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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 SEPTEMBER 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 11,583,489
----------------------------- -------------------------------------
(Class) (Outstanding at October 31, 2003)
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended
September 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)
September 30, December 31,
--------- ---------
2003 2002
--------- ---------
Assets
Real estate held for investment (net of accumulated depreciation of
$108,875 in 2003 and $103,173 in 2002) ............................................ $ 400,294 $ 427,989
For-sale housing inventory .......................................................... 102,054 31,632
Assets held for sale ................................................................ -- 7,538
Investments in and advances to partnerships and joint ventures ...................... 53,578 29,102
Cash and cash equivalents ........................................................... 21,563 18,023
Restricted cash ..................................................................... 7,942 6,115
Goodwill ............................................................................ 2,691 2,691
Other assets, net (including $626 in 2002 due from affiliates) ...................... 29,666 17,134
--------- ---------
$ 617,788 $ 540,224
========= =========
Liabilities and Stockholders' Equity
Liabilities
Notes, debentures, and interest payable ............................................. $ 484,681 $ 428,926
Other liabilities (including $150 in 2002 due to affiliates) ........................ 27,679 19,042
--------- ---------
512,360 447,968
Commitments and contingencies .......................................................
Minority interests .................................................................. 22,143 18,523
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000; shares outstanding,
11,644,588 in 2003 and 7,896,760 in 2002 (after deducting 5,744,559 in 2003
and 3,705,382 in 2002 held in treasury) ........................................... 116 79
Special stock, $.01 par value; authorized shares, 7,500,000; shares outstanding, none -- --
Cumulative preferred stock, $.01 par value; authorized shares, 2,500,000; shares
outstanding, 753,333 in 2003 and 560,518 in 2002; liquidation preference,
$9,040 in 2003 and $6,726 in 2002, or $12 per share ............................... 8 6
Paid-in capital ..................................................................... 306,421 306,414
Accumulated deficit ................................................................. (223,260) (232,766)
--------- ---------
83,285 73,733
--------- ---------
$ 617,788 $ 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 Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue
Rentals ....................................................... $ 22,143 $ 21,239 $ 64,137 $ 61,071
For-sale housing inventory sales .............................. 20,302 5,222 35,135 20,398
Management fees and other (including $112 and $310 in the
three and nine month periods in 2003 and $105 and $381
in the three and nine month periods in 2002 from affiliates) 166 131 402 461
-------- -------- -------- --------
42,611 26,592 99,674 81,930
-------- -------- -------- --------
Expenses
Property operations ........................................... 12,737 11,468 35,151 32,231
Costs of for-sale housing inventory sales ..................... 15,103 6,122 28,733 22,658
Depreciation .................................................. 4,996 4,601 15,544 13,471
General and administrative
Corporate .................................................. 3,222 2,555 9,748 6,822
Property ................................................... 878 736 2,756 2,244
-------- -------- -------- --------
36,936 25,482 91,932 77,426
-------- -------- -------- --------
Other income and expenses
Equity in income of partnerships and joint ventures ........... 7,169 4,820 6,276 14,849
Minority interests in income of consolidated partnerships and
joint ventures ............................................. (1,166) (462) (2,284) (924)
Interest income (including $25 and $136 in the three and nine
month periods in 2002 from affiliates) ..................... 412 106 664 440
Interest expense (including $67 and $202 in the three and nine
month periods in 2002 to affiliates) ....................... (5,601) (5,724) (20,107) (17,954)
Gain on sale of real estate ................................... -- -- 1,223 --
Loss on investments ........................................... -- (13) -- (13)
Insurance and other claims .................................... -- 84 -- 84
Litigation settlement ......................................... -- 102 -- 102
-------- -------- -------- --------
Income (loss) from continuing operations ........................ 6,489 23 (6,486) 1,088
Discontinued operations
Loss from operations .......................................... (25) (142) (38) (128)
Gain on sale of real estate ................................... 7,367 -- 16,590 2,267
-------- -------- -------- --------
Net income (loss) ............................................... 13,831 (119) 10,066 3,227
Dividends on cumulative preferred stock ......................... (226) (171) (559) (513)
-------- -------- -------- --------
Net income (loss) allocable to common stockholders .............. $ 13,605 $ (290) $ 9,507 $ 2,714
======== ======== ======== ========
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 Nine Months
Ended September 30, Ended September 30,
------------------------------ --------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Earnings per common share
Income (loss) from continuing operations allocable to
common stockholders ......................................... $ .54 $ (.01) $ (.60) $ .04
Discontinued operations ....................................... .63 (.01) 1.41 .18
-------------- -------------- -------------- --------------
Net income (loss) allocable to common stockholders ............ $ 1.17 $ (.02) $ .81 $ .22
============== ============== ============== ==============
Weighted average shares of common stock used in computing
earnings per common share ................................... 11,664,829 12,029,148 11,760,509 12,130,805
============== ============== ============== ==============
Earnings per common share - assuming dilution
Income (loss) from continuing operations allocable to
common stockholders ......................................... $ .46 $ (.01) $ (.60) $ .04
Discontinued operations ....................................... .54 (.01) 1.41 .16
-------------- -------------- -------------- --------------
Net income (loss) allocable to common stockholders ............ $ 1.00 $ (.02) $ .81 $ .20
============== ============== ============== ==============
Weighted average shares of common stock used in computing
earnings per common share - assuming dilution ............... 13,567,149 12,029,148 11,760,509 13,171,737
============== ============== ============== ==============
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 Nine Months
Ended September 30,
--------------------------
2003 2002
-------- --------
Cash Flows from Operating Activities
Net income ........................................................................ $ 10,066 $ 3,227
Adjustments to reconcile net income to net cash provided by operating activities:
Insurance and other claims ..................................................... -- (84)
Loss on investments ............................................................ -- 13
Gain on sale of real estate .................................................... (17,813) (2,267)
Minority interests in income of consolidated partnerships and joint ventures ... 2,284 924
Depreciation and amortization .................................................. 17,875 17,071
Equity in income of partnerships and joint ventures ............................ (6,276) (14,849)
Purchase of for-sale housing inventory ......................................... (12,450) --
Noncash for-sale housing inventory development costs ........................... 8,972 14,335
Noncash compensation related to stock options .................................. 200 285
Changes in other assets and liabilities, net of effects of noncash investing
and financing activities:
Increase in interest receivable............................................... (159) (5)
Increase in other assets...................................................... (3,254) (84)
Decrease in other liabilities................................................. (2,563) (1,998)
Increase (decrease) in interest payable ...................................... 337 (264)
-------- --------
Net cash provided by (used in) operating activities ........................ (2,781) 16,304
Cash Flows from Investing Activities
Acquisition of land for development ............................................... -- (3,055)
Proceeds from the sale of real estate ............................................. 20,168 3,005
Real estate improvements .......................................................... (7,256) (8,138)
Real estate development costs ..................................................... (10,186) (22,555)
Earnest money deposits paid, net .................................................. (727) (347)
Note receivable collections ....................................................... 146 2,919
Distributions from investing activities of partnerships and joint ventures ........ -- 10,747
Advances to partnerships and joint ventures for development costs or for the
purchase of land for development ............................................... (27,010) (6,537)
Refund of partnership and joint venture development costs from construction
financing ...................................................................... -- 5,961
Net distributions related to property operations of partnerships and joint ventures 7,521 2,139
Other ............................................................................. (913) (558)
-------- --------
Net cash used in investing activities .......................................... (18,257) (16,419)
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 Nine Months
Ended September 30,
----------------------------
2003 2002
--------- ---------
Cash Flows from Financing Activities
Proceeds from borrowings ................................................. $ 177,698 $ 84,021
Principal payments on notes payable ...................................... (159,197) (70,452)
Repayments of advances from affiliates, net .............................. -- (7,942)
Distributions from financing activities of partnerships and joint ventures 8,837 7,096
Stock repurchases ........................................................ (3,245) (3,447)
Dividends to stockholders, including amounts accrued in prior years ...... (564) (1,084)
Other .................................................................... 1,049 609
--------- ---------
Net cash provided by financing activities .............................. 24,578 8,801
--------- ---------
Net increase in cash and cash equivalents .................................. 3,540 8,686
Cash and cash equivalents, beginning of period ............................. 18,023 8,989
--------- ---------
Cash and cash equivalents, end of period ................................... $ 21,563 $ 17,675
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid .............................................................. $ 18,550 $ 18,083
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
For the Nine Months
Ended September 30,
--------------------------
2003 2002
