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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to____________
Commission File Number 0-22999
TARRAGON REALTY INVESTORS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 94-2432628
------ ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1775 Broadway, 23rd Floor, New York, NY 10019
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 949-5000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Common Stock, $.01 per value 11,705,861
---------------------------- ------------------------------
(Class) (Outstanding at July 31, 2003)
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended June 30,
2003, have not been audited by independent certified public accountants, but, in
our opinion, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of consolidated financial position, consolidated results
of operations, and consolidated cash flows at the dates and for the periods
indicated have been included.
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
June 30, December 31,
2003 2002
--------- ---------
Assets
Real estate held for investment (net of accumulated depreciation of
$105,454 in 2003 and $103,173 in 2002) ............................................ $ 402,378 $ 427,989
For-sale housing inventory .......................................................... 89,077 31,632
Assets held for sale ................................................................ 5,341 7,538
Investments in and advances to partnerships and joint ventures ...................... 36,684 29,102
Cash and cash equivalents ........................................................... 18,663 18,023
Restricted cash ..................................................................... 6,876 6,115
Goodwill ............................................................................ 2,691 2,691
Other assets, net (including $626 in 2002 due from affiliates) ...................... 30,407 17,134
--------- ---------
$ 592,117 $ 540,224
========= =========
Liabilities and Stockholders' Equity
Liabilities
Notes, debentures, and interest payable ............................................. $ 479,500 $ 428,926
Liabilities related to assets held for sale ......................................... 3,383 --
Other liabilities ................................................................... 20,192 19,042
--------- ---------
503,075 447,968
Commitments and contingencies .......................................................
Minority interests .................................................................. 21,298 18,523
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000; shares outstanding,
11,705,218 in 2003 and 7,896,760 in 2002 (after deducting 5,708,951 in 2003
and 3,705,382 in 2002 held in treasury) ........................................... 117 79
Special stock, $.01 par value; authorized shares, 7,500,000; shares outstanding,
none............................................................................... -- --
Preferred stock, $.01 par value; authorized shares, 2,500,000; shares
outstanding, 557,518 in 2003 and 560,518 in 2002; liquidation preference,
$6,690 in 2003 and $6,726 in 2002, or $12 per share ............................... 6 6
Paid-in capital ..................................................................... 304,486 306,414
Accumulated deficit ................................................................. (236,865) (232,766)
--------- ---------
67,744 73,733
--------- ---------
$ 592,117 $ 540,224
========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
2
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue
Rentals ...................................................... $ 21,189 $ 21,171 $ 42,522 $ 40,366
For-sale housing inventory sales ............................. 11,079 5,932 14,833 15,176
Interest (including $65 and $153 in the three and six month
periods in 2002 from affiliates) ......................... 123 188 252 334
Management fees and other (including $103 and $198 in the
three and six month periods in 2003 and $82 and $272 in the
three and six month periods in 2002 from affiliates) ...... 128 106 236 330
Equity in income (loss) of partnerships and joint
ventures .................................................. (763) 395 (893) 10,027
-------- -------- -------- --------
31,756 27,792 56,950 66,233
Expenses
Property operations .......................................... 11,569 10,870 22,639 20,981
Costs of for-sale housing inventory sales .................... 8,305 7,292 13,630 16,536
Interest (including $76 and $135 in the three and six month
periods in 2002 to affiliates) ............................ 5,972 6,708 14,635 12,361
Depreciation ................................................. 5,971 4,752 10,668 9,005
General and administrative
Corporate ................................................. 3,243 2,227 6,526 4,265
Property .................................................. 1,044 781 1,878 1,508
-------- -------- -------- --------
36,104 32,630 69,976 64,656
-------- -------- -------- --------
Income (loss) before other items ............................... (4,348) (4,838) (13,026) 1,577
Minority interest in income of consolidated partnerships and
joint ventures ............................................... (632) (313) (1,118) (462)
Gain on sale of real estate .................................... -- -- 1,223 --
-------- -------- -------- --------
Income (loss) from continuing operations ....................... (4,980) (5,151) (12,921) 1,115
Discontinued operations
Loss from operations ......................................... (19) (73) (67) (36)
Gain on sale of real estate .................................. -- -- 9,223 2,267
-------- -------- -------- --------
Net income (loss) .............................................. (4,999) (5,224) (3,765) 3,346
Dividends on cumulative preferred stock ........................ (167) (171) (333) (342)
-------- -------- -------- --------
Net income (loss) allocable to common stockholders ............. $ (5,166) $ (5,395) $ (4,098) $ 3,004
======== ======== ======== ========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
3
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Dollars in thousands, except per share data)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Earnings per common share
Income (loss) from continuing operations allocable to common
stockholders .................................................. $ (.44) $ (.44) $ (1.13) $ .07
Discontinued operations ......................................... -- -- .78 .18
-------------- -------------- -------------- --------------
Net income (loss) allocable to common stockholders .............. $ (.44) $ (.44) $ (.35) $ .25
============== ============== ============== ==============
Weighted average shares of common stock used in computing
earnings per common share ..................................... 11,797,007 12,143,804 11,809,141 12,182,477
============== ============== ============== ==============
Earnings per common share - assuming dilution
Income (loss) from continuing operations allocable to common
stockholders .................................................. $ (.44) $ (.44) $ (1.13) $ .06
Discontinued operations ......................................... -- -- .78 .17
-------------- -------------- -------------- --------------
Net income (loss) allocable to common stockholders .............. $ (.44) $ (.44) $ (.35) $ .23
============== ============== ============== ==============
Weighted average shares of common stock used in computing
earnings per common share - assuming dilution ................. 11,797,007 12,143,804 11,809,141 13,252,786
============== ============== ============== ==============
The accompanying notes are an integral part of these Consolidated
Financial Statements.
4
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
For the Six Months
Ended June 30,
---------------------
2003 2002
--------- ---------
Cash Flows from Operating Activities
Net income (loss) ............................................................. $ (3,765) $ 3,346
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Gain on sale of real estate .............................................. (10,446) (2,267)
Minority interest in income of consolidated partnership .................. 1,118 462
Depreciation and amortization ............................................ 12,319 11,421
Equity in (income) loss of partnerships and joint ventures ............... 893 (10,027)
Noncash compensation related to stock options ............................ 152 253
Decrease in for-sale housing inventory development costs ................. 5,982 12,284
Changes in other assets and liabilities, net of effects of noncash
investing and financing activities:
(Increase) decrease in interest receivable ............................. (22) 3
(Increase) in other assets ............................................. (4,568) (92)
Increase (decrease) in other liabilities ............................... 145 (3,940)
(Decrease) in interest payable ........................................ (253) (213)
--------- ---------
Net cash provided by operating activities ............................ 1,555 11,230
Cash Flows from Investing Activities
Acquisition of real estate or controlling interest in a joint venture .......... (12,513) (3,055)
Proceeds from the sale of real estate .......................................... 13,585 3,005
Real estate development costs and improvements ................................. (13,846) (19,481)
Earnest money deposits paid, net ............................................... (2,142) (650)
Distributions from investing activities of partnerships and joint ventures ..... -- 10,747
Advances to partnerships and joint ventures for development costs .............. (7,900) (5,363)
Refund of partnership and joint venture development costs from construction
financing ................................................................... -- 3,748
Net distributions related to property operations of partnerships and joint
ventures .................................................................... 1,605 1,626
Other ......................................................................... (571) 890
--------- ---------
Net cash (used in) investing activities ..................................... (21,782) (8,533)
Cash Flows from Financing Activities
Proceeds from borrowings ....................................................... 147,619 52,171
Payments of mortgage notes payable ............................................. (126,369) (44,271)
Repayment of advances from affiliates, net ..................................... -- (243)
Distributions from financing activities of partnerships and joint ventures ..... 1,223 239
Stock repurchases .............................................................. (2,231) (1,824)
Dividends to stockholders, including amounts accrued in prior years ............ (339) (743)
Other .......................................................................... 964 (144)
--------- ---------
Net cash provided by financing activities ................................... 20,867 5,185
--------- ---------
Net increase in cash and cash equivalents ....................................... 640 7,882
Cash and cash equivalents, beginning of period .................................. 18,023 8,989
--------- ---------
Cash and cash equivalents, end of period ........................................ $ 18,663 $ 16,871
========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
5
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
For the Six Months
Ended June 30,
-------------------
2003 2002
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ..................................................................... $ 13,849 $ 12,058
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the purchase of real estate
or controlling interest in a joint venture:
Real estate .................................................................. $ -- $ 3,055
For-sale housing inventory ................................................... 62,417 --
Restricted cash .............................................................. 8 --
Other assets ................................................................. 412 --
Notes and interest payable ................................................... (45,984) --
Other liabilities ............................................................ (3,340) --
Minority interest ............................................................ (1,000) --
-------- --------
Cash paid .................................................................. $ 12,513 $ 3,055
======== ========
Assets written off and liabilities released in connection with the
disposition of real estate:
Real estate .................................................................. $ 16,045 $ 2,676
Other assets ................................................................. 52 (3)
Notes and interest payable ................................................... (12,546) (1,897)
Other liabilities ............................................................ (412) (38)
Gain on sale ................................................................. 10,446 2,267
-------- --------
Cash received .............................................................. $ 13,585 $ 3,005
======== ========
Effect on assets and liabilities of the consolidation of two properties in
2002 and the deconsolidation of one property in 2003 in connection with
changes in control:
Real estate .................................................................. $(16,377) $ 38,488
Investments in and advances to partnerships and joint ventures ............... 2,549 207
Other assets ................................................................. (260) 1,858
Notes and interest payable ................................................... 13,424 (31,672)
Other liabilities ............................................................ 664 (284)
Minority interest ............................................................ -- (8,597)
-------- --------
$ -- $ --
======== ========
Purchase of mortgage receivable financed with note payable ........................ $ 12,826 $ --
======== ========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
6
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial
statements. Operating results for the six month period ended June 30, 2003, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. For further information, refer to the Consolidated
Financial Statements and Notes included in our Annual Report on Form 10-K for
the year ended December 31, 2002. Dollar amounts in tables are in thousands.
