16)(17)
(18)(19)(20)(21)
* Less than 1%.
(1) Percentages are based upon 8,391,632 shares of Common Stock outstanding
at April 5, 1999.
(2) Includes 92,674 shares owned by William S. Friedman directly and 625,000
shares covered by two separate presently exercisable options.
(3) Includes 1,889,061 shares owned by Mr. Friedman's spouse, Lucy N.
Friedman. Mr. Friedman disclaims beneficial ownership of all such shares.
(4) Includes 124,735 shares owned by Tarragon Capital Corporation; 131,343
shares owned by Tarragon Partners, Ltd.; and 543,607 shares owned by
Beachwold Partners, L.P.
(5) Includes 74,298 shares owned by Mr. Friedman's minor sons, Gideon and
Samuel Friedman. Mr. Friedman disclaims beneficial ownership of such
shares.
(6) Does not include 90,504 shares owned by Mr. Friedman's adult son, Ezra
Friedman, and 66,343 shares owned by Mr. Friedman's adult daughter, Tanya
Friedman. Mr. Friedman disclaims beneficial ownership of such shares.
(7) Includes 15,672 shares covered by five separate presently exercisable
options.
(8) Includes 2,176 shares owned by Lance Liebman directly and 15,672 shares
covered by five separate presently exercisable options.
(9) Includes 15,672 shares covered by five separate presently exercisable
options.
(10) Includes 32,838 shares owned by Raymond V. J. Schrag directly and 15,672
shares covered by five separate presently exercisable options. Also
includes 4,410 shares owned by Mr. Schrag's wife as custodian for his
minor son, Ben. It does not include 1,410 shares owned by Mr. Schrag's
adult daughter, Rebecca, as to which shares Mr. Schrag disclaims any
beneficial ownership.
(11) Includes 5,105 shares owned by Carl B. Weisbrod directly and 12,672
shares covered by five separate presently exercisable options.
(12) Includes 9,507 shares owned by Chester Beck directly and 3,500 shares
covered by five separate presently exercisable options.
(13) Includes 2,700 shares owned by Willie K. Davis directly and 3,500 shares
covered by five separate presently exercisable options.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
Security Ownership of Management (Continued)
(14) Includes 1,000 shares owned by Michael E. Smith directly and 3,500 shares
covered by five separate presently exercisable options.
(15) Includes 6,000 shares acquired by Mr. Clinton by virtue of a stock option
exercise on March 18, 1999, and 6,035 shares covered by two separate
presently exercisable options.
(16) Includes 10,085 shares covered by four separate presently exercisable
options.
(17) Includes 18,859 shares covered by three separate presently exercisable
options.
(18) Includes 3,333 shares covered by a presently exercisable option.
(19) Includes 1,875 shares covered by two separate presently exercisable
options.
(20) Includes 5,000 shares acquired by Mr. Minor by virtue of a stock option
exercise on January 28, 1999, and 10,498 shares covered by five separate
presently exercisable options.
(21) Includes 6,794 shares owned by Mr. Stricklin directly.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires that Company directors, executive
officers, and persons holding more than ten percent of the Company's Common
Stock file initial reports of ownership of the Company's Common Stock and
reports of any changes in that ownership to the Securities and Exchange
Commission. Specific due dates for these reports have been established, and the
Company is required to report any failure to file by these dates during fiscal
1998.
To the Company's knowledge, based solely upon the written representations of
its incumbent directors, executive officers, and its ten percent holders, and
copies of the reports that they have filed with the Securities and Exchange
Commission, all of these filing requirements were satisfied during 1998 except
that the initial reports on Form 3 for Messrs. Minor, Stricklin, Clinton, and
Larsen and for Ms. Meyer were filed late.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
The Advisor and its affiliates
Although the Board is directly responsible for managing the affairs of the
Company and for setting the policies which guide it, until November 1998, the
day-to-day operations of the Company were performed by TRA, an advisory firm
owned by William S. Friedman, a Director, President, and Chief Executive Officer
of the Company, and his wife, Lucy N. Friedman. TRA operated under the
supervision of the Board pursuant to a written advisory agreement approved by
shareholders. The duties of the advisor included, among other things, locating,
investigating, evaluating, and recommending real estate investments and sale
opportunities and
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
The Advisor and its affiliates (Continued)
financing and refinancing sources for the Company. The advisor also served as a
consultant in connection with the business plan and investment policy decisions
made by the Board.
Pursuant to the terms of the advisory agreement, TRA was entitled to receive an
incentive advisory fee equal to 16% of the Company's adjusted funds from
operations before deduction of the advisory fee for the period from January 1,
1998, through November 24, 1998, as well as acquisition commissions and mortgage
brokerage and refinancing fees equal to 1% of the acquisition cost of real
estate or 1% of the amount of the loan originated or refinanced.
The Company had no employees prior to its acquisition of TRA and paid no
salaries. Instead, employees of TRA rendered services to the Company and were
compensated by TRA. In accordance with the terms of the advisory agreement,
certain services provided by the advisor, including accounting, legal, investor
relations, data processing, and related departmental overhead, were reimbursed
directly by the Company.