-------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets written off and liabilities released in connection with the sale of
real estate:
Real estate .................................................................. $ 22,006 $ 2,676
Other assets ................................................................. 382 (3)
Notes and interest payable ................................................... (19,374) (1,897)
Other liabilities ............................................................ (659) (38)
Gain on sale ................................................................. 17,813 2,267
-------- --------
Cash received .............................................................. $ 20,168 $ 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 $ --
======== ========
Liabilities and equity that financed the purchase of for-sale housing inventory:
Notes payable and other liabilities .......................................... $ 60,866 $ --
======== ========
Equity ....................................................................... $ 2,859 $ --
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
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 nine month period ended September 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
(loss) for the three and nine month periods ended September 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 (loss) 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 Nine Months Ended
September 30, September 30,
------------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------ ------------ ------------
Net income (loss) allocable to common stockholders, as
reported .............................................. $ 13,605 $ (290) $ 9,507 $ 2,714
Add: Stock-based employee compensation expense
included in reported net income (loss) ................ 49 31 201 284
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards ............................................ (109) (96) (387) (473)
------------- ------------ ------------ ------------
Pro forma net income (loss) allocable to common
stockholders .......................................... $ 13,545 $ (355) $ 9,321 $ 2,525
============= ============ ============ ============
Earnings per common share
Net income (loss) allocable to common stockholders,
as reported ......................................... $ 1.17 $ (.02) $ .81 $ .22
============= ============ ============ ============
Net income (loss) allocable to common stockholders,
pro forma ........................................... $ 1.16 $ (.03) $ .79 $ .21
============= ============ ============ ============
Earnings per common share - assuming dilution
Net income (loss) allocable to common stockholders,
as reported ......................................... $ 1.00 $ (.02) $ .81 $ .20
============= ============ ============ ============
Net income (loss) allocable to common stockholders,
pro forma ........................................... $ 1.00 $ (.03) $ .79 $ .19
============= ============ ============ ============
8
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 September 30, 2003:
Profits Carrying
Interest Amount
-------------- ------------
601 Ninth Street Development, L.L.C....................................... 50% $ 454
801 Pennsylvania Avenue................................................... 50% 1
Adams Street Development, L.L.C........................................... 40% 695
Ansonia Apartments, L.P................................................... 70% -
Ansonia Liberty, L.L.C.................................................... 90% -
Block 88 Development, L.L.C............................................... 40% 412
Block 99/102 Development, L.L.C........................................... 40% 216
Danforth Apartment Owners, L.L.C.......................................... 99% 89
Fenwick Tarragon Apartments, L.L.C. ...................................... 70% 1,993
Guardian-Jupiter Partners, Ltd............................................ 70% 2,243
Lake Sherwood Partners, L.L.C............................................. 70% -
Larchmont Associates, L.P................................................. 57% 2,608
Merritt 8 Acquisitions, L.L.C............................................. 80% 845
Merritt Stratford, L.L.C.................................................. 50% 497
Metropolitan Sarasota, Ltd................................................ 70% 14,999
One Las Olas, Ltd......................................................... 68% 16,135
100 East Las Olas, Ltd., and East Las Olas, Ltd........................... 70% 5,516
Sacramento Nine........................................................... 70% 458
Summit/Tarragon Murfreesboro, L.L.C....................................... 70% 493
Tarragon Calistoga, L.L.C................................................. 80% 448
Tarragon Savannah I & II, L.L.C........................................... 99% 2,536
Thirteenth Street Development, L.L.C...................................... 50% 2,792
Vineyard at Eagle Harbor, L.L.C........................................... 99% 48
Warwick Grove Company, L.L.C.............................................. 50% 100
------------
$ 53,578
============
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 Certified 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. in exchange for 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 $35.3 million of mortgages on four unconsolidated properties;
$14.5 million relates to a mortgage that matures in 2006 and provides for a
two-year extension option, $925,000 relates to a mortgage that matures in 2012,
and $19.9 million relates to two mortgages with an aggregate balance of $19.1
million at September 30, 2003, that mature in 2004. We have also guaranteed
construction loans totaling $167.6 million on four unconsolidated properties,
including the $90 million construction loan for the Las Olas River House
condominium development. This construction loan has a September 30, 2003,
balance of $53.7 million, matures in 2005, and provides for a one-year extension
option. The aggregate balance of the other construction
9
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
- --------------------------------------------------------------------------------
(Continued)
loans at September 30, 2003, is $77.3 million. These construction loans mature
in 2004 and have one- or two-year extension options. In addition, we have
guaranteed $1.2 million of other loans on one property that mature in December
2003. We have recorded a $400,000 liability in connection with one of these
guarantees. Estimated fair values of other guarantees provided since January 1,
2003, are not significant.
Below is unaudited summarized financial information for Ansonia, Devonshire, and
our other unconsolidated partnerships and joint ventures for the three and nine
month periods ended September 30, 2003 and 2002:
Three Months Ended September 30, 2003
Ansonia Other Total
-------- -------- --------
Rental revenue ............................................. $ 5,155 $ 7,345 $ 12,500
Property operating expenses ................................ (2,595) (4,352) (6,947)
Interest expense ........................................... (2,134) (2,645) (4,779)
Depreciation expense ....................................... (856) (1,561) (2,417)
-------- -------- --------
Net loss ................................................... (430) (1,213) (1,643)
Elimination of management fees paid to Tarragon ............ 252 190 442
-------- -------- --------
Net loss before management fees paid to Tarragon ........... $ (178) $ (1,023) $ (1,201)
======== ======== ========
Equity in loss of partnerships and joint ventures .......... $ (124) $ (668) $ (792)
Loss from investment written off ........................... -- (313) (313)
Cash distributions in excess of investment ................. 6,992 1,282 8,274
-------- -------- --------
$ 6,868 $ 301 $ 7,169
======== ======== ========
Three Months Ended September 30, 2002
Rental revenue ............................................. $ 4,952 $ 4,906 $ 9,858
Property operating expenses ................................ (2,633) (2,744) (5,377)
Interest expense ........................................... (1,808) (2,149) (3,957)
Depreciation expense ....................................... (395) (1,471) (1,866)
-------- -------- --------
Income (loss) from continuing operations ................... 116 (1,458) (1,342)
Discontinued operations (1) ................................ -- 214 214
-------- -------- --------
Net income (loss) .......................................... 116 (1,244) (1,128)
Elimination of management fees paid to Tarragon ............ 244 104 348
-------- -------- --------
Net income (loss) before management fees paid to Tarragon
$ 360 $ (1,140) $ (780)
======== ======== ========
Equity in income (loss) of partnerships and joint ventures . $ 252 $ (1,009) $ (757)
Cash distributions in excess of investment ................. 5,204 373 5,577
-------- -------- --------
$ 5,456 $ (636) $ 4,820
======== ======== ========
- -----------------
(1) Includes revenue of $915.
10
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
- -----------------------------------------------------------------------
(Continued)
Nine Months Ended September 30, 2003
Ansonia Other Total
-------- -------- --------
Rental revenue ........................................... $ 15,182 $ 19,526 $ 34,708
Property operating expenses .............................. (7,698) (11,240) (18,938)
Interest expense ......................................... (5,293) (7,992) (13,285)
Depreciation expense ..................................... (2,509) (4,535) (7,044)
-------- -------- --------
Net loss ................................................. (318) (4,241) (4,559)
Elimination of management fees paid to Tarragon .......... 750 468 1,218
-------- -------- --------
Net income (loss) before management fees paid to Tarragon $ 432 $ (3,773) $ (3,341)
======== ======== ========
Equity in income (loss) of partnerships and joint ventures $ 303 $ (2,668) $ (2,365)
Loss from investment written off ......................... -- (313) (313)
Cash distributions in excess of investment ............... 7,554 1,400 8,954
-------- -------- --------
$ 7,857 $ (1,581) $ 6,276
======== ======== ========
Nine Months Ended September 30, 2002
Ansonia Devonshire Other Total
-------- -------- -------- --------
Rental revenue .................................. $ 15,273 $ 577 $ 15,394 $ 31,244
Property operating expenses ..................... (7,670) (466) (7,597) (15,733)
Interest expense ................................ (4,857) (206) (5,703) (10,766)
Depreciation expense ............................ (2,523) -- (3,684) (6,207)
-------- -------- -------- --------
Income (loss) before other items ................ 223 (95) (1,590) (1,462)
Gain on sale of real estate ..................... 2,133 25,107 -- 27,240
-------- -------- -------- --------
Income (loss) from continuing operations ........ 2,356 25,012 (1,590) 25,778
Discontinued operations (2) ..................... -- -- 724 724
-------- -------- -------- --------
Net income (loss) ............................... 2,356 25,012 (866) 26,502
Elimination of management fees paid to Tarragon . 756 -- 281 1,037
-------- -------- -------- --------
Net income (loss) before management fees paid
to Tarragon ................................... $ 3,112 $ 25,012 $ (585) $ 27,539
======== ======== ======== ========
Equity in income (loss) of partnerships and joint
ventures ...................................... $ 2,179 $ 8,103 $ (1,010) $ 9,272
Cash distributions in excess of investment ...... 5,204 -- 373 5,577
-------- -------- -------- --------
$ 7,383 $ 8,103 $ (637) $ 14,849
======== ======== ======== ========
- -----------------
(2) Includes revenue of $2,576.