Certain 2002 balances have been reclassified to conform to the 2003
presentation.
NOTE 2. STOCK OPTION PLANS
In 2002, we adopted the fair value method defined in Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," in accounting for our stock option plans, where previously we
applied the Accounting Principles Board's Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," and related Interpretations. We
elected to apply it prospectively for all options granted or modified since the
beginning of 2002, as allowed by SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." Because some awards under the plans
vest over periods ranging from one to five years, the cost related to
stock-based employee compensation included in the determination of net income
for the three and six month periods ended June 30, 2003 and 2002, is less than
that which would have been recognized if the fair value based method had been
applied to all awards since the original effective date of SFAS No. 123. The
following table illustrates the effect on net income and earnings per common
share as if the fair value based method had been applied to all outstanding and
unvested awards in each period.
For The Three Months Ended For The Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
2003 2002 2003 2002
-------------- --------------- --------------- ---------------
Net income (loss) allocable to common stockholders, as
reported $ (5,166) $ (5,395) $ (4,098) $ 3,004
Add:
Stock-based employee compensation expense included
in reported net income 49 176 152 253
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards (112) (239) (278) (377)
-------------- --------------- --------------- ---------------
Pro forma net income (loss) allocable to common
stockholders $ (5,229) $ (5,458) $ (4,224) $ 2,880
============== =============== =============== ===============
Earnings per common share
Net income (loss) allocable to common stockholders,
as reported $ (.44) $ (.44) $ (.35) $ .25
============== =============== =============== ===============
Net income (loss) allocable to common stockholders,
pro forma $ (.44) $ (.45) $ (.36) $ .24
============== =============== =============== ===============
Earnings per common share - assuming dilution
Net income (loss) allocable to common stockholders,
as reported $ (.44) $ (.44) $ (.35) $ .23
============== =============== =============== ===============
Net income (loss) allocable to common stockholders,
pro forma $ (.44) $ (.45) $ (.36) $ .22
============== =============== =============== ===============
7
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
Investments in and advances to partnerships and joint ventures consisted of the
following at June 30, 2003:
Profits
Interest
--------------
601 Ninth Street Development, L.L.C.................... 50% $ 428
801 Pennsylvania Avenue................................ 50% -
Adams Street Development, L.L.C........................ 40% 647
Ansonia Apartments, L.P................................ 70% 106
Ansonia Liberty, L.L.C................................. 90% 84
Block 88 Development, L.L.C............................ 40% 411
Block 99/102 Development, L.L.C........................ 40% 197
Danforth Apartment Owners, L.L.C....................... 99% 204
Fenwick Tarragon Apartments, L.L.C. ................... 70% 2,120
Guardian-Jupiter Partners, Ltd......................... 70% 3,582
Lake Sherwood Partners, L.L.C.......................... 70% -
Larchmont Associates, L.P.............................. 57% 2,519
Merritt 8 Acquisitions, L.L.C.......................... 80% 634
Merritt Stratford, L.L.C............................... 50% 519
One Las Olas, Ltd...................................... 68% 13,787
100 East Las Olas, Ltd., and East Las Olas, Ltd........ 70% 4,916
Sacramento Nine........................................ 70% 482
Summit/Tarragon Murfreesboro, L.L.C.................... 70% 629
Tarragon Calistoga, L.L.C.............................. 80% 604
Tarragon Savannah I & II, L.L.C........................ 99% 2,608
Thirteenth Street Development, L.L.C................... 50% 2,076
Vineyard at Eagle Harbor, L.L.C........................ 99% 131
--------
$ 36,684
========
We exercise significant influence over but hold noncontrolling interests in each
of the above partnerships or joint ventures or our outside partners have
significant participating rights, as defined in the Financial Accounting
Standard Board's Emerging Issues Task Force's 96-16 Abstract, or important
rights, as defined by the American Institute of Public Accountants' Statement of
Position 78-9, "Accounting for Investments in Real Estate Ventures." Therefore,
we account for our investments in these partnerships and joint ventures using
the equity method.
As of January 1, 2003, Tarragon contributed its interest in Vintage at Fenwick
Plantation to Fenwick Tarragon Apartments, L.L.C. and acquired a 70% interest in
the joint venture. This contribution reduced our real estate held for investment
and other assets by $16.6 million and reduced our notes and interest payable and
other liabilities by $14 million. No gain or loss was recognized on the
contribution.
We have guaranteed $19.6 million of mortgages on three unconsolidated
properties. $14.5 million relates to a mortgage that matures in 2006, $925,000
relates to a mortgage that matures in 2012, and $4.1 million relates to a
mortgage that matures in 2004. We have also guaranteed construction loans
totaling $168.8 million on four unconsolidated properties, including the $90
million construction loan for the Las Olas River House condominium development.
This construction loan has a June 30, 2003, balance of $35.3 million, matures in
2005, and provides for a one-year extension option. The aggregate balance of the
other construction loans at June 30, 2003, is $77.2 million. These construction
loans mature in 2003 or 2004 and have one- or two-year extension options. We
have recorded no liability in connection with these guarantees. Estimated fair
values of guarantees provided since January 1, 2003, are not significant.
8
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)
Below is unaudited summarized financial information for Ansonia, Devonshire, and
our other unconsolidated partnerships and joint ventures for the three and six
month periods ended June 30, 2003 and 2002:
Three Months Ended June 30, 2003
Ansonia Other Total
-------- -------- --------
Rental revenue $ 5,073 $ 6,278 $ 11,351
Property operating expenses (2,479) (3,629) (6,108)
Interest expense (1,594) (3,077) (4,671)
Depreciation expense (839) (1,500) (2,339)
-------- -------- --------
Net income (loss) 161 (1,928) (1,767)
Elimination of management fees paid to Tarragon 253 145 398
-------- -------- --------
Net income (loss) before management fees paid to Tarragon $ 414 $ (1,783) $ (1,369)
======== ======== ========
Equity in income (loss) of partnerships and joint ventures $ 290 $ (1,325) $ (1,035)
Cash distributions in excess of investment 212 60 272
-------- -------- --------
$ 502 $ (1,265) $ (763)
======== ======== ========
Three Months Ended June 30, 2002
Rental revenue $ 5,085 $ 4,765 $ 9,850
Property operating expenses (2,425) (2,303) (4,728)
Interest expense (1,500) (1,800) (3,300)
Depreciation expense (1,394) (1,037) (2,431)
-------- -------- --------
(Loss) before other items (234) (375) (609)
Gain on sale of real estate 1,012 -- 1,012
-------- -------- --------
Income (loss) from continuing operations 778 (375) 403
Discontinued operations (1) -- 401 401
-------- -------- --------
Net income 778 26 804
Elimination of management fees paid to Tarragon 251 91 342
-------- -------- --------
Net income before management fees paid
to Tarragon $ 1,029 $ 117 $ 1,146
======== ======== ========
Equity in income (loss) of partnerships and joint ventures $ 718 $ (323) $ 395
======== ======== ========
- ----------------------------
(1) Includes revenue of $847.
9
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)
Six Months Ended June 30, 2003
Ansonia Other Total
-------- -------- --------
Rental revenue $ 10,027 $ 12,182 $ 22,209
Property operating expenses (5,103) (6,888) (11,991)
Interest expense (3,158) (5,348) (8,506)
Depreciation expense (1,654) (2,974) (4,628)
-------- -------- --------
Net income (loss) 112 (3,028) (2,916)
Elimination of management fees paid to Tarragon 498 278 776
-------- -------- --------
Net income (loss) before management fees paid to Tarragon $ 610 $ (2,750) $ (2,140)
======== ======== ========
Equity in income (loss) of partnerships and joint ventures $ 427 $ (2,000) $ (1,573)
Cash distributions in excess of investment 562 118 680
-------- -------- --------
$ 989 $ (1,882) $ (893)
======== ======== ========
Six Months Ended June 30, 2002
Ansonia Devonshire Other Total
-------- -------- -------- --------
Rental revenue $ 10,321 $ 577 $ 10,488 $ 21,386
Property operating expenses (5,036) (466) (4,854) (10,356)
Interest expense (3,050) (206) (3,553) (6,809)
Depreciation expense (2,128) -- (2,213) (4,341)
-------- -------- -------- --------
Income (loss) before other items 107 (95) (132) (120)
Gain on sale of real estate 2,133 25,107 -- 27,240
-------- -------- -------- --------
Income (loss) from continuing operations 2,240 25,012 (132) 27,120
Discontinued operations (2) -- -- 510 510
-------- -------- -------- --------
Net income 2,240 25,012 378 27,630
Elimination of management fees paid to Tarragon 512 -- 177 689
-------- -------- -------- --------
Net income before management fees paid
to Tarragon $ 2,752 $ 25,012 $ 555 $ 28,319
======== ======== ======== ========
Equity in income (loss) of partnerships and joint
ventures $ 1,925 $ 8,103 $ (1) $ 10,027
======== ======== ======== ========
- ----------------------------
(2) Includes revenue of $1,661.
NOTE 4. FOR-SALE HOUSING
With the sell-out of the 5600 Collins Avenue project nearing completion, we
implemented a new sales strategy in April 2003 to facilitate a quick close-out
of the project and to enable us to reallocate resources devoted to this project
to other projects. In connection with the new sales strategy, we lowered the
asking prices of the remaining condominium units. Based on the lower sale
prices, we wrote down the carrying value of the project as of March 31, 2003, by
$1.6 million. As of July 31, 2003, we have only four unsold units remaining.
10
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the weighted average
number of shares of common stock outstanding for the three and six month periods
ended June 30, 2003 and 2002. Following is a reconciliation of the weighted
average shares of common stock outstanding used in the computation of earnings
per share and earnings per share - assuming dilution. The information presented
for 2002 has been restated to give effect to the three-for-two stock split in
February 2003.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted average shares of common stock
outstanding 11,797,007 12,143,804 11,809,141 12,182,477
Convertible preferred interest of minority
partner in consolidated partnership -- -- -- 356,318
Stock options -- -- -- 713 991
---------- ---------- ---------- ----------
Weighted average shares of common stock outstanding -
assuming dilution 11,797,007 12,143,804 11,809,141 13,252,786
========== ========== ========== ==========
On a weighted average basis, options to purchase 2,878,539 shares of common
stock at a price of $7.08 were outstanding during the six month period ended
June 30, 2003. Their effect is not reflected in the computation of weighted
average shares of common stock outstanding - assuming dilution because their
effect is antidilutive due to a loss from continuing operations allocable to
common stockholders during the period. The options, which expire between
December 31, 2005, and December 31, 2012, were still outstanding at June 30,
2003.