From April 1, 1994, through November 24, 1998, TRA or TMI, its wholly owned
subsidiary, provided property management services to the Company for a fee of
4.5% of the monthly gross rents collected. As of November 24, 1998, the Company
was no longer required to pay management fees on the properties managed in-house
by TMI.
In fiscal year 1998 (through November 24, 1998), the Company incurred fees and
paid expense reimbursements to TRA and TMI as follows (dollars in thousands):
1998
--------
Advisory fees................................................ $ 1,048
Property management fees .................................... 1,884
Commercial lease commissions................................. 12
Real estate acquisition fees................................. 105
Equity refinancing fees...................................... 643
Expense reimbursements....................................... 2,215
Certain Other Relationships
In February 1998, National Omni Associates, L.P., a partnership in which the
Company holds a 70% interest, paid a brokerage commission of $100,000 to
Highland Funding Corp. for consulting services provided in connection with the
partnership's acquisition of 5600 Collins Avenue. Chester Beck, who serves as a
Director of the Company, is the President of Highland Funding Corp.
From January 1993 to January 1998, FMS, Inc., provided property-level management
services for several properties owned by the Company. In 1998, FMS, Inc., earned
fees of $6,706 for performing such services. Willie K. Davis, who serves as a
Director of the Company, was the Chairman, President, and sole shareholder of
FMS, Inc., at the time FMS, Inc., was so employed.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
Certain Other Relationships (Continued)
In fiscal year 1998, affiliates of William S. Friedman and his wife, Lucy N.
Friedman, made advances to the Company and its predecessor pursuant to the terms
of a $6 million unsecured line of credit. Advances under the line of credit bear
interest at the lower of LIBOR plus 1% per annum or the lowest rate at which
credit is offered to the Company by any third party and were made in part to
facilitate acquisitions by the Company and partnerships in which it holds
interests. The balance of such advances at December 31 ,1998, was $5.9 million,
including interest accrued during the year of $41,000.
Management believes that all of the foregoing transactions were at least as
advantageous to the Company as could have been obtained from unrelated third
parties.
Restrictions on Related Party Transactions
Historically, the Company has engaged in and may continue to engage in business
transactions, including real estate partnerships, with related parties.
The Company's Articles of Incorporation prohibit the Company from engaging in
any transaction with the advisor, any director, officer, or employee of the
Company or the advisor, or any affiliate or associate (as such terms are defined
in Rule 12b-2 under the Exchange Act) of any of the aforementioned persons,
unless the material facts as to the relationship and financial interest of the
relevant individuals in the transaction are disclosed to the Board or the
appropriate committee thereof and the Board or committee determines that the
transaction is fair to the Company and approves the transaction by the
affirmative vote of a majority of Independent Directors entitled to vote.
In connection with an action styled Olive, et. al. v. National Income Realty
Trust, et. al., NIRT, among others, entered into an agreement in May 1994 (the
"Olive settlement") which provided that any related party transaction entered
into prior to April 27, 1999, with certain limited exceptions, would require the
unanimous approval of the Board of Trustees. In addition, pursuant to the Olive
settlement, related party transactions could only be undertaken in exceptional
circumstances, and after a determination by the Board of Trustees that the
transaction was in the best interest of NIRT and that no other opportunity
exists that was as good as the opportunity presented by such transaction.
In light of the consolidation of NIRT into the Company, the Board has elected to
treat the requirements for approval of related party transactions contained in
the Olive settlement as binding on the Company. To the extent that the
requirements for approval of related party transactions imposed by the Olive
settlement are stricter than those imposed by the Articles of Incorporation and
Bylaws of the Company, the Board will abide by such stricter requirements
through the remainder of the term of the Olive settlement.
[This space intentionally left blank.]
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Report of Independent Public Accountants - Arthur Andersen LLP
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations -
Years Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity Years Ended December 31, 1998,
1997, and 1996
Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997, and
1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or because the
required information is shown in the Consolidated Financial Statements or the
notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this report:
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger dated June 5, 1998, by
and between Tarragon Realty Investors, Inc., and
National Income Realty Trust (incorporated by
reference to Exhibit 3.6 to Registration Statement
No. 333-60527 on Form S-4).
2.2 Stock Purchase Agreement dated June 5, 1998, among
Tarragon Realty Investors, Inc., Tarragon Realty
Advisors, Inc., William S. Friedman, and Lucy N.
Friedman (incorporated by reference to Exhibit 3.7 to
Registration Statement No. 333-60527 on Form S-4).
3.1 Articles of Incorporation of National Income Realty
Corporation (incorporated by reference to Exhibit 3.8
to Form 8-K for event occurring November 24, 1998).
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Exhibit
Number Description
- ------ -----------
3.2 Articles of Merger of National Income Realty
Corporation into Tarragon Realty Investors, Inc.
(incorporated by reference to Exhibit 3.9 to Form 8-K
for event occurring November 24, 1998).