NOTE 4. FOR-SALE HOUSING
For-sale housing inventory sales revenue is recognized at the time of closing
under the completed contract method until the sales qualify for the
percentage-of-completion method. As of September 30, 2003, all for-sale housing
inventory sales revenue to date has been recognized under the completed contract
method. The related profit is recognized when collectibility of the sale price
is reasonably assured and the earnings process is substantially complete. When a
sale does not meet the requirements for income recognition, profit is deferred
until such requirements are met.
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 November 7, 2003, we have only four unsold units remaining.
11
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 nine month
periods ended September 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 Nine Months
Ended September 30, Ended September 30,
----------------------------- ------------------ ----------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted average shares of common stock outstanding . 11,664,829 12,029,148 11,760,509 12,130,805
Convertible preferred interest of minority partner in
consolidated joint venture ........................ 356,318 -- -- 356,318
Stock options ....................................... 1,546,002 -- -- 684,614
---------- ---------- ---------- ----------
Weighted average shares of common stock outstanding -
assuming dilution ................................. 13,567,149 12,029,148 11,760,509 13,171,737
========== ========== ========== ==========
The following table presents information about options not given effect 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.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Weighted average number of shares of common stock... -- 2,765,181 2,889,531(1) --
Weighted average price.............................. $ -- $ 6.89 $ 7.12 $ --
- ---------------
(1) The options, which expire between December 31, 2005, and December 31, 2012,
were still outstanding at September 30, 2003.
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 joint
venture represents the preferred interest of Mr. Robert Rohdie in a joint
venture we consolidate. For the three month period ended September 30, 2002, and
the nine month period ended September 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.
12
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING
Our business is divided into three principal segments - development of for-sale
housing communities, the operation of our investment portfolio, and development
of rental apartment communities. Our activities in the For-Sale Housing Division
encompass condominium conversions of existing apartment communities, the
development of town homes and new, mid- or high-rise condominiums for sale to
residents, and the sale of single-family home sites to homebuilders. Our
investment portfolio of stabilized apartment communities and commercial
properties is the largest segment in terms of assets. Funds generated by the
operation, sale, or refinancing of properties in the investment portfolio
support our overhead and finance our development activities. In the Development
Division, we create new investment properties, primarily apartment communities,
which, upon stabilization, become part of our investment portfolio. 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.
For-Sale Housing. Assets in this division include luxury mid- and high-rise
condominiums, townhouses under development, and existing apartment communities
under conversion to condominiums. They also include single-family home sites for
sale to homebuilders. Communities currently under development and/or being
marketed by the For-Sale Housing Division include the following.
Number of
Unsold
Homes or
Community Location Home Sites Description
- ------------------------------------ ---------------------- ------------- ----------------------------------------------------
Consolidated communities
5600 Collins Avenue............ Miami Beach, FL 6 Condominium conversion
Alexandria Place............... Apopka, FL 120 Single-family home site development
Alexandria Pointe.............. Deland, FL 123 Single-family home site development
Alta Mar....................... Ft. Meyers, FL 131 Luxury high-rise condominium development
Pine Crest Village I........... Ft. Lauderdale, FL 59 Condominium conversion
Pine Crest Village II.......... Ft. Lauderdale, FL 116 Condominium conversion
Smoky Mountain Ridge........... Pigeon Forge, TN 198 Cabin site development
Southridge Pointe.............. Deland, FL 29 Single-family home site development
Tuscany on the Intracoastal.... Boynton Beach, FL 286 Condominium conversion
Venetian Bay Village I......... Kissimmee, FL 93 Townhome vacation community
Venetian Bay Village II........ Kissimmee, FL 136 Townhome vacation community
Wekiva Crest................... Apopka, FL 28 Single-family home site development
Woods of Lake Helen............ Lake Helen, FL 105 Single-family home site development
Woods of Southridge............ Deland, FL 17 Single-family home site development
-------------
1,447
-------------
Unconsolidated communities
Las Olas River House........... Ft Lauderdale, FL 287 High-rise luxury condominium development
Las Olas River House Phase II.. Ft Lauderdale, FL 44 Mixed-use retail and condominium development
Metropolitan................... Sarasota, FL 125 High-rise luxury condominium development
Warwick Grove.................. Warwick, NY 214 Traditional new development
XXII Hundred Grand............. Hoboken, NJ 118 Mid-rise luxury condominium development
XXIII Hundred Grand............ Hoboken, NJ 159 Mid-rise luxury condominium development
-------------
947
-------------
2,394
=============
13
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
- --------------------------
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. The
Investment Division has 8,730 consolidated stabilized apartments and 4,536
stabilized apartments owned through unconsolidated partnerships and joint
ventures. It also has consolidated commercial properties with 965,466 square
feet and commercial properties owned through unconsolidated partnerships and
joint ventures with 267,022 square feet.
Development. Assets in this division are under development or in initial
lease-up, under renovation, or land held for development or sale. Development
Division apartments in lease-up or under renovation include 820 consolidated
units and 558 units owned through unconsolidated partnerships and joint
ventures. A commercial property under reposition with 151,387 square feet is
also included in the Development Division.
We measure the performance of our For-Sale Housing and Development Divisions
primarily by gross profit from third party and intercompany sales. Intercompany
sales in the tables that follow represent the transfer of properties between
divisions. 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 use net operating income (rental revenue less property operating expenses) to
measure the performance of our Investment Division. We have historically used
funds from operations ("FFO"), as defined below, to measure the performance of
our Investment Division, since its operation resembled that of traditional
REITs, due to its widespread acceptance and use within the REIT and analyst
communities. However, we believe FFO is no longer a meaningful and relevant
performance measure of the Investment Division because the funds generated by
the Investment Division are used to finance the activities of the For-Sale
Housing and Development Divisions rather than to directly benefit the Investment
Division. FFO, as defined by the National Association of Real Estate Investment
Trusts, 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 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 that are not
directly associated with one of our divisions in the same proportions as general
and administrative expenses are allocated.
14
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
- --------------------------
The following tables summarize operating data through income (loss) from
continuing operations for the three divisions and net operating income for our
Investment Division for the three and nine month periods ended September 30,
2003 and 2002.