On a weighted average basis, options to purchase 2,865,426 shares of common
stock at a price of $7.08 were outstanding during the three month period ended
June 30, 2003. Their effect is not reflected in the computation of weighted
average shares of common stock outstanding - assuming dilution because their
effect is antidilutive due to a loss from continuing operations allocable to
common stockholders during the period.
On a weighted average basis, options to purchase 2,784,137 shares of common
stock at a price of $6.88 were outstanding during the three month period ended
June 30, 2002. Their effect is not reflected in the computation of weighted
average shares of common stock outstanding - assuming dilution because their
effect is antidilutive due to a loss from continuing operations allocable to
common stockholders during the period.
During all periods presented, the exercise prices of all options were less than
the market prices of the common stock on a weighted average basis.
The convertible preferred interest of minority partner in consolidated
partnership represents the preferred interest of Mr. Robert Rohdie in a joint
venture we consolidate. For the three month period ended June 30, 2002, and the
three and six month periods ended June 30, 2003, his interest was convertible
into 356,318 shares. However, its effect is not reflected in weighted average
shares of common stock outstanding - assuming dilution because its effect is
antidilutive due to losses from continuing operations allocable to common
stockholders in these periods.
11
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING
Our business is divided into three principal segments - the operation of our
investment portfolio, property development, and for-sale housing. Our investment
portfolio of stabilized apartment communities and commercial properties is the
largest segment and the one whose operation most resembles that of traditional
real estate investment trusts. Funds generated by the operation, sale, or
refinancing of properties in the investment portfolio support our overhead and
finance our development activities. The second segment is property development
through which we create new investment properties, primarily apartment
communities, which, upon stabilization, become part of our investment portfolio.
Our activities in the third segment, for-sale housing, encompass condominium
conversions of existing apartment communities and the development of town homes
and new, high-rise condominiums for sale to residents. We reclassify properties
from the Development Division to the Investment Division once they have achieved
stabilized operations, as defined below. We reclassify properties for which we
have initiated renovation or reposition activities from the Investment Division
to the Development Division. We reclassify properties for which we have
initiated condominium conversion activities from the Investment Division to the
For-Sale Housing Division.
o Development. Assets in this division are under development or
in initial lease-up, under renovation, or land held for
development or sale.
o Investment. This division includes properties with stabilized
operations. We consider a property "stabilized" when
development or renovation is complete and recurring operating
income exceeds operating expenses and debt service. Prior to
2003, we defined stabilized properties as completed properties
with stabilized market rate occupancy at market rents for
comparable product in the property's market and which are
subject to neither renovation nor repositioning.
o For-Sale Housing. Assets in this division include luxury
high-rise condominiums, senior housing communities, and
townhouses under development and existing apartment
communities under conversion to condominiums.
The following table summarizes apartment units and commercial square footage in
the Development and Investment Divisions as of June 30, 2003. The For-Sale
Housing Division includes three consolidated properties under renovation and
scheduled for sale as 526 condominium homes and two projects under development
with a total of 293 condominium homes. It also includes a 42-story luxury
condominium project under development and a mixed-use retail and residential
condominium project with an aggregate 325 homes owned through unconsolidated
joint ventures.
12
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
Apartment units:
Consolidated or directly owned:
Development division:
Completed apartment units in lease-up or under renovation .............. 702
Apartment units under construction ..................................... 296
Investment division:
Apartment units presented in income (loss) from continuing operations... 8,642
Apartment units presented in discontinued operations ................... 138
Unconsolidated and owned through joint ventures:
Development division:
Completed apartment units in lease-up or under renovation .............. 948
Investment division ...................................................... 4,146
---------
14,872
=========
Commercial square footage:
Consolidated or directly owned:
Development division ..................................................... 151,387
Investment division ...................................................... 993,169
Unconsolidated and owned through joint ventures:
Investment division ...................................................... 267,022
---------
1,411,578
=========
The following tables summarize operating data through income (loss) from
continuing operations for the three divisions and net operating income (rental
revenue less property operating expenses) and funds from operations for our
Investment Division for the three and six month periods ended June 30, 2003 and
2002.
We use funds from operations, as defined below, to measure the performance of
our Investment Division. We measure the performance of our Development and
For-Sale Housing Divisions primarily by gross profit from third party and
intercompany sales. Intercompany sales for 2003 include transfers on January 1,
2003, from the Development Division to the Investment Division of properties
with 278 apartments and 221,744 square feet of commercial space that were
stabilized during 2002. Intercompany sales for 2002 include transfers on January
1, 2002, from the Development Division to the Investment Division of properties
with 2,970 apartments and 355,737 square feet of commercial space that were
stabilized during 2001 and transfers on April 1, 2002, from the Development
Division to the Investment Division of properties with 737 apartment units and
34,381 square feet of commercial space that were stabilized in the first quarter
of 2002. The sale prices for these properties were their estimated fair market
values as of the date of transfer, and the cost of sales was their net carrying
values as of the same date. Gains on transfers of assets between segments do not
represent gains recognizable in accordance with GAAP and, accordingly, are
eliminated for purposes of consolidated reporting.
We allocate our general and administrative expenses among our three segments
based on the functions of the corporate departments. We allocate other corporate
items, including interest, management fee, and other revenue, and minority
interests in income of consolidated partnerships and joint ventures in the same
proportions as general and administrative expenses are allocated.
13
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months Ended June 30, 2003
---------------------------------------------------------------------
For-Sale
Investment Development Housing Eliminations Total
---------- ----------- ------- ------------ -------
Rental revenue
Consolidated properties ......................... $ 19,696 $ 1,307 $ 186 $ -- $ 21,189
Unconsolidated properties ....................... 9,797 1,554 -- -- 11,351
-------- -------- -------- -------- --------
Total rental revenue ......................... 29,493 2,861 186 -- 32,540
Sales of apartment development and for-sale housing
inventory
Consolidated properties
Sales to third parties ..................... -- -- 11,079 -- 11,079
-------- -------- -------- -------- --------
29,493 2,861 11,265 -- 43,619
Property operating expenses
Consolidated properties ......................... 10,114 1,294 161 -- 11,569
Unconsolidated properties ....................... 5,031 1,069 8 -- 6,108
Costs of sales of apartment development and
for-sale housing inventory
Consolidated properties
Sales to third parties ..................... -- -- 9,730 (1,425) 8,305
-------- -------- -------- -------- --------
15,145 2,363 9,899 (1,425) 25,982
-------- -------- -------- -------- --------
Net operating income .............................. 14,348 498 1,366 1,425 17,637
Interest expense
Consolidated properties ......................... 5,556 311 105 -- 5,972
Unconsolidated properties ....................... 3,900 771 -- -- 4,671
-------- -------- -------- -------- --------
Property level income (loss) before depreciation .. 4,892 (584) 1,261 1,425 6,994
Allocated general and administrative expenses and
other corporate items ........................... (1,696) (692) (2,280) -- (4,668)
-------- -------- -------- -------- --------
Income (loss) before depreciation and gain on sale
of real estate .................................. 3,196 (1,276) (1,019) 1,425 2,326
Depreciation
Consolidated properties ......................... (5,814) (487) -- 330 (5,971)
Unconsolidated properties ....................... (2,215) (491) -- 367 (2,339)
Distributions from unconsolidated partnerships and
joint ventures in excess of investment .......... 272 -- -- -- 272
Elimination of management fees paid by partnerships
and joint ventures to Tarragon .................. 352 46 -- -- 398
Outside partners' interests in loss of
unconsolidated partnerships and joint ventures .. 167 219 8 (60) 334
-------- -------- -------- -------- --------
(Loss) from continuing operations ................. $ (4,042) $ (1,989) $ (1,011) $ 2,062 $ (4,980)
======== ======== ======== ======== ========
14
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months Ended June 30, 2002
---------------------------------------------------------------------
For-Sale
Investment Development Housing Eliminations Total
---------- ----------- ------- ------------ --------
Rental revenue
Consolidated properties ......................... $ 18,751 $ 1,669 $ 751 $ -- $ 21,171
Unconsolidated properties ....................... 9,542 308 -- -- 9,850
-------- -------- -------- -------- --------
Total rental revenue ......................... 28,293 1,977 751 -- 31,021
Sales of apartment development and for-sale housing
inventory
Consolidated properties
Sales to third parties ..................... -- -- 5,932 -- 5,932
Intercompany sales ......................... -- 73,279 -- (73,279) --
-------- -------- -------- -------- --------
28,293 75,256 6,683 (73,279) 36,953
Property operating expenses
Consolidated properties ......................... 9,207 1,303 360 -- 10,870
Unconsolidated properties ....................... 4,525 203 -- -- 4,728
Costs of sales of apartment development and
for-sale housing inventory
Consolidated properties
Sales to third parties ..................... -- -- 7,292 -- 7,292
Intercompany sales ......................... -- 60,341 -- (60,341) --
-------- -------- -------- -------- --------
13,732 61,847 7,652 (60,341) 22,890
-------- -------- -------- -------- --------
Net operating income (loss) ....................... 14,561 13,409 (969) (12,938) 14,063
Interest expense
Consolidated properties ......................... 6,001 379 328 -- 6,708
Unconsolidated properties ....................... 3,019 281 -- -- 3,300
-------- -------- -------- -------- --------
Property level income (loss) before depreciation . 5,541 12,749 (1,297) (12,938) 4,055
Allocated general and administrative expenses and
other corporate items ........................... (1,576) (1,211) (240) -- (3,027)
-------- -------- -------- -------- --------
Income (loss) before depreciation and gain on sale
of real estate .................................. 3,965 11,538 (1,537) (12,938) 1,028
Depreciation
Consolidated properties ......................... (4,573) (490) -- 311 (4,752)
Unconsolidated properties ....................... (2,653) (159) -- 381 (2,431)
Gain on sale of real estate of unconsolidated
partnerships and joint ventures ................. 1,012 -- -- -- 1,012
Discontinued operations of unconsolidated
partnerships and joint ventures ................. 394 -- -- 7 401
Elimination of management fees paid by partnerships
and joint ventures to Tarragon .................. 335 7 -- -- 342
Outside partners' interests in (income) loss of
unconsolidated partnerships and joint ventures .. (779) 100 -- (72) (751)
-------- -------- -------- -------- --------
Income (loss) from continuing operations .......... $ (2,299) $ 10,996 $ (1,537) $(12,311) $ (5,151)
======== ======== ======== ======== ========
15
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Six Months Ended June 30, 2003
---------------------------------------------------------------------
For-Sale
Investment Development Housing Eliminations Total
---------- ----------- ------- ------------ -------
Rental revenue