10.1 Stock Option Agreement dated December 17, 1998, (but
effective November 24, 1998) by and between Tarragon
Realty Investors, Inc., and William S. Friedman
(incorporated by reference to Exhibit 10.2 to Form
8-K for event occurring November 24, 1998).
10.2 Stock Option Agreement dated December 17, 1998, (but
effective November 24, 1998) by and between Tarragon
Realty Investors, Inc., and Lucy N. Friedman
(incorporated by reference to Exhibit 10.3 to Form
8-K for event occurring November 24, 1998).
10.3 Employment Agreement dated December 17, 1998, (but
effective November 24, 1998) by and between Tarragon
Realty Investors, Inc., and William S. Friedman
(incorporated by reference to Exhibit 10.4 to Form
8-K for event occurring November 24, 1998).
10.4 Stock Option Agreement dated December 17, 1998, (but
effective November 24, 1998) by and between Tarragon
Realty Investors, Inc., and William S. Friedman
(incorporated by reference to Exhibit 10.5 to Form
8-K for event occurring November 24, 1998).
21.0 * Subsidiaries of the Registrant.
27.0 * Financial Data Schedule.
* Filed herewith
(b) The following reports on Form 8-K were filed during the fourth
quarter covered by this report or with respect to events occurring
after the period covered by this report but prior to the filing of
this report.
Date of Event Date Filed Items Reported
------------- ---------- --------------
June 5, 1998 September 21, 1998 Item 5. Other Events
November 24, 1998 January 13, 1999 Item 5. Other Events
Item 7. Financial Statements
and Exhibits
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 15, 1999 By: /s/ William S. Friedman
----------------------------- --------------------------------------
William S. Friedman
President, Chief Executive Officer,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Capacities In Which Signed Date
/s/ Carl B. Weisbrod Director and Chairman of the Board March 29, 1999
- ----------------------------------- --------------
Carl B. Weisbrod
/s/ William S. Friedman President, Chief Executive Officer, April 15, 1999
- ----------------------------------- and Director --------------
William S. Friedman (Principal Executive Officer)
/s/ Erin D. Davis Executive Vice President and April 15, 1999
- ----------------------------------- Chief Financial Officer --------------
Erin D. Davis (Principal Financial and
Accounting Officer)
/s/ Chester Beck Director March 25, 1999
- ----------------------------------- --------------
Chester Beck
/s/ Willie K. Davis Director April 15, 1999
- ----------------------------------- --------------
Willie K. Davis
/s/ Sally Hernandez-Pinero Director April 5, 1999
- ----------------------------------- --------------
Sally Hernandez-Pinero
/s/ Lance Liebman Director March 29, 1999
- ----------------------------------- --------------
Lance Liebman
/s/ Lawrence G. Schafran Director April 15, 1999
- ----------------------------------- --------------
Lawrence G. Schafran
/s/ Raymond V.J. Schrag Director April 15, 1999
- ----------------------------------- --------------
Raymond V. J. Schrag
/s/ Michael E. Smith Director April 15, 1999
- ----------------------------------- --------------
Michael E. Smith
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TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger dated June 5, 1998, by and between Tarragon Realty
Investors, Inc., and National Income Realty Trust (incorporated by reference to
Exhibit 3.6 to Registration Statement No. 333-60527 on Form S-4).
2.2 Stock Purchase Agreement dated June 5, 1998, among Tarragon Realty Investors, Inc.,
Tarragon Realty Advisors, Inc., William S. Friedman, and Lucy N. Friedman
(incorporated by reference to Exhibit 3.7 to Registration Statement No. 333-60527 on
Form S-4).
3.1 Articles of Incorporation of National Income Realty Corporation (incorporated by
reference to Exhibit 3.8 to Form 8-K for event occurring November 24, 1998).
3.2 Articles of Merger of National Income Realty Corporation into Tarragon Realty
Investors, Inc. (incorporated by reference to Exhibit 3.9 to Form 8-K for event
occurring November 24, 1998).
10.1 Stock Option Agreement dated December 17, 1998, (but effective November 24, 1998) by
and between Tarragon Realty Investors, Inc., and William S. Friedman (incorporated by
reference to Exhibit 10.2 to Form 8-K for event occurring November 24, 1998).
10.2 Stock Option Agreement dated December 17, 1998, (but effective November 24, 1998) by
and between Tarragon Realty Investors, Inc., and Lucy N. Friedman (incorporated by
reference to Exhibit 10.3 to Form 8-K for event occurring November 24, 1998).
10.3 Employment Agreement dated December 17, 1998, (but effective November 24, 1998) by
and between Tarragon Realty Investors, Inc., and William S. Friedman (incorporated by
reference to Exhibit 10.4 to Form 8-K for event occurring November 24, 1998).
10.4 Stock Option Agreement dated December 17, 1998, (but effective November 24, 1998) by
and between Tarragon Realty Investors, Inc., and William S. Friedman (incorporated by
reference to Exhibit 10.5 to Form 8-K for event occurring November 24, 1998).
21.0 * Subsidiaries of the Registrant.
27.0 * Financial Data Schedule.
* Filed herewith