For the Three Months Ended September 30, 2003
--------------------------------------------------------------------
For-Sale
Housing Investment Development Eliminations Total
-------- -------- -------- -------- --------
Rental revenue
Consolidated properties ......................... $ 618 $ 20,160 $ 1,365 $ -- $ 22,143
Unconsolidated properties ....................... -- 11,459 1,041 -- 12,500
-------- -------- -------- -------- --------
Total rental revenue ......................... 618 31,619 2,406 -- 34,643
Sales of apartment development and for-sale housing
inventory
Consolidated properties
Sales to third parties ..................... 20,302 -- -- -- 20,302
Intercompany sales ......................... -- -- 11,700 (11,700) --
Unconsolidated properties
Intercompany sales ......................... -- -- 50,500 (50,500) --
-------- -------- -------- -------- --------
20,920 31,619 64,606 (62,200) 54,945
Property operating expenses
Consolidated properties ......................... 279 11,046 1,412 -- 12,737
Unconsolidated properties ....................... 8 6,192 747 -- 6,947
Costs of sales of apartment development and
for-sale housing inventory
Consolidated properties
Sales to third parties ..................... 17,416 -- -- (2,313) 15,103
Intercompany sales ......................... -- -- 11,014 (11,014) --
Unconsolidated properties
Intercompany sales ......................... -- -- 42,289 (42,289) --
-------- -------- -------- -------- --------
17,703 17,238 55,462 (55,616) 34,787
-------- -------- -------- -------- --------
Net operating income .............................. 3,217 14,381 9,144 (6,584) 20,158
Interest expense
Consolidated properties ......................... 379 4,914 308 -- 5,601
Unconsolidated properties ....................... -- 4,318 461 -- 4,779
-------- -------- -------- -------- --------
Property level income before depreciation ......... 2,838 5,149 8,375 (6,584) 9,778
Allocated general and administrative expenses and
other corporate items ........................... (1,960) (1,064) (498) -- (3,522)
-------- -------- -------- -------- --------
Income before depreciation and other items ........ 878 4,085 7,877 (6,584) 6,256
15
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
- --------------------------
For the Three Months Ended September 30, 2003
------------------------------------------------------------------
For-Sale
Housing Investment Development Eliminations Total
------- ---------- ----------- ------------ -----
Depreciation
Consolidated properties ......................... $ -- $(4,869) $ (463) $ 336 $(4,996)
Unconsolidated properties ....................... -- (2,574) (264) 421 (2,417)
Minority interests in income of consolidated
partnerships and joint ventures ................. (684) (463) (19) -- (1,166)
Elimination of management fees paid by partnerships
and joint ventures to Tarragon .................. -- 410 32 -- 442
Outside partners' interests in loss of
unconsolidated partnerships and joint ventures .. 8 348 129 (76) 409
Distributions from unconsolidated partnerships and
joint ventures in excess of investment .......... -- 8,274 -- -- 8,274
Loss from joint venture investment written off .... -- -- (313) -- (313)
Outside partners' interests in intercompany sales
of unconsolidated partnerships and joint ventures -- -- (2,463) 2,463 --
------- ------- ------- ------- -------
Income from continuing operations ................. $ 202 $ 5,211 $ 4,516 $(3,440) $ 6,489
======= ======= ======= ======= =======
For the Three Months Ended September 30, 2002
------------------------------------------------------------------
For-Sale
Housing Investment Development Eliminations Total
------- ---------- ----------- ------------ -----
Rental revenue
Consolidated properties ......................... $ 526 $ 18,965 $ 1,748 $ -- $ 21,239
Unconsolidated properties ....................... -- 9,083 775 -- 9,858
-------- -------- -------- -------- --------
Total rental revenue ......................... 526 28,048 2,523 -- 31,097
Sales of apartment development and for-sale housing
inventory
Consolidated properties
Sales to third parties
Intercompany sales ......................... 5,222 -- -- -- 5,222
-------- -------- -------- -------- --------
5,748 28,048 2,523 -- 36,319
Property operating expenses
Consolidated properties ......................... 304 9,622 1,542 -- 11,468
Unconsolidated properties ....................... -- 4,867 510 -- 5,377
Costs of sales of apartment development and
for-sale housing inventory
Consolidated properties
Sales to third parties
Intercompany sales ......................... 6,122 -- -- -- 6,122
-------- -------- -------- -------- --------
6,426 14,489 2,052 -- 22,967
-------- -------- -------- -------- --------
Net operating income (loss) ....................... (678) 13,559 471 -- 13,352
Interest expense
Consolidated properties ......................... 244 5,074 406 -- 5,724
Unconsolidated properties ....................... -- 3,515 442 -- 3,957
-------- -------- -------- -------- --------
Property level income (loss) before depreciation . (922) 4,970 (377) -- 3,671
16
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
- --------------------------
For the Three Months Ended September 30, 2002
------------------------------------------------------------------
For-Sale
Housing Investment Development Eliminations Total
------- ---------- ----------- ------------ -----
Allocated general and administrative expenses and
other corporate items ........................... $ (240) $(1,311) $(1,330) $ -- $(2,881)
------- ------- ------- ------- -------
Income (loss) before depreciation and other items . (1,162) 3,659 (1,707) -- 790
Depreciation
Consolidated properties ......................... -- (4,294) (598) 291 (4,601)
Unconsolidated properties ....................... -- (1,836) (291) 261 (1,866)
Minority interests in income of consolidated
partnerships and joint ventures ................. (12) (381) (69) -- (462)
Discontinued operations of unconsolidated
partnerships and joint ventures ................. -- 122 -- 92 214
Elimination of management fees paid by partnerships
and joint ventures to Tarragon .................. -- 325 23 -- 348
Outside partners' interests in (income) loss of
unconsolidated partnerships and joint ventures .. -- (11) 133 (99) 23
Distributions from unconsolidated partnerships and
joint ventures in excess of investment .......... -- 5,577 -- -- 5,577
------- ------- ------- ------- -------
Income (loss) from continuing operations .......... $(1,174) $ 3,161 $(2,509) $ 545 $ 23
======= ======= ======= ======= =======
For the Nine Months Ended September 30, 2003
-------------------------------------------------------------------------
For-Sale
Housing Investment Development Eliminations Total
--------- --------- --------- --------- ---------
Rental revenue
Consolidated properties ......................... $ 1,144 $ 59,133 $ 3,860 $ -- $ 64,137
Unconsolidated properties ....................... -- 30,933 3,775 -- 34,708
--------- --------- --------- --------- ---------
Total rental revenue ......................... 1,144 90,066 7,635 -- 98,845
Sales of apartment development and for-sale housing
inventory
Consolidated properties
Sales to third parties ..................... 35,135 -- -- -- 35,135
Intercompany sales ......................... -- -- 24,409 (24,409) --
Unconsolidated properties
Intercompany sales ......................... -- -- 68,500 (68,500) --
--------- --------- --------- --------- ---------
36,279 90,066 100,544 (92,909) 133,980
17
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
- --------------------------
For the Nine Months Ended September 30, 2003
----------------------------------------------------------------------
For-Sale
Housing Investment Development Eliminations Total
------- ---------- ----------- ------------ -----
Property operating expenses
Consolidated properties ......................... $ 619 $ 30,798 $ 3,734 $ -- $ 35,151
Unconsolidated properties ....................... 24 16,271 2,643 -- 18,938
Costs of sales of apartment development and
for-sale housing inventory
Consolidated properties
Sales to third parties ..................... 32,471 -- -- (3,738) 28,733
Intercompany sales ......................... -- -- 20,457 (20,457) --
Unconsolidated properties
Intercompany sales ......................... -- -- 57,033 (57,033) --
-------- -------- -------- -------- --------
33,114 47,069 83,867 (81,228) 82,822
-------- -------- -------- -------- --------
Net operating income .............................. 3,165 42,997 16,677 (11,681) 51,158
Interest expense
Consolidated properties ......................... 3,991 15,229 887 -- 20,107
Unconsolidated properties ....................... -- 11,478 1,807 -- 13,285
-------- -------- -------- -------- --------
Property level income (loss) before depreciation .. (826) 16,290 13,983 (11,681) 17,766
Allocated general and administrative expenses and
other corporate items ........................... (4,516) (3,775) (3,147) -- (11,438)
-------- -------- -------- -------- --------
Income (loss) before depreciation, gain (loss) on
sale of real estate, and other items ............ (5,342) 12,515 10,836 (11,681) 6,328
Depreciation
Consolidated properties ......................... -- (15,181) (1,364) 1,001 (15,544)
Unconsolidated properties ....................... -- (6,945) (1,254) 1,155 (7,044)
Gain (loss) on sale of real estate - consolidated
properties
Sales to third parties .......................... -- (66) -- 1,289 1,223
Minority interests in income of consolidated
partnerships and joint ventures ................. (882) (1,293) (109) -- (2,284)
Elimination of management fees paid by partnerships
and joint ventures to Tarragon .................. -- 1,104 114 -- 1,218
Outside partners' interests in loss of
unconsolidated partnerships and joint ventures .. 24 594 553 (195) 976
Distributions from unconsolidated partnerships and
joint ventures in excess of investment .......... -- 8,954 -- -- 8,954
Loss from joint venture investment written off .... -- -- (313) -- (313)
Outside partners' interests in intercompany sales
of unconsolidated partnerships and joint ventures -- -- (3,440) 3,440 --
-------- -------- -------- -------- --------