Consolidated properties ......................... $ 39,503 $ 2,495 $ 524 $ -- $ 42,522
Unconsolidated properties ....................... 19,475 2,734 -- -- 22,209
-------- -------- -------- -------- --------
Total rental revenue ......................... 58,978 5,229 524 -- 64,731
Sales of apartment development and for-sale housing
inventory
Consolidated properties
Sales to third parties ..................... -- -- 14,833 -- 14,833
Intercompany sales ......................... -- 12,709 -- (12,709) --
Unconsolidated properties
Intercompany sales ......................... -- 18,000 -- (18,000) --
-------- -------- -------- -------- --------
58,978 35,938 15,357 (30,709) 79,564
Property operating expenses
Consolidated properties ......................... 19,978 2,321 340 -- 22,639
Unconsolidated properties ....................... 10,078 1,897 16 -- 11,991
Costs of sales of apartment development and
for-sale housing inventory
Consolidated properties
Sales to third parties ..................... -- -- 15,055 (1,425) 13,630
Intercompany sales ......................... -- 9,443 -- (9,443) --
Unconsolidated properties
Intercompany sales ......................... -- 14,744 -- (14,744) --
-------- -------- -------- -------- --------
30,056 28,405 15,411 (25,612) 48,260
-------- -------- -------- -------- --------
Net operating income (loss) ....................... 28,922 7,533 (54) (5,097) 31,304
Interest expense
Consolidated properties ......................... 10,444 579 3,612 -- 14,635
Unconsolidated properties ....................... 7,161 1,345 -- -- 8,506
-------- -------- -------- -------- --------
Property level income (loss) before depreciation .. 11,317 5,609 (3,666) (5,097) 8,163
Allocated general and administrative expenses and
other corporate items ........................... (3,541) (2,739) (2,754) -- (9,034)
-------- -------- -------- -------- --------
Income (loss) before depreciation and gain on sale
of real estate .................................. 7,776 2,870 (6,420) (5,097) (871)
16
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Six Months Ended June 30, 2003
-----------------------------------------------------------------------
For-Sale
Investment Development Housing Eliminations Total
---------- ----------- ------- ------------ ---------
Depreciation
Consolidated properties ........................... $(10,433) $ (900) $ -- $ 665 $(10,668)
Unconsolidated properties ......................... (4,373) (989) -- 734 (4,628)
Gain (loss) on sale of real estate - consolidated
properties
Sales to third parties ............................ (66) -- -- 1,289 1,223
Distributions from unconsolidated partnerships and
joint ventures in excess of investment ............ 680 -- -- -- 680
Elimination of management fees paid by partnerships
and joint ventures to Tarragon .................... 694 82 -- -- 776
Outside partners' interests in loss of
unconsolidated partnerships and joint ventures .... 247 424 16 (120) 567
Outside partners' interests in intercompany sales
of unconsolidated partnerships and joint ventures . -- (977) -- 977 --
-------- -------- -------- -------- --------
Income (loss) from continuing operations ............ $ (5,475) $ 510 $ (6,404) $ (1,552) $(12,921)
======== ======== ======== ======== ========
For the Six Months Ended June 30, 2002
------------------------------------------------------------------------
For-Sale
Investment Development Housing Eliminations Total
---------- ----------- ------- ------------ ----------
Rental revenue
Consolidated properties ......................... $ 34,126 $ 4,551 $ 1,689 $ -- $ 40,366
Unconsolidated properties ....................... 20,974 412 -- -- 21,386
--------- --------- --------- --------- ---------
Total rental revenue ......................... 55,100 4,963 1,689 -- 61,752
Sales of apartment development and for-sale housing
inventory
Consolidated properties
Sales to third parties ..................... -- -- 15,176 -- 15,176
Intercompany sales ......................... -- 185,109 -- (185,109) --
Unconsolidated properties
Intercompany sales ......................... -- 118,850 -- (118,850) --
--------- --------- --------- --------- ---------
55,100 308,922 16,865 (303,959) 76,928
Property operating expenses
Consolidated properties ......................... 16,959 3,242 780 -- 20,981
Unconsolidated properties ....................... 10,106 250 -- -- 10,356
Costs of sales of apartment development and
for-sale housing inventory
Consolidated properties
Sales to third parties ..................... -- -- 16,536 -- 16,536
Intercompany sales ......................... -- 159,918 -- (159,918) --
Unconsolidated properties
Intercompany sales ......................... -- 89,628 -- (89,628) --
--------- --------- --------- --------- ---------
27,065 253,038 17,316 (249,546) 47,873
--------- --------- --------- --------- ---------
Net operating income (loss) ....................... 28,035 55,884 (451) (54,413) 29,055
17
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Six Months Ended June 30, 2002
---------------------------------------------------------------------
For-Sale
Investment Development Housing Eliminations Total
---------- ----------- ------- ------------ -------
Interest expense
Consolidated properties ......................... $ 10,234 $ 1,306 $ 821 $ -- $ 12,361
Unconsolidated properties ....................... 6,500 309 -- -- 6,809
-------- -------- -------- -------- --------
Property level income (loss) before depreciation .. 11,301 54,269 (1,272) (54,413) 9,885
Allocated general and administrative expenses and
other corporate items ........................... (2,815) (2,313) (443) -- (5,571)
-------- -------- -------- -------- --------
Income (loss) before depreciation and gain on sale
of real estate .................................. 8,486 51,956 (1,715) (54,413) 4,314
Depreciation
Consolidated properties ......................... (8,199) (1,338) -- 532 (9,005)
Unconsolidated properties ....................... (4,888) (215) -- 762 (4,341)
Gain on sale of real estate of unconsolidated
partnerships and joint ventures, net of income
previously recognized by Tarragon ............... 10,982 -- -- -- 10,982
Discontinued operations of unconsolidated
partnerships and joint ventures ................. 496 -- -- 14 510
Elimination of management fees paid by partnerships
and joint ventures to Tarragon .................. 676 13 -- -- 689
Outside partners' interests in (income) loss of
unconsolidated partnerships and joint ventures .. (1,996) 105 -- (143) (2,034)
Outside partners' interests in intercompany sales
of unconsolidated partnerships and joint ventures -- (2,754) -- 2,754 --
-------- -------- -------- -------- --------
Income (loss) from continuing operations .......... $ 5,557 $ 47,767 $ (1,715) $(50,494) $ 1,115
======== ======== ======== ======== ========
18
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Reconciliation of revenues per operating data table to total revenues per
accompanying Consolidated Statements of Operations:
Total revenues per operating data table ................................ $ 43,619 $ 36,953 $ 79,564 $ 76,928
Less expenses related to unconsolidated partnerships and joint ventures:
Property operating expenses ....................................... (6,108) (4,728) (11,991) (10,356)
Interest expense .................................................. (4,671) (3,300) (8,506) (6,809)
Depreciation expense .............................................. (2,339) (2,431) (4,628) (4,341)
Discontinued operations of unconsolidated partnerships and joint
ventures ............................................................ -- 401 -- 510
Gain on sale of real estate of unconsolidated partnerships and joint
ventures, net of income previously recognized by Tarragon ........... -- 1,012 -- 10,982
Distributions from unconsolidated partnerships and joint ventures in
excess of investment ................................................ 272 -- 680 --
Elimination of management fees paid by partnerships and joint ventures
to Tarragon ......................................................... 398 342 776 689
Outside partners' interests in (income) loss of unconsolidated
partnerships and joint ventures ..................................... 334 (751) 567 (2,034)
Interest, management fee, and other revenue presented with allocated
general and administrative expenses and other corporate items ....... 251 294 488 664
-------- -------- -------- --------
Total revenues per accompanying Consolidated Statements of Operations .. $ 31,756 $ 27,792 $ 56,950 $ 66,233
======== ======== ======== ========
Investment Division Net Operating Income:
Rental revenue
Same store stabilized apartment communities ............................ $ 23,607 $ 23,325 $ 47,107 $ 46,237
Apartment communities stabilized during period ......................... 2,393 1,595 4,800 1,595
Apartment communities sold during period ............................... -- 418 -- 1,837
Commercial properties .................................................. 3,493 2,955 7,071 5,431
-------- -------- -------- --------
29,493 28,293 58,978 55,100
Property operating expenses
Same store stabilized apartment communities ............................ 12,411 11,383 24,607 22,684
Apartment communities stabilized during period ......................... 1,114 681 2,182 681
Apartment communities sold during period ............................... -- 392 -- 1,281
Commercial properties .................................................. 1,620 1,276 3,267 2,419
-------- -------- -------- --------
15,145 13,732 30,056 27,065
Net operating income
Same store stabilized apartment communities ............................ 11,196 11,942 22,500 23,553
Apartment communities stabilized during period ......................... 1,279 914 2,618 914
Apartment communities sold during period ............................... -- 26 -- 556
Commercial properties .................................................. 1,873 1,679 3,804 3,012
-------- -------- -------- --------
$ 14,348 $ 14,561 $ 28,922 $ 28,035
======== ======== ======== ========
19
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Funds from operations - Investment Division (1):
Same store stabilized apartment communities ........................... $ 3,928 $ 4,445 $ 8,612 $ 9,093
Apartment communities stabilized during period ........................ 564 377 1,267 377
Apartment communities sold during period .............................. -- 70 -- 310
Apartment communities in discontinued operations ...................... (19) 350 18 806
Commercial properties ................................................. 552 632 1,640 1,333
-------- -------- -------- --------
5,025 5,874 11,537 11,919
Allocation of corporate interest expense .............................. (249) (351) (487) (693)
Allocation of general and administrative expenses ..................... (1,343) (1,473) (2,878) (2,828)
Allocation of other corporate items ................................... (353) (103) (663) 13
-------- -------- -------- --------
$ 3,080 $ 3,947 $ 7,509 $ 8,411
======== ======== ======== ========
Reconciliation of funds from operations to income (loss) from continuing
operations - Investment Division:
Funds from operations ................................................. $ 3,080 $ 3,947 $ 7,509 $ 8,411
Discontinued operations ............................................... 19 (350) (18) (806)
Depreciation and amortization of real estate assets ................... (5,640) (4,367) (10,090) (8,033)
Depreciation and amortization of real estate assets of partnerships and
joint ventures ..................................................... (1,773) (2,278) (3,490) (3,705)
Distributions from partnerships and joint ventures in excess of
investments ........................................................ 272 -- 680 --
Loss on sale of real estate to third parties .......................... -- -- (66) --
Gain on sale of real estate of unconsolidated partnerships and joint
ventures ........................................................... -- 749 -- 9,690
-------- -------- -------- --------
Income (loss) from continuing operations .............................. $ (4,042) $ (2,299) $ (5,475) $ 5,557
======== ======== ======== ========
- --------------------
(1) Tarragon considers funds from operations ("FFO") to be an appropriate
measure of the performance of our investment portfolio but not of our
other assets. FFO, as defined by the National Association of Real
Estate Investment Trusts ("NAREIT"), equals net income (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. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect FFO on the
same basis. We believe that a clear understanding of the operating
results of our investment portfolio requires examining FFO along with
net income (loss) as shown in the Consolidated Financial Statements and
Notes. FFO does not represent cash generated from operating activities
in accordance with GAAP and is not an alternative to net income as an
indication of our operating performance or to cash flow as a measure of
liquidity, nor is it necessarily indicative of cash available to fund
cash needs and cash dividends. Our calculation of FFO may be different
from the methods used by other companies and, therefore, may not be
comparable to other companies.