Income (loss) from continuing operations .......... $ (6,200) $ (318) $ 5,023 $ (4,991) $ (6,486)
======== ======== ======== ======== ========
18
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
- --------------------------
For the Nine Months Ended September 30, 2002
-----------------------------------------------------------------------------
For-Sale
Housing Investment Development Eliminations Total
--------- --------- --------- --------- ---------
Rental revenue
Consolidated properties ......................... $ 2,215 $ 52,557 $ 6,299 $ -- $ 61,071
Unconsolidated properties ....................... -- 30,057 1,187 -- 31,244
--------- --------- --------- --------- ---------
Total rental revenue ......................... 2,215 82,614 7,486 -- 92,315
Sales of apartment development and for-sale housing
inventory
Consolidated properties
Sales to third parties ..................... 20,398 -- -- -- 20,398
Intercompany sales ......................... -- -- 185,109 (185,109) --
Unconsolidated properties
Intercompany sales ......................... -- -- 118,850 (118,850) --
--------- --------- --------- --------- ---------
22,613 82,614 311,445 (303,959) 112,713
Property operating expenses
Consolidated properties ......................... 1,084 26,369 4,778 -- 32,231
Unconsolidated properties ....................... -- 14,973 760 -- 15,733
Costs of sales of apartment development and
for-sale housing inventory
Consolidated properties
Sales to third parties ..................... 22,658 -- -- -- 22,658
Intercompany sales ......................... -- -- 159,918 (159,918) --
Unconsolidated properties
Intercompany sales ......................... -- -- 89,628 (89,628) --
--------- --------- --------- --------- ---------
23,742 41,342 255,084 (249,546) 70,622
--------- --------- --------- --------- ---------
Net operating income (loss) ....................... (1,129) 41,272 56,361 (54,413) 42,091
Interest expense
Consolidated properties ......................... 1,065 15,174 1,715 -- 17,954
Unconsolidated properties ....................... -- 10,015 751 -- 10,766
--------- --------- --------- --------- ---------
Property level income (loss) before depreciation .. (2,194) 16,083 53,895 (54,413) 13,371
Allocated general and administrative expenses and
other corporate items ........................... (659) (3,815) (3,518) -- (7,992)
--------- --------- --------- --------- ---------
Income (loss) before depreciation, gain on sale of
real estate, and other items .................... (2,853) 12,268 50,377 (54,413) 5,379
19
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
- --------------------------
For the Nine Months Ended September 30, 2002
------------------------------------------------------------------------
For-Sale
Housing Investment Development Eliminations Total
-------- -------- -------- -------- --------
Depreciation
Consolidated properties ......................... $ -- $(12,358) $ (1,936) $ 823 $(13,471)
Unconsolidated properties ....................... -- (6,724) (506) 1,023 (6,207)
Minority interests in income of consolidated
partnerships and joint ventures ................. (37) (691) (196) -- (924)
Gain on sale of real estate of unconsolidated
partnerships and joint ventures ................. -- 10,982 -- -- 10,982
Discontinued operations of unconsolidated
partnerships and joint ventures ................. -- 618 -- 106 724
Elimination of management fees paid by partnerships
and joint ventures to Tarragon .................. -- 1,002 35 -- 1,037
Outside partners' interests in (income) loss of
unconsolidated partnerships and joint ventures .. -- (2,005) 238 (242) (2,009)
Distributions from unconsolidated partnerships and
joint ventures in excess of investment .......... -- 5,577 -- -- 5,577
Outside partners' interests in intercompany sales
of unconsolidated partnerships and joint ventures -- -- (2,754) 2,754 --
-------- -------- -------- -------- --------
Income (loss) from continuing operations .......... $ (2,890) $ 8,669 $ 45,258 $(49,949) $ 1,088
======== ======== ======== ======== ========
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Investment Division Net Operating Income:
Rental revenue
Same store stabilized apartment communities .. $ 23,723 $ 23,266 $ 70,299 $ 68,968
Apartment communities stabilized during period 4,102 1,737 8,901 3,332
Apartment communities sold during period ..... -- 249 -- 2,086
Commercial properties ........................ 3,794 2,796 10,866 8,228
-------- -------- -------- --------
31,619 28,048 90,066 82,614
Property operating expenses
Same store stabilized apartment communities .. (13,385) (12,169) (37,767) (34,635)
Apartment communities stabilized during period (2,117) (864) (4,298) (1,545)
Apartment communities sold during period ..... -- (180) -- (1,461)
Commercial properties ........................ (1,736) (1,276) (5,004) (3,701)
-------- -------- -------- --------
(17,238) (14,489) (47,069) (41,342)
Net operating income
Same store stabilized apartment communities .. 10,338 11,097 32,532 34,333
Apartment communities stabilized during period 1,985 873 4,603 1,787
Apartment communities sold during period ..... -- 69 -- 625
Commercial properties ........................ 2,058 1,520 5,862 4,527
-------- -------- -------- --------
$ 14,381 $ 13,559 $ 42,997 $ 41,272
======== ======== ======== ========
20
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
- --------------------------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- -----------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Reconciliation of revenue:
Total revenue per segment operating data tables ..................... $ 54,945 $ 36,319 $ 133,980 $ 112,713
Less rental revenue of unconsolidated partnerships and joint ventures (12,500) (9,858) (34,708) (31,244)
Management fee and other revenue presented with allocated general and
administrative expenses and other corporate items ................ 166 131 402 461
--------- --------- --------- ---------
Total revenue per accompanying Consolidated Statements of Operations $ 42,611 $ 26,592 $ 99,674 $ 81,930
========= ========= ========= =========
NOTE 7. INCOME TAXES
No current or deferred income tax expense has been recognized for the three and
nine month periods ended September 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.
NOTE 8. DISCONTINUED OPERATIONS
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 statement have been
reported in discontinued operations. Discontinued operations for the three and
nine month periods ended September 30, 2003 and 2002, include the operations of
nine properties sold in 2002 or the first nine months of 2003. Total revenues
for these properties for the three and nine month periods ended September 30,
2003, were $329,000 and $1.7 million, respectively, and for the three and nine
month periods ended September 30, 2002, were $2 million and $6.2 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
$262,000 to date. Remediation efforts are underway at a total estimated cost of
$850,000, of which $700,000 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 determine Tarragon's proportionate share of the profits or losses of the
partnerships and joint ventures consistent with the allocation of cash
distributions in accordance with the provisions the American Institute of
Certified Public Accountants' Statement of Position ("SOP") 78-9, "Accounting
for Investments in Real Estate Ventures."
We have investments in 24 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 SOP 78-9. 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.
For-sale housing inventory sales revenue is recognized at the time of closing
under the completed contract method until the sales qualify for the
percentage-of-completion method. As of September 30, 2003, all for-sale housing
inventory sales revenue to date has been recognized under the completed contract
method. The related profit is recognized when collectibility of the sale price
is reasonably assured and the earnings process is substantially complete. When a
sale does not meet the requirements for income recognition, profit is deferred
until such requirements are met.
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" ("ABP No. 30"),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.
As required by SFAS No. 145, items classified as extraordinary in prior periods
that do not meet the criteria in ABP No. 30 for classification as extraordinary
have been reclassified to conform to the current presentation.
23
In November 2002, the FASB issued Interpretation (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5,
"Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures," and
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." FIN 45
requires guarantors to recognize a liability at the inception of guarantee
arrangements within its scope. Guarantors are also required to provide
additional disclosures for guarantees. We adopted FIN 45 on January 1, 2003.
There was no impact on our reported net income or loss.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin 51,
"Consolidated Financial Statements," for certain entities that do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of
FIN 46 will be required to be consolidated by their primary beneficiary. The
primary beneficiary of a variable interest entity is determined to be the party
that absorbs a majority of the entity's expected losses, receives a majority of
its expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. The period in which the
provisions of FIN 46 apply to variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003, has been
deferred by the FASB until the first fiscal period ending after December 15,
2003. Our initial determination is that the adoption of the provisions of FIN 46
will not have a material effect 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 requires 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.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003. We adopted SFAS No. 150 as required on July 1,
2003. There was no impact to 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 $262,000
to date. Remediation efforts are underway at a total estimated cost of $850,000,
$700,000 of which has been incurred to date.