NOTE 7. INCOME TAXES
No current or deferred income tax expense has been recognized for the three and
six month periods ended June 30, 2003, due to the expected application of net
operating loss carryforwards. At December 31, 2002, Tarragon had Federal net
operating loss carryforwards of approximately $50.3 million.
20
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 8. ASSETS HELD FOR SALE
Assets held for sale and liabilities related to assets held for sale in the
accompanying Consolidated Balance Sheets include the following:
June 30, December 31,
-------- ------------
2003 2002
------ ------
Real estate (net of accumulated depreciation of $2,377 in 2003 and $301 in 2002) . $5,187 $7,538
Restricted cash .................................................................. 77 --
Other assets, net ................................................................ 77 --
------ ------
$5,341 $7,538
====== ======
Notes and interest payable ....................................................... $3,305 $ --
Other liabilities ................................................................ 78 --
------ ------
$3,383 $ --
====== ======
The June 30, 2003, amounts include balances related to an apartment community
sold in July 2003. At December 31, 2002, our assets held for sale included two
apartment communities for which a plan of disposal was implemented prior to the
adoption of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." In the second quarter of 2003, we ceased marketing them for
sale and reclassified them to real estate held for investment. Upon their
reclassification, we incurred no loss because their estimated fair values
exceeded their net carrying values, and we recorded depreciation of $1 million
for the period during which they were classified as held for sale.
In accordance with SFAS No. 144, operating results for properties for which we
implemented plans of disposals after the adoption of this pronouncement have
been reported in discontinued operations. Discontinued operations for the three
and six month periods ended June 30, 2003 and 2002, include the operations of
seven properties sold in 2002 or the first quarter of 2003 and one property held
for sale as of June 30, 2003. Total revenues for these properties for the three
and six month periods ended June 30, 2003, were $241,000 and $858,000,
respectively, and for the three and six month periods ended June 30, 2002, were
$1.7 million and $3.7 million, respectively. The operations of these properties
were previously reported in the Investment Division.
NOTE 9. COMMITMENTS AND CONTINGENCIES
In April 2003, in connection with the condominium conversion of Pine Crest
Village at Victoria Park, representatives of Tarragon may have inadvertently
disturbed asbestos-containing materials. Such actions are currently under
investigation by the Environmental Protection Agency and may result in civil
and/or criminal proceedings under applicable law. The extent of any resulting
liability is unknown at this time. We have incurred legal and other professional
fees and costs of relocating residents in connection with this matter totaling
$154,000 to date. Remediation efforts are underway at a total estimated cost of
$700,000, of which $228,000 has been incurred to date and the remainder of which
has been accrued.
Tarragon is also party to various claims and routine litigation arising in the
ordinary course of business. We do not believe that the results of such claims
and litigation, individually or in the aggregate, will have a material adverse
effect on our business, financial position, or results of operations.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Please read this discussion along with the Consolidated Financial Statements and
Notes included elsewhere in this report. Dollar amounts in tables are in
thousands except for per unit or per share amounts.
Risks Associated with Forward-Looking Statements Included in this Form 10-Q
In addition to historical information, this Form 10-Q contains forward-looking
statements. Forward-looking statements are expressions of our current beliefs
and expectations, based on information currently available to us, estimates, and
projections about our industry, and certain assumptions made by our management.
These statements are not historical facts. We use words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions to identify our forward-looking statements, which include, among
other things, our anticipated financings and sales of properties and For-Sale
Housing inventory.
Because we are unable to control or predict many of the factors that will
determine our future performance and financial results, including future
economic, competitive, and market conditions, our forward-looking statements are
not guarantees of future performance. They are subject to risks, uncertainties,
and errors in assumptions that could cause our actual results to differ
materially from those reflected in our forward-looking statements. We believe
that the assumptions underlying our forward-looking statements are reasonable.
However, you should not place undue reliance on these forward-looking
statements. They only reflect our view and expectations as of the date of this
Form 10-Q. We undertake no obligation to publicly update or revise any
forward-looking statement in light of new information, future events, or
otherwise.
Critical Accounting Policies
Asset Impairment
We regularly review the carrying values of our properties. Accounting principles
generally accepted in the United States of America ("GAAP") require that the
carrying value of a property held for sale not exceed the lower of its cost or
its estimated fair value less costs to sell. In instances where a property's
estimated fair value less costs to sell is less than its carrying value at the
time of evaluation, we provide an allowance for loss by making a charge against
operations. Our review of properties held for sale generally includes selective
site inspections, comparing the property's current rents to market rents,
reviewing the property's expenses and maintenance requirements, discussions with
the property manager, and a review of the surrounding area. We may make
adjustments to estimated fair values based on future reviews.
We also evaluate our properties held for investment for impairment whenever
events or changes in circumstances indicate that a property's carrying value may
not be recoverable. This evaluation generally consists of reviewing the
property's cash flow and current and projected market conditions, as well as
changes in general and local economic conditions. If we conclude that a property
has been impaired, its carrying value is written down to estimated fair value
with a charge against current earnings.
Investments in Partnerships and Joint Ventures Accounted for Using the Equity
Method
We use the equity method to account for investments in partnerships and joint
ventures over which we exercise significant influence but do not control. Under
the equity method, our initial investments are increased by our proportionate
share of operating income and additional advances and decreased by our
proportionate share of operating losses and distributions received. All
significant intercompany transactions are eliminated.
22
We have investments in 22 partnerships or joint ventures in which we hold
noncontrolling interests or our outside partners have significant participating
rights, as defined by the Financial Accounting Standards Board's ("FASB")
Emerging Issues Task Force in its 96-16 Abstract, or important rights, as
defined by the American Institute of Certified Public Accountants' Statement of
Position 78-9, "Accounting for Investments in Real Estate Ventures." The net
effect of not consolidating these partnerships and joint ventures has been to
reduce consolidated total assets, total liabilities, and gross revenues and
expenses but has had no effect on reported net income or loss except in
instances where we have received distributions from a partnership or joint
venture in excess of our investment in the entity, with the excess recorded as
income.
Revenue Recognition
Rental revenue is recognized on the straight-line basis. Lease terms for our
apartment communities are generally for one year or less. Lease terms for our
commercial properties are generally from three to five years, although they may
be shorter or longer. Rental concessions are deferred and amortized on the
straight-line basis over the lease terms as a reduction to rental revenue. We
accrue percentage rentals only after the tenants' sales have reached the
threshold provided for in the lease.
Interest and management fee revenue are recognized when earned. Revenue from
long term laundry and cable service contracts is deferred and amortized to
income on the straight-line basis over the terms of the contracts.
Gains on sales of real estate are recognized when and to the extent permitted by
Statement of Financial Accounting Standards ("SFAS") No. 66 - "Accounting for
Sales of Real Estate." Until the requirements of SFAS No. 66 for full profit
recognition have been met, transactions are accounted for using the deposit,
installment, cost recovery, or financing method, whichever is appropriate.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which, among other things, rescinded SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt." SFAS No. 4 required gains and losses from
extinguishments of debt to be classified as extraordinary items, if material.
Under SFAS No. 145, gains and losses on extinguishments of debt will no longer
be classified as extraordinary unless they meet the unusual in nature and
infrequency of occurrence criteria in the Accounting Principles Board's Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," which is expected to be rare. We adopted
SFAS No. 145 on January 1, 2003. Therefore, gains or losses on extinguishment of
debt prior to maturity are no longer classified as extraordinary items, but
there was no impact on our reported net income or loss.
In November 2002, the FASB issued Interpretation (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5,
"Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures," and
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." FIN 45
requires guarantors to recognize a liability at the inception of guarantee
arrangements within its scope. Guarantors are also required to provide
additional disclosures for guarantees. We adopted FIN 45 on January 1, 2003.
There was no impact on our reported net income or loss.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin 51,
"Consolidated Financial Statements," for certain entities that do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of
FIN 46 will be
23
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. Our initial determination is that the adoption
of the provisions of FIN 46 will not have a material impact upon our financial
condition or results of operations.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 improves financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS No. 149 clarifies the circumstances in which a
contract with an initial net investment meets the characteristics of a
derivative and when a derivative contains a financing component. It also amends
certain other existing pronouncements. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. We are currently evaluating the
effect adopting this pronouncement will have on our financial statements.
Environmental Matters
Under federal, state, and local environmental laws, ordinances, and regulations,
Tarragon may be liable for removal or remediation costs, as well as other costs
(such as fines or injuries to persons and property) where our employees may have
arranged for removal, disposal, or treatment of hazardous or toxic substances.
In addition, environmental laws impose liability for release of
asbestos-containing materials into the air, and third parties can seek recovery
from Tarragon for personal injury associated with those materials. We are not
aware of any liability relating to these matters that would have a material
adverse effect on our business, financial position, or results of operations.
However, there is a matter involving the alleged release of asbestos-containing
materials at one of our condominium conversion projects, as described in Part
II, Item 1. "LEGAL PROCEEDINGS." As of this date, we are unable to determine the
outcome of this matter and whether it will have a material impact on our
financial statements. We have incurred legal and other professional fees and
costs of relocating residents in connection with this matter totaling $154,000
to date. Remediation efforts are underway at a total estimated cost of $700,000,
$228,000 of which has been incurred to date.
Liquidity and Capital Resources
Our principal sources of cash are property operations, borrowings, and proceeds
from the sale of properties. We believe these sources will continue to meet our
cash requirements, including debt service payments, property maintenance and
improvements, development costs for properties under construction, projected
purchases of existing properties, dividends on preferred stock, and planned
repurchases of common stock. Although we expect these sources of cash to be
sufficient to fund planned uses of cash, we can make no assurance that the
expected sales and refinancings of properties will be completed as planned.
Proceeds from borrowings are expected to continue to be a key source of cash for
Tarragon. During the remainder of 2003, we expect to generate net proceeds from
mortgage borrowings on consolidated and unconsolidated properties of $28
million. We have a $20 million unsecured line of credit with affiliates of
William S. Friedman, our President and Chief Executive Officer and Chairman of
our Board of Directors. Advances under the line of credit accrue interest at the
lower of 100 basis points over the thirty day LIBOR or the lowest rate offered
in writing to Tarragon for an unsecured loan by an institutional lender.
Payments of interest only are due on demand, but no more frequently than
monthly, and all outstanding principal and interest are due at maturity in
January 2004. All of these funds are available to us as of June 30, 2003, as
there was no outstanding balance. We currently have $9.7 million outstanding
under two lines of credit that mature in 2004. Payment terms of a $10 million
line of credit, of which $2.3 million is currently available, are interest only
24
monthly at 175 basis points over the thirty day LIBOR, with the outstanding
balance due at maturity of December 2004. Payment terms of a $2 million line of
credit are interest only monthly at 240 basis points over the thirty day LIBOR,
with the outstanding balance due at maturity of May 2004.
Proceeds from sales of properties are also expected to continue to be a key
source of cash for Tarragon. We expect to generate $18 million in net proceeds
from the sale of consolidated properties during the remainder of 2003.
At July 27, 2003, we had entered into contracts to sell 72 of 113 units at Pine
Crest Village I at Victoria Park for an aggregate contract price of $14.2
million. We began the conversion of Pine Crest to homes for sale in 2002 and
began closing sales in April 2003. We acquired Venetian Bay Village, a
condominium development in May 2003. We have contracts to sell 87 of 136 units
for an aggregate contract price of $12.5 million. During the remainder of 2003,
we expect to generate sale proceeds of $2 million in excess of renovation costs
and mortgage payments from our for-sale housing activities.
In July and August 2003, a newly formed joint venture acquired land in Sarasota,
Florida, for a luxury condominium development, at a total cost of $28.7 million.
The joint venture obtained a $15 million mortgage (guaranteed by Tarragon and
its joint venture partner), and Tarragon advanced the balance of the required
funds.
Principal payments on mortgages totaling $18 million come due during the
remainder of 2003, including $16 million of balloon payments. Additionally, a $9
million construction loan for a condominium development with a June 30, 2003,
balance of $8.4 million matures in December 2003. We intend to extend the loans
or pay them off as they come due, largely through refinancings. Of the loans
maturing during the remainder of 2003, a $7.7 million mortgage provides for a
one-year extension option. We believe we can arrange such new financing as may
be needed to repay maturing notes.
In addition to the $15 million mortgage guarantee discussed above, we have
guaranteed $19.6 million of mortgages on three unconsolidated properties. $14.5
million relates to a mortgage that matures in 2006, $925,000 relates to a
mortgage that matures in 2012, and $4.1 million relates to a mortgage that
matures in 2004. We have also guaranteed construction loans totaling $168.8
million on four unconsolidated properties, including the $90 million
construction loan for the Las Olas River House condominium development. This
construction loan has a June 30, 2003, balance of $35.3 million, matures in
2005, and provides for a one-year extension option. The aggregate balance of the
other construction loans at June 30, 2003, is $77.2 million. These construction
loans mature in 2003 or 2004 and have one- or two-year extension options.
Cash Flows from Operating Activities
Our net cash flow provided by operating activities was $1.6 million for the
first six months of 2003 and $11.2 million for the first six months of 2002. Of
this decrease in cash flow, $3.6 million is due to increases in renovation and
development costs for for-sale housing inventory. See "For-Sale Housing
Inventory Sales" below. Increased corporate general and administrative expenses,
as discussed in "Corporate Expenses" below, contributed to the decline.
Additionally, in connection with obtaining a construction loan to finance the
condominium conversion of Pine Crest Apartments, we repaid two mortgages prior
to their maturities and incurred a $3.1 million prepayment penalty.
25
Cash Flows from Investing Activities
During the first six months of 2003, we used cash in investing activities of
$21.8 million. During the first six months of 2002, we used net cash in
investing activities of $8.5 million.
In the second quarter of 2003, Tarragon invested $10.7 million in the purchase
of properties for the For-Sale Housing Division and $1.8 million in the
acquisition of a controlling interest in a joint venture with a condominium
project under development. In the first quarter of 2002, we purchased land for
the development of a rental apartment community for $3.1 million.
Proceeds from the sale of real estate increased $10.6 million. See "Sales of
Consolidated Properties" below for the detail of net cash proceeds from the sale
of consolidated properties during the first six months of 2003. During the first
six months of 2002, Tarragon received its share of net proceeds from the sale of
four partnership or joint venture properties totaling $10.7 million.
During the first six months of 2003, Tarragon advanced $5.8 million to One Las
Olas in connection with the development of its luxury condominium project.
During this same period, Tarragon advanced an aggregate $2 million to five joint
ventures for land purchase or development costs for their condominium projects
in Hoboken, New Jersey. During the first six months of 2002, Tarragon advanced
$4.2 million to East Las Olas for its purchase of land for a condominium
development and received net repayment of advances of $3.7 million from One Las
Olas upon closing of its construction loan. During this period, Tarragon also
advanced $1.1 million to a partnership in connection with its construction of a
rental apartment community.
Cash Flows from Financing Activities
Cash provided by financing activities increased $15.7 million for the first six
months of 2003 compared to the first six months of 2002.
As stated previously, proceeds from borrowings are a significant source of cash
for Tarragon. During the six months ended June 30, 2003, net construction loan
borrowings were $14.2 million. We also received net proceeds of $11.7 million
from financings of consolidated properties and $1.2 million from financings of
unconsolidated properties. During the six months ended June 30, 2002, we
received net proceeds of $8.2 million from financings of consolidated properties
and $239,000 from financings of unconsolidated properties. We also received $5.7
million of net construction loan borrowings.
Common Stock Repurchase Program
The Board of Directors has authorized a common stock repurchase program. We
intend to continue to repurchase shares of our common stock as long as we
believe the fair market value of our net assets per share is substantially
greater than the market price of our common stock. We repurchased 146,454 shares
of our common stock in open market and negotiated transactions during the first
six months of 2003 at a cost of $2.2 million. Subject to market conditions, we
expect to repurchase shares of our common stock in 2003 at a rate consistent
with that of 2002. As of June 30, 2003, Tarragon had authority to repurchase an
additional 483,952 common shares.
26
Sales of Consolidated Properties
The following table summarizes sales of consolidated properties during the first
six months of 2003. Except for the sale of a portion of Northwest O'Hare Office
Building, the gains on sale were presented in discontinued operations in
accordance with SFAS No. 144.
Date of Sale Property Sale Price Net Cash Proceeds Gain on Sale
--------------------------------------------------------------------------------------------------------------------
Jan-03 Prado Bay Apartments $ 10,315 $ 4,119 $ 5,107
Jan-03 Newport Apartments 10,000 4,106 2,013
Jan-03(1) Northwest O'Hare Office Building 3,000 2,748 1,223
Feb-03 Briarwest Shopping Center 3,100 1,426 1,098
Mar-03 Holly House Apartments 3,017 1,186 1,005
--------------- ----------------- ---------------
$ 29,432 $ 13,585 $ 10,446
------------------- =============== ================= ===============
(1) Represents the sale of a portion of the property.
For-Sale Housing Inventory Sales
The following table summarizes the sales and cash flow of For-sale housing
inventory for the three and six month periods ended June 30, 2003 and 2002.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Number of units sold.............................. 49 23 61 60
Aggregate sales................................... $ 11,079 $ 5,932 $ 14,833 $ 15,176
Gross profit (loss)............................... 2,774 (1,360) 1,203 (1,360)
Aggregate sales collected......................... $ 10,797 $ 5,514 $ 14,482 $ 14,621
Mortgage payments................................. (7,304) (3,755) (7,304) (10,492)
--------------- --------------- --------------- ---------------
Net cash proceeds................................. 3,493 1,759 7,178 4,129
Renovation and development costs paid............. (3,928) (2,210) (7,296) (3,697)
Proceeds from borrowings.......................... 9,191 - 9,191 -
--------------- --------------- --------------- ---------------
Net cash received (paid).......................... $ 8,756 $ (451) $ 9,073 $ 432
=============== =============== =============== ===============
In April 2003, we began closing sales of condominium units at Pine Crest Village
I at Victoria Park. Costs incurred at this project in the three and six months
periods ended June 30, 2002, not reflected above totaled $223,000.