24
Liquidity and Capital Resources
Our principal sources of cash are Investment Division property operations,
borrowings, and proceeds from the sale of these properties. As our For-Sale
Housing Division continues to grow, sales of for-sale housing inventory will
become a significant source of cash. We believe these sources will continue to
meet our cash requirements, including debt service payments, property
maintenance and improvements, development costs for rental apartment and
for-sale housing communities under construction or renovation, 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 or other financing transactions on consolidated and
unconsolidated properties of $25 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 September 30, 2003, as there was no outstanding balance. We have an
additional $14.5 million available under two lines of credit that mature in
2004. Payment terms of a $14.7 million line of credit, of which $12.5 million is
currently available, are interest only monthly at 175 basis points over the
thirty day LIBOR, with the outstanding balance due at maturity of December 2004.
Payment terms of an unused $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, although we expect to generate only an additional
$4 million in net proceeds from the sale of consolidated properties during the
remainder of 2003.
Principal payments on mortgages totaling $15.9 million come due during the
remainder of 2003, including $15 million of balloon payments. This includes $6.4
million representing the September 30, 2003, balance of a $9 million
construction loan for a townhome development that matures in December 2003. We
expect to repay this loan with proceeds from sales of townhomes. It also
includes a $2 million loan that was paid off after the end of the third quarter.
Additionally, it includes a $6.4 million mortgage for which the lender has
agreed to a one-year extension.
We have guaranteed $35.3 million of mortgages on four unconsolidated properties;
$14.5 million relates to a mortgage that matures in 2006 and provides for a
two-year extension option, $925,000 relates to a mortgage that matures in 2012,
and $19.9 million relates to two mortgages with an aggregate balance of $19.1
million at September 30, 2003, that mature in 2004. We have also guaranteed
construction loans totaling $167.6 million on four unconsolidated properties,
including the $90 million construction loan for the Las Olas River House
condominium development. This construction loan has a September 30, 2003,
balance of $53.7 million, matures in 2005, and provides for a one-year extension
option. The aggregate balance of the other construction loans at September 30,
2003, is $77.3 million. These construction loans mature in 2004 and have one- or
two-year extension options. In addition, we have guaranteed $1.2 million of
other loans on one property that mature in December 2003.
25
Cash Flows from Operating Activities
We used net cash of $2.8 million in operating activities during the first nine
months of 2003. Net cash flow provided by operating activities was $16.3 million
for the first nine months of 2002. This decrease in cash flow was net of an
increase in for-sale housing inventory sales collected of $13 million. Cash paid
for development or renovation costs to for-sale housing inventory increased $9.7
million. See discussion below under "For-Sale Housing Activity." Also, we paid
$12.5 million in connection with the purchase of for-sale housing inventory. The
sale of seven properties in 2003 resulted in a decrease in cash flow from
property operations but also decreased interest paid. Increased corporate
general and administrative expenses, as discussed in "Corporate Expenses" below,
also reduced cash flow from operating activity. Additionally, we incurred a $3.1
million prepayment penalty in connection with the repayment of two mortgages
prior to their maturities in order to obtain a construction loan to finance the
condominium conversion of Pine Crest Apartments.
Cash Flows from Investing Activities
During the first nine months of 2003, we used cash in investing activities of
$18.3 million. During the first nine months of 2002, we used net cash in
investing activities of $16.4 million.
Proceeds from the sale of real estate increased $17.2 million. See "Sales of
Consolidated Properties" below for the detail of net cash proceeds from the sale
of consolidated properties during the first nine months of 2003. During the
first nine 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 nine months of 2003, Tarragon advanced $27 million to
partnerships and joint ventures for development costs or for the purchase of
land for development. This amount included $14.6 million to Metropolitan
Sarasota, $8.1 to One Las Olas, $909,000 to East Las Olas, and $2.2 million to
Thirteenth Street Development. All of these entities have condominium
developments under construction. During the first nine months of 2002, Tarragon
advanced $6.5 million to partnerships or joint ventures for development costs or
for the purchase of land for development. This amount included $4.3 million to
East Las Olas and $307,000 to Thirteenth Street Development. It also included
$1.2 million to Guardian-Jupiter Partners, which had a rental apartment
community under construction. Additionally, during the first nine months of
2002, Tarragon received net repayment of advances of $6 million from One Las
Olas upon closing of its construction loan.
Cash Flows from Financing Activities
Cash provided by financing activities increased $15.8 million for the first nine
months of 2003 compared to the first nine months of 2002.
As stated previously, proceeds from borrowings are a significant source of cash
for Tarragon. During the nine months ended September 30, 2003, net construction
loan borrowings for the For-Sale Housing Division were $13.8 million. See
"For-Sale Housing Activity" below. We used $16.7 million of construction loan
borrowings to repay mortgages secured by Pine Crest Apartments and $3.1 million
to pay the associated prepayment penalties. Other construction loan borrowings
totaled $10.1 million. We also received net proceeds of $20.6 million from
financings of consolidated properties and $8.8 million from financings of
unconsolidated properties. During the nine months ended September 30, 2002, we
received net proceeds of $11.9 million from financings of consolidated
properties and $7.1 million from financings of unconsolidated properties. We
also received $14.2 million of net construction loan borrowings. During this
same period, we made $7.9 million of net repayment of advances under the line of
credit with affiliates of William S. Friedman, our President and Chief Executive
Officer and Chairman of our Board of Directors.
26
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 214,304 shares
of our common stock in open market and negotiated transactions during the first
nine months of 2003 at a cost of $3.2 million. Subject to market conditions, we
expect to repurchase shares of our common stock during the remainder of 2003 at
a rate consistent with that of the first nine months. As of September 30, 2003,
Tarragon had authority to repurchase an additional 416,102 common shares.
Sales of Consolidated Properties
The following table summarizes sales of consolidated properties during the first
nine 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
Jul-03 Diamond Loch Apartments 4,250 652 1,256
Sep-03 Marina Park Apartments 10,300 5,931 6,111
--------------- ----------------- ---------------
$ 43,982 $ 20,168 $ 17,813
------------------- =============== ================= ===============
(1) Represents the sale of a portion of the property.
For-Sale Housing Activity
The following table summarizes the cash flow related to For-sale housing
activities for the three and nine month periods ended September 30, 2003 and
2002.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Aggregate sales ......................... $ 20,302 $ 5,222 $ 35,135 $ 20,398
Commissions and closing costs ........... (2,177) (264) (2,529) (819)
-------- -------- -------- --------
Aggregate net sales collected ........... 18,125 4,958 32,606 19,579
Loan release payments ................... (17,143) -- (24,446) (10,492)
-------- -------- -------- --------
Net cash proceeds ....................... 982 4,958 8,160 9,087
Development costs allocated to units sold (12,926) (5,858) (26,204) (21,839)
Non-cash development costs .............. 2,990 2,274 8,972 14,335
-------- -------- -------- --------
Renovation and development costs paid ... (9,936) (3,584) (17,232) (7,504)
Proceeds from borrowings ................ 8,836 -- 38,260 --
-------- -------- -------- --------
Net cash received (paid) ................ $ (118) $ 1,374 $ 29,188 $ 1,583
======== ======== ======== ========
During the nine month period ended September 30, 2003, $19.8 million of
construction loan borrowings was used to repay two mortgages secured by Pine
Crest Apartments and the associated prepayment penalties.
27
Results of Operations
Consolidated Properties
At September 30, 2003, our consolidated apartment communities included 9,550
operating units, and our consolidated commercial properties had an aggregate 1.1
million square feet. The following table summarizes the components of aggregate
property level net operating results for all of our consolidated properties for
the three month periods ended September 30, 2003 and 2002.
Three Months Ended September 30,
-------------------------------------------------------
2003 2002 Change
--------------- ---------------- ----------------
Rental revenue..................................... $ 22,143 $ 21,239 $ 904
Property operating expenses........................ (12,737) (11,468) (1,269)
--------------- ---------------- ----------------
Net operating income............................... 9,406 9,771 (365)
Interest expense................................... (5,083) (5,374) 291
Depreciation expense............................... (4,996) (4,601) (395)
--------------- ---------------- ----------------
$ (673) $ (204) $ (469)
=============== ================ ================
The following table presents the impact on property level revenues and expenses
of the operations of recently completed properties in lease-up, properties
undergoing condominium conversions, and one property sold in 2002 for the three
month periods ended September 30, 2003 and 2002.