In May 2003, we acquired control of Venetian Bay Village, a town home
condominium vacation community in Kissimmee, Florida. Approximately 45% of the
176 condominium units of the first phase of an expected three phases was
complete at June 30, 2003. The information presented above includes sales and
development activities since the date of acquisition.
In June 2003, we acquired Tuscany on the Intracoastal, a recently completed
286-unit luxury apartment community in Boynton Beach, Florida, for $45.5
million. We plan to convert this property to condominium homes for sale.
Due to an increase in estimated costs to complete the condominium conversion of
5600 Collins Avenue, we recorded For-sale housing inventory write-downs in 2002
totaling $2.7 million. With the sell-out of the project nearing completion, we
implemented a new sales strategy in April 2003 to facilitate a quick close-out
of the project and to enable us to reallocate resources devoted to this project
to other projects. In connection with the new sales strategy, we lowered the
asking prices of the remaining condominium units. Based on the lower sale
prices, we wrote down the carrying value of the project as of March 31, 2003, by
$1.6 million. As of July 31, 2003, we have only four unsold units remaining at
this project.
27
Results of Operations
Consolidated Properties
At June 30, 2003, our consolidated apartment communities included 9,344
operating units (excluding assets held for sale reported in discontinued
operations), and our consolidated commercial properties had an aggregate 1.1
million square feet. The following table summarizes the components of aggregate
property level net operating results for all of our consolidated properties for
the three month periods ended June 30, 2003 and 2002.
Three Months Ended June 30,
-------------------------------------------------------
2003 2002 Change
--------------- ---------------- ----------------
Rental revenue.................................... $ 21,189 $ 21,171 $ 18
Property operating expenses....................... (11,569) (10,870) (699)
--------------- ---------------- ----------------
Net operating income.............................. 9,620 10,301 (681)
Interest expense.................................. (5,563) (6,181) 618
Depreciation expense.............................. (5,971) (4,752) (1,219)
--------------- ---------------- ----------------
$ (1,914) $ (632) $ (1,282)
=============== ================ ================
The following table presents the changes in property level revenues and expenses
caused by new development properties in lease-up for the three month periods
ended June 30, 2003 and 2002.
Properties in
Lease-up (a) Other Changes Total
--------------- ---------------- -- ----------------
Rental revenue.................................... $ 555 $ (537) $ 18
Property operating expenses....................... (246) (453) (699)
--------------- ---------------- ----------------
Net operating income.............................. 309 (990) (681)
Interest expense.................................. (10) 628 618
Depreciation expense.............................. (29) (1,190) (1,219)
--------------- ---------------- ----------------
$ 270 $ (1,552) $ (1,282)
=============== ================ ================
- -------------------------------
(a) Includes three properties recently completed or under construction that
began lease-up in 2002 or 2003.
Other changes for rental revenue and property operating expenses include the
effect of taking apartments out of service at Pine Crest in connection with the
condominium conversion. For Pine Crest, rental revenue decreased $612,000, and
property operating expenses decreased $138,000.
Other changes for depreciation expense include $1.1 million recorded in the
second quarter of 2003 upon the reclassification of two properties to real
estate held for investment for the period during which they were classified as
held for sale.
28
The following table summarizes the components of aggregate property level net
operating results for all of our consolidated properties for the six month
periods ended June 30, 2003 and 2002.
Six Months Ended June 30,
-------------------------------------------------------
2003 2002 Change
--------------- ---------------- ----------------
Rental revenue.................................... $ 42,522 $ 40,366 $ 2,156
Property operating expenses....................... (22,639) (20,981) (1,658)
--------------- ---------------- ----------------
Net operating income.............................. 19,883 19,385 498
Interest expense.................................. (13,910) (11,320) (2,590)
Depreciation expense.............................. (10,668) (9,005) (1,663)
--------------- ---------------- ----------------
$ (4,695) $ (940) $ (3,755)
=============== ================ ================
The following table presents the changes in property level revenues and expenses
caused by properties consolidated in April 2002 and new development properties
in lease-up for the six month periods ended June 30, 2003 and 2002.
Properties
Consolidated in Properties in
April 2002 (a) Lease-up (b) Other Changes Total
------------------ ---------------- ---------------- ----------------
Rental revenue..................... $ 1,695 $ 1,296 $ (835) $ 2,156
Property operating expenses........ (672) (470) (516) (1,658)
------------------ ---------------- ---------------- ----------------
Net operating income............... 1,023 826 (1,351) 498
Interest expense................... (95) (289) (2,206) (2,590)
Depreciation expense............... (315) (148) (1,200) (1,663)
------------------ ---------------- ---------------- ----------------
$ 613 $ 389 $ (4,757) $ (3,755)
================== ================ ================ ================
- ------------------------------------
(a) In connection with a change in control, Antelope Pines and Woodcreek
Garden were consolidated beginning April 2002.
(b) Includes three properties recently completed or under construction that
began lease-up in 2002 or 2003.
Other changes for rental revenue and property operating expenses include the
effect of taking apartments out of service at Pine Crest in connection with the
condominium conversion. For Pine Crest, rental revenue decreased $1.1 million,
and property operating expenses decreased $314,000.
Other increases for interest expense include a $3.1 million prepayment penalty
and $241,000 of deferred financing expenses written off upon the early payoff of
two mortgages secured by Pine Crest Apartments. The mortgages were paid off in
connection with the closing of a $25 million construction loan to finance the
condominium conversion of this property.
Other changes for depreciation expense include the second quarter 2003
adjustment for two properties reclassified to real estate held for investment
described above.
29
The following table presents operating information about our same store
portfolio of 40 consolidated apartment communities with 8,436 units owned for
both three month periods.
Three Months Ended
June 30,
---------------------------
Percentage
2003 2002 Change Change
-------- -------- -------- ------
Rental revenue ............................... $ 16,301 $ 15,969 $ 332 2.1%
Property operating expenses .................. (9,139) (8,143) (996) 12.2%
-------- -------- -------- ------
Net operating income ......................... $ 7,162 $ 7,826 $ (664) (8.5%)
======== ======== ======== =======
Net operating income as a percentage of rental
revenue .................................... 43.9% 49.0% (5.1%)
Average monthly rental revenue per unit ...... $ 644 $ 631 $ 13 2.1%
Rental revenue increased chiefly due to generally higher rental rates, as well
as decreased vacancy losses due to slightly higher average overall occupancy.
Increases in property operating expenses included utilities, property taxes and
insurance, marketing costs, and personnel-related expenses.
The following table presents operating information about our same store
portfolio of 40 consolidated apartment communities with 8,436 units owned for
both six month periods.
Six Months Ended
June 30,
---------------------------
Percentage
2003 2002 Change Change
-------- -------- -------- ------
Rental revenue ............................... $ 32,628 $ 31,596 $ 1,032 3.3%
Property operating expenses .................. (17,837) (16,412) (1,425) (8.7%)
-------- -------- -------- -----
Net operating income ......................... $ 14,791 $ 15,184 $ (393) (2.6%)
======== ======== ======== =====
Net operating income as a percentage of rental
revenue .................................... 45.3% 48.1% (2.8%)
Average monthly rental revenue per unit ...... $ 645 $ 624 $ 21 3.4%
The increases in rental revenues and property operating expenses for the six
month period can be attributed to the same factors described above for the three
month period.
30
Unconsolidated Partnerships and Joint Ventures
The following table summarizes the components of equity in income (loss) of
unconsolidated partnerships and joint ventures for the three month periods ended
June 30, 2003 and 2002.
Three Months Ended June 30,
--------------------------------------------
2003 2002 Change
-------- -------- --------
Rental revenue .................................. $ 11,351 $ 9,850 $ 1,501
Property operating expenses ..................... (6,108) (4,728) (1,380)
-------- -------- --------
Net operating income ............................ 5,243 5,122 121
Interest expense ................................ (4,671) (3,300) (1,371)
Depreciation expense ............................ (2,339) (2,431) 92
Gain on sale of real estate ..................... -- 1,012 (1,012)
Discontinued operations ......................... -- 401 (401)
Elimination of management fees paid to Tarragon . 398 342 56
Outside partners' interest in (income) loss ..... 334 (751) 1,085
Distributions in excess of investment ........... 272 -- 272
-------- -------- --------
Equity in income (loss) of partnerships and joint
ventures ...................................... $ (763) $ 395 $ (1,158)
======== ======== ========
Discontinued operations include the net operating results of Stone Creek
Associates whose only property was sold in December 2002.
Distributions in excess of investment are primarily related to distributions of
financing proceeds of partnerships or joint ventures in which we have recovered
our investment. In these situations, the joint ventures' debt is non-recourse to
Tarragon, and Tarragon has not committed to fund any cash flow deficits of the
joint ventures.
The following table presents the effect of properties sold during 2002, a
property deconsolidated in 2003, and new development properties in lease-up on
aggregate joint ventures' property level revenues and expenses.
Properties Property Other
Sold in Deconsolidated Properties Other
2002 (a) in 2003 (b) in Lease-up (c) Changes Total
-------- ----------- --------------- ------- ------
Rental revenue ............. $ (172) $ 285 $1,528 $ (140) $ 1,501
Property operating expenses 217 (297) (888) (412) (1,380)
------ ------ ------ ------ -------
Net operating income (loss) 45 (12) 640 (552) 121
Interest expense ........... 50 (142) (520) (759) (1,371)
Depreciation expense ....... -- (132) (320) 544 92
------ ------ ------ ------ -------
Income (loss) before gain on
sale of real estate and
discontinued operations .. $ 95 $ (286) $ (200) $ (767) $(1,158)
====== ====== ====== ====== =======
- ---------------------------
(a) Includes four apartment communities sold in 2002. Operating results for
a fifth property sold have been presented in discontinued operations.