Properties Condominium Property Other
in Lease-up (a) Conversions Sold Changes Total
--------------- ----------- ---- ------- -----
Rental revenue ............ $ 818 $ 91 $ (252) $ 247 $ 904
Property operating expenses (409) 25 179 (1,064) (1,269)
------- ------- ------- ------- -------
Net operating income (loss) 409 116 (73) (817) (365)
Interest expense .......... 109 (57) (4) 243 291
Depreciation expense ...... (255) -- -- (140) (395)
------- ------- ------- ------- -------
$ 263 $ 59 $ (77) $ (714) $ (469)
======= ======= ======= ======= =======
- -----------------
(a) Includes six recently completed properties in lease-up during one or both
periods presented.
The increase in net operating income for Condominium Conversions is primarily
due to the purchase of Tuscany on the Intracoastal in June 2003. This increase
is partially offset by a decrease resulting from taking units out of service at
Pine Crest Apartments.
The increase in property operating expenses included in Other Changes is related
to higher personnel, landscaping, and other costs incurred in connection with
leasing efforts. Additionally, property taxes were higher for newly constructed
apartment communities whose values have been reassessed after completion.
Utilities and property insurance costs also increased.
28
The following table summarizes the components of aggregate property level net
operating results for all of our consolidated properties for the nine month
periods ended September 30, 2003 and 2002.
Nine Months Ended September 30,
--------------------------------------------
2003 2002 Change
-------- -------- --------
Rental revenue ............ $ 64,137 $ 61,071 $ 3,066
Property operating expenses (35,151) (32,231) (2,920)
-------- -------- --------
Net operating income ...... 28,986 28,840 146
Interest expense .......... (18,863) (16,562) (2,301)
Depreciation expense ...... (15,544) (13,471) (2,073)
-------- -------- --------
$ (5,421) $ (1,193) $ (4,228)
======== ======== ========
The following table presents the impact on property level revenues and expenses
of the operations of properties consolidated in April 2002, recently completed
properties in lease-up, properties undergoing condominium conversions, and one
property sold in 2002 for the nine month periods ended September 30, 2003 and
2002.
Properties
Consolidated Properties
in April 2002 in Lease-up Condominium Property Other
(a) (b) Conversions Sold Changes Total
------- ------- ----------- ------- ------- -------
Rental revenue ............ $ 1,855 $ 2,788 $(1,072) $ (730) $ 225 $ 3,066
Property operating expenses (755) (1,051) 466 512 (2,092) (2,920)
------- ------- ------- ------- ------- -------
Net operating income (loss) 1,100 1,737 (606) (218) (1,867) 146
Interest expense .......... (83) (142) (2,833) (11) 768 (2,301)
Depreciation expense ...... (318) (430) -- -- (1,325) (2,073)
------- ------- ------- ------- ------- -------
$ 699 $ 1,165 $(3,439) $ (229) $(2,424) $(4,228)
======= ======= ======= ======= ======= =======
- ----------------------------------
(a) In connection with a change in control, Antelope Pines and Woodcreek
Garden were consolidated beginning April 2002.
(b) Includes six recently completed properties in lease-up during one or both
periods presented.
The decrease in net operating income for Condominium Conversions is primarily
due to taking units out of service at Pine Crest Apartments, resulting in a $1.7
million decrease in rental revenue and a $496,000 decrease in property operating
expenses. This decrease is partially offset by the net operating income added by
the purchase of Tuscany on the Intracoastal in June 2003.
The increase in interest expense for Condominium Conversions includes prepayment
penalties totaling $3.1 million 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.
The increase in property operating expenses in the Other Changes column is
attributable to the same factors affecting the three month period.
Other changes for depreciation expense include $1 million recorded in the second
quarter of 2003 upon the reclassification of two apartment communities to real
estate held for investment for the period during which they were classified as
held for sale.
29
Unconsolidated Partnerships and Joint Ventures
The following table summarizes the components of equity in income of
unconsolidated partnerships and joint ventures for the three month periods ended
September 30, 2003 and 2002.
Three Months Ended September 30,
--------------------------------------------
2003 2002 Change
-------- -------- --------
Rental revenue .................................... $ 12,500 $ 9,858 $ 2,642
Property operating expenses ....................... (6,947) (5,377) (1,570)
-------- -------- --------
Net operating income .............................. 5,553 4,481 1,072
Interest expense .................................. (4,779) (3,957) (822)
Depreciation expense .............................. (2,417) (1,866) (551)
Discontinued operations ........................... -- 214 (214)
Elimination of management fees paid to Tarragon ... 442 348 94
Outside partners' interest in loss ................ 409 23 386
Loss from investment written off .................. (313) -- (313)
Distributions in excess of investment ............. 8,274 5,577 2,697
-------- -------- --------
Equity in income of partnerships and joint ventures $ 7,169 $ 4,820 $ 2,349
======== ======== ========
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 a property deconsolidated in 2003 and
recently completed properties in lease-up on aggregate joint ventures' property
level revenues and expenses.
Property Other
De-consolidated Properties in
in 2003 (a) Lease-up (b) Other Changes Total
----------- ------------ ------------- -----
Rental revenue .................. $ 431 $ 1,624 $ 587 $ 2,642
Property operating expenses ..... (323) (905) (342) (1,570)
------- ------- ------- -------
Net operating income ............ 108 719 245 1,072
Interest expense ................ (138) (366) (318) (822)
Depreciation expense ............ (135) (245) (171) (551)
------- ------- ------- -------
Income (loss) before discontinued
operations .................... $ (165) $ 108 $ (244) $ (301)
======= ======= ======= =======
- -----------------------------
(a) 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.
(b) Includes three partnerships with recently completed properties in
lease-up.
30
The following table summarizes the components of equity in income of
unconsolidated partnerships and joint ventures for the nine month periods ended
September 30, 2003 and 2002.
Nine Months Ended September 30,
--------------------------------------------
2003 2002 Change
-------- -------- --------
Rental revenue ......................................... $ 34,708 $ 31,244 $ 3,464
Property operating expenses ............................ (18,938) (15,733) (3,205)
-------- -------- --------
Net operating income ................................... 15,770 15,511 259
Interest expense ....................................... (13,285) (10,766) (2,519)
Depreciation expense ................................... (7,044) (6,207) (837)
Gain on sale of real estate ............................ -- 27,240 (27,240)
Discontinued operations ................................ -- 724 (724)
Elimination of management fees paid to Tarragon
1,218 1,037 181
Outside partners' interest in (income) loss ............ 976 (2,009) 2,985
Loss from investment written off ....................... (313) -- (313)
Distributions in excess of investment .................. 8,954 5,577 3,377
Reduction in gain recognized for distributions in excess
of investment recognized in 2000 ..................... -- (16,258) 16,258
-------- -------- --------
Equity in income of partnerships and joint ventures .... $ 6,276 $ 14,849 $ (8,573)
======== ======== ========
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 recently completed
properties in lease-up on aggregate joint ventures' property level revenues and
expenses.
Properties
Consolidated Properties Property Other
in April Sold in De-consolidated Properties Other
2002 (a) 2002 (b) in 2003 (c) in Lease-up (d) Changes Total
-------- -------- ----------- --------------- ------- -----
Rental revenue ............ (1,405) (1,358) 903 4,623 $ 701 3,464
Property operating expenses 550 947 (886) (2,618) (1,198) (3,205)
------- ------- ------- ------- ------- -------
Net operating income (loss) (855) (411) 17 2,005 (497) 259
Interest expense .......... 268 417 (422) (1,430) (1,352) (2,519)
Depreciation expense ...... 243 -- (396) (997) 313 (837)
------- ------- ------- ------- ------- -------
Loss before gain on sale of
real estate and discontinued
operations .............. $ (344) $ 6 $ (801) $ (422) $(1,536) $(3,097)
======= ======= ======= ======= ======= =======
- -------------------------
(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 recently completed properties in
lease-up.
Interest expense in Other Changes above increased over corresponding periods of
the prior year because of higher loan balances from refinanced and supplemental
mortgages and from the write-off of deferred borrowing costs and prepayment
penalties or exit fees incurred in connection with refinancings completed during
the period.