(b) Due to a change in control in connection with forming a joint venture,
The Vintage at Fenwick Plantation was deconsolidated in January 2003.
Construction of this property was recently completed, and it began
leasing in July 2002.
(c) Includes three partnerships with properties recently completed or under
construction that began lease-up in 2002.
31
The following table summarizes the components of equity in income (loss) of
unconsolidated partnerships and joint ventures for the six month periods ended
June 30, 2003 and 2002.
Six Months Ended June 30,
--------------------------------------------
2003 2002 Change
-------- -------- --------
Rental revenue .................................. $ 22,209 $ 21,386 $ 823
Property operating expenses ..................... (11,991) (10,356) (1,635)
-------- -------- --------
Net operating income ............................ 10,218 11,030 (812)
Interest expense ................................ (8,506) (6,809) (1,697)
Depreciation expense ............................ (4,628) (4,341) (287)
Gain on sale of real estate ..................... -- 27,239 (27,239)
Discontinued operations ......................... -- 510 (510)
Elimination of management fees paid to Tarragon . 776 689 87
Outside partners' interest in (income) loss ..... 567 (2,034) 2,601
Distributions in excess of investment ........... 680 -- 680
Reduction in gain recognized for distributions in
excess of investment recognized in 2000 ....... -- (16,257) 16,257
-------- -------- --------
Equity in income (loss) of partnerships and joint
ventures ...................................... $ (893) $ 10,027 $(10,920)
======== ======== ========
Gain on sale of real estate for 2002 includes a $25.1 million gain on the sale
of Devonshire Apartment Owners' sole property, The Villages at Gateway. The
reduction in gain recognized for distributions in excess of investment
recognized in 2000 also relates to Devonshire Apartment Owners. This income was
recognized in connection with the transfer of ownership of The Villages at
Gateway to the joint venture in July 2000 and represented distribution of
financing proceeds in excess of our investment in the joint venture.
The following table presents the effect of properties consolidated or sold
during 2002, a property deconsolidated in 2003, and new development properties
in lease-up on aggregate joint ventures' property level revenues and expenses.
Properties
Consolidated Properties Property Other
in April Sold in Deconsolidated Properties Other
2002 (a) 2002 (b) in 2003 (c) in Lease-up (d) Changes Total
-------- -------- ----------- --------------- ------- -----
Rental revenue ............... $(1,405) $(1,358) $ 472 $ 2,998 $ 116 $ 823
Property operating expenses .. 550 947 (563) (1,714) (855) (1,635)
------- ------- ------- ------- ------- -------
Net operating income (loss) .. (855) (411) (91) 1,284 (739) (812)
Interest expense ............. 268 417 (284) (1,063) (1,035) (1,697)
Depreciation expense ......... 243 -- (262) (751) 483 (287)
------- ------- ------- ------- ------- -------
Loss before gain on sale of
real estate and discontinued
operations ................. $ (344) $ 6 $ (637) $ (530) $(1,291) $(2,796)
======= ======= ======= ======= ======= =======
- ------------------------------
(a) In connection with a change in control, Antelope Pines and Woodcreek
Garden were consolidated beginning April 2002.
(b) Includes four apartment communities sold in 2002. Operating results for
a fifth property sold have been presented in discontinued operations.
(c) Due to a change in control in connection with forming a joint venture,
The Vintage at Fenwick Plantation was deconsolidated in January 2003.
Construction of this property was recently completed, and it began
leasing in July 2002.
(d) Includes three partnerships with properties recently completed or under
construction that began lease-up in 2002.
Interest expense in Other Changes above increased over corresponding periods of
the prior year because of higher loan balances from refinanced and supplemental
mortgages. In addition, interest expense for the three and six months periods
ended June 30, 2003, includes costs incurred in paying off an existing mortgage
in connection with a refinancing.
32
Corporate Expenses
Corporate general and administrative expenses increased $1 million for the
second quarter of 2003 compared to the second quarter of 2002 and $2.3 million
for the first half of 2003 compared to the first half of 2002 primarily due to
development-related personnel additions and compensation increases. Also,
expenses incurred in connection with potential acquisitions or development
projects or financing transactions that were not selected for further investment
increased $100,000 and $368,000 for the three and six month periods.
Additionally, in the second quarter of 2003, we incurred $150,000 of legal and
other professional fess and costs of relocating residents in connection with a
matter relating to the alleged release of asbestos-containing materials at one
of our condominium conversion projects.
Segment Operating Results
Investment Division
Net operating income (rental revenue less property operating expenses) for our
54 same store Investment Division apartment communities with 11,773 units
(consolidated and unconsolidated) decreased $746,000, or 6.2%, in the second
quarter of 2003 compared to the second quarter of 2002 and decreased $1.1
million, or 4.5%, in the first six months of 2003 compared to the first six
months of 2002. These decreases were mostly due to increases in property
operating expenses: 9% for the second quarter of 2003 compared to the second
quarter of 2002 and 8.5% for the first six months of 2003 compared to the first
six months of 2002. These increases in property operating expenses were
partially offset by increases in rental revenues: 1.2% for the second quarter of
2003 compared to the second quarter of 2002 and 1.9% for the first six months of
2003 compared to the first six months of 2002. Net operating income as a
percentage of rental revenue for these properties was 47.4% in the second
quarter of 2003 and 51.2% in the second quarter of 2002. Net operating income as
a percentage of rental revenue was 47.8% in the first six months of 2003 and
50.9% in the first six months of 2002. Weather-related costs, including
utilities and heavy snow removal, were higher in 2003. Property taxes increased
as certain properties were reassessed fully since completion of construction.
Additionally, leasing and landscaping costs increased in connection with efforts
to maintain occupancy levels.
The four (three consolidated and one unconsolidated) apartment communities
stabilized and moved to the Investment Division during 2002 or 2003 contributed
net operating income of $1.3 million for the three month period ended June 30,
2003, $2.6 million for the six month period ended June 30, 2003, and $914,000
for the three and six month periods ended June 30, 2002, to the Investment
Division. Prior to their stabilization, their operating results were presented
in the Development Division.
Tarragon uses funds from operations ("FFO") along with net income or loss
computed in accordance with GAAP to measure the performance of the properties in
its Investment Division. See NOTE 6. "SEGMENT REPORTING" in the Notes to
Consolidated Financial Statements for the definition of FFO. The 54 same store
apartment communities with 11,773 units, both consolidated and unconsolidated,
reported FFO of $3.9 million in the second quarter of 2003 and $4.4 million in
the second quarter of 2002. These properties reported FFO of $8.6 million for
the first six months of 2003 and $9.1 million for the first six months of 2002.
The four apartment communities stabilized and moved into the Investment Division
during 2002 or 2003 contributed FFO of $564,000 for the three month period ended
June 30, 2003, $1.3 million for the six month period ended June 30, 2003, and
$377,000 for the three and six month periods ended June 30, 2002, to the
Investment Division.
33
Development Division
Tarragon measures the performance of its Development Division primarily by gross
profit from third party and intercompany sales. Gross profit from intercompany
sales is the excess of the properties' estimated fair values over their net
carrying values at the date they are determined to be stabilized and moved into
the Investment Division. Gains on transfers of assets between segments do not
represent gains recognizable in accordance with GAAP and, accordingly, are
eliminated for purposes of consolidated reporting.
In the first quarter of 2003, the Development Division reported gross profit of
$5.5 million on the transfer of properties that had become stabilized (three
consolidated and one unconsolidated) to the Investment Division. In the first
six months of 2002, the Development Division reported net profit of $51.6
million on the transfer of 11 consolidated and five unconsolidated properties to
the Investment Division upon the determination that they were stabilized. Of
this amount, $12.9 million was reported in the second quarter of 2002.
For-Sale Housing Division
Tarragon also measures the performance of its For-Sale Housing Division
primarily by gross profit from third party and intercompany sales. Although it
is our smallest division, it is expected to be our most rapidly growing
division.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Tarragon is exposed to market risk from changes in interest rates that may
adversely affect our financial position, results of operations, and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage such
exposure through our regular operating and financing activities. We do not trade
or speculate in financial instruments. There have been no material changes to
Tarragon's market risk since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed within 90 days of the
filing of this Form 10-Q, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in reports that
the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There were no significant
changes in the Company's internal controls or other factors that could
significantly affect these disclosure controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 2003, in connection with the condominium conversion of Pine Crest
Village at Victoria Park, representatives of Tarragon may have inadvertently
disturbed asbestos-containing materials. Such actions are currently under
investigation by the Environmental Protection Agency and may result in civil
and/or criminal proceedings under applicable law. The extent of any resulting
liability is unknown at this time. We have incurred legal and other professional
fees and costs of relocation of residents in connection with this matter
totaling $154,000 to date. Remediation efforts are underway at a total estimated
cost of $700,000, of which $228,000 has been incurred to date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARRAGON REALTY INVESTORS, INC.
Date: August 11, 2003 By: /s/William S. Friedman
------------------------------- --------------------------------
William S. Friedman
President, Chief Executive
Officer, Director, and
Chairman of the
Board of Directors
Date: August 11, 2003 By: /s/Erin D. Pickens
------------------------------- --------------------------------
Erin D. Pickens
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
36
CERTIFICATION
I, William S. Friedman, President/CEO, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tarragon Realty
Investors, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 11, 2003 /s/ William S. Friedman
----------------------- ------------------------------------
William S. Friedman, President
and Chief Executive Officer
37
CERTIFICATION
I, Erin D. Pickens, Executive Vice President/CFO, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tarragon Realty
Investors, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 11, 2003 /s/ Erin D. Pickens
------------------------- ---------------------------------
Erin D. Pickens
Executive Vice President
and Chief Financial Officer
38
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
EXHIBIT 99.1 Certification of Chief Executive Officer Page 40
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
EXHIBIT 99.2 Certification of Chief Financial Officer Page 41
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
39