31
Corporate Expenses
Corporate general and administrative expenses increased $667,000 for the third
quarter of 2003 compared to the third quarter of 2002 and $2.9 million for the
first nine months of 2003 compared to the first nine months of 2002 primarily
due to development-related personnel additions and compensation increases.
Additionally, we incurred legal and other professional fees and costs of
relocating residents of $112,000 for the three month period and $262,000 for the
nine month period in connection with a matter relating to the alleged release of
asbestos-containing materials at one of our condominium conversion projects.
Partially offsetting these increases are decreases of $650,000 and $282,000 for
the three and nine month periods in expenses incurred in connection with
potential acquisitions or development projects or financing transactions that
were not selected for further investment.
Segment Operating Results
For-Sale Housing Division
At September 30, 2003, approximately one-fourth of our real estate assets were
in the For-Sale Housing Division. The following table summarizes the sales and
gross profit of For-sale housing inventory for the three and nine month periods
ended September 30, 2003 and 2002.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Number of units sold
5600 Collins Avenue .......................... 2 19 21 79
Pine Crest Village I ......................... 55 -- 80 --
Single-family home sites ..................... 13 -- 13 --
Smoky Mountain Ridge ......................... 6 -- 6 --
Venetian Bay Village I ....................... 52 -- 69 --
-------- -------- -------- --------
Aggregate number of units sold ............ 128 19 189 79
======== ======== ======== ========
For-sale housing inventory sales
5600 Collins Avenue .......................... $ 504 $ 5,222 $ 6,277 $ 20,398
Pine Crest Village I ......................... 10,928 -- 17,624 --
Single-family home sites ..................... 664 -- 664 --
Smoky Mountain Ridge ......................... 931 -- 931 --
Venetian Bay Village I ....................... 7,275 -- 9,639 --
-------- -------- -------- --------
Aggregate sales ........................... $ 20,302 $ 5,222 $ 35,135 $ 20,398
======== ======== ======== ========
Gross profit on for-sale housing inventory sales
5600 Collins Avenue .......................... $ -- $ (900) $ (1,571) $ (2,260)
Pine Crest Village I ......................... 4,371 -- 7,050 --
Single-family home sites ..................... 49 -- 49 --
Smoky Mountain Ridge ......................... -- -- -- --
Venetian Bay Village I ....................... 779 -- 874 --
-------- -------- -------- --------
Gross profit (loss) ....................... $ 5,199 $ (900) $ 6,402 $ (2,260)
======== ======== ======== ========
Less profit previously recognized by the
Investment Division upon the transfer of
Pine Crest Apartments to the For-Sale
Housing Division .......................... (2,313) -- (3,738) --
-------- -------- -------- --------
Gross profit (loss) to the For-Sale Housing
Division................................... $ 2,886 $ (900) $ 2,664 $ (2,260)
======== ======== ======== ========
Due to increases in estimated costs to complete the condominium conversion and
lowering sale prices to facilitate a quick close-out of 5600 Collins Avenue, we
have recorded inventory write-downs totaling $4.3 million. Of this amount,
$900,000 and $2.3 million were recorded in the three and nine month periods
ended September 30, 2002, and $1.6 million was recorded in the nine month period
ended September 30, 2003. As of November 7, 2003, we have only four unsold units
remaining at this project.
32
The following table includes the active communities in our For-Sale Housing
Division.
Homes or Home Sites Sold, Homes or Home Sites Available
Not Closed For Sale
---------------------------- -----------------------------
Number of Number Aggregate Number Estimated
Unsold Homes of Homes or Contract of Homes or Remaining
or Homes Sites Homes Sites Prices Homes Sites Sell-Out
-------------- ---------- -------------- ---------- ------------
Consolidated Communities
5600 Collins Avenue............. 6 2 $ 1,150 4 $ 3,250
Alexandria Place................ 120 120 4,805 - -
Alexandria Pointe............... 123 123 4,757 - -
Alta Mar........................ 131 - - 131 39,000
Pine Crest Village I............ 59 43 9,032 16 4,212
Pine Crest Village II........... 116 62 12,535 54 14,704
Smoky Mountain Ridge............ 198 33 6,601 165 14,104
Tuscany on the Intracoastal..... 286 25 6,339 261 63,290
Venetian Bay Village I.......... 93 88 12,560 5 680
Venetian Bay Village II......... 136 13 1,951 123 17,854
Wekiva Crest.................... 28 28 1,552 - -
Woods of Lake Helen............. 105 105 4,008 - -
Unconsolidated communities(1)
Las Olas River House............ 287 204 150,412 83 121,550
Las Olas River House Phase II... 44 - - 44 37,516
-------------- ---------- -------------- ---------- --------------
1,732 846 $ 215,702 886 $ 316,160
============== ========== ============== ========== ==============
(1) Tarragon has a 70% profits interest in both of these projects. Revenue
recognition policies of unconsolidated partnerships and joint ventures are
the same as Tarragon's. Please see "Critical Accounting Policies - Revenue
Recognition."
Investment Division
At September 30, 2003, approximately two-thirds of our real estate assets were
in the Investment Division. Tarragon measures the performance of its Investment
Division primarily by net operating income (rental revenue less property
operating expenses). Historically, Tarragon has used funds from operations, as
defined in NOTE 6. "SEGMENT REPORTING," to measure the performance of its
Investment Division, since the operation of the Investment Division resembled
that of traditional real estate investment trusts ("REITs"), due to its
widespread acceptance and use within the REIT and analyst communities. However,
we believe FFO is no longer a meaningful and relevant performance measure of the
Investment Division because the funds generated by the Investment Division are
used to finance the activities of the For-Sale Housing and Development Divisions
rather than to directly benefit the Investment Division. Additionally, in the
future, it is our intention to convert many of these apartment communities to
condominiums, which affects the manner in which we operate them. The following
table presents net operating income for our 53 same store Investment Division
apartment communities with 11,683 units (consolidated and unconsolidated) and
the six (four consolidated and two unconsolidated) apartment communities
stabilized and moved to the Investment Division during 2002 or 2003. Prior to
their stabilization, the operating results of these six properties were included
in the Development Division.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Same store stabilized apartment communities:
Rental revenue ...................................... $ 23,723 $ 23,266 $ 70,299 $ 68,968
Property operating expenses ......................... (13,385) (12,169) (37,767) (34,635)
-------- -------- -------- --------
Net operating income .............................. $ 10,338 $ 11,097 $ 32,532 $ 34,333
======== ======== ======== ========
Net operating income as a percentage of rental revenue 43.6% 47.7% 46.3% 49.8%
Average monthly rental revenue per unit .............. $ 677 $ 664 $ 669 $ 656
Apartment communities stabilized during period:
Rental revenue ....................................... $ 4,102 $ 1,737 $ 8,901 $ 3,332
Property operating expenses .......................... (2,117) (864) (4,298) (1,545)
-------- -------- -------- --------
Net operating income .............................. $ 1,985 $ 873 $ 4,603 $ 1,787
======== ======== ======== ========
33
Net operating income for our 53 same store stabilized apartment communities
decreased $759,000, or 6.8%, in the third quarter of 2003 compared to the third
quarter of 2002 and decreased $1.8 million, or 5.2%, in the first nine months of
2003 compared to the first nine months of 2002. These decreases were mostly due
to increases in property operating expenses: 10% for the third quarter of 2003
compared to the third quarter of 2002 and 9% for the first nine months of 2003
compared to the first nine months of 2002. These increases in property operating
expenses were partially offset by increases in rental revenues: 2% for both the
three and nine month periods in 2003 compared to the same periods in 2002. The
ratio of net operating income to rental revenue for these properties decreased
4.1% in the third quarter of 2003 compared to the third quarter of 2002. This
ratio decreased 3.5% in the first nine months of 2003 compared to the first nine
months of 2002. Increased property operating expenses included weather-related
costs (such as utilities and heavy snow removal), property taxes increased as
certain properties were reassessed fully since completion of construction, and
personnel, landscaping, and other costs incurred in connection with leasing
efforts.
Development Division
At September 30, 2003, less than 10% of our real estate assets were in the
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 nine months of 2003, the Development Division reported gross profit
of $12 million on the transfer of properties that had become stabilized (four
consolidated and two unconsolidated) to the Investment Division. Of this amount,
$6.4 million was reported in the third quarter of 2003. In the first nine months
of 2002, the Development Division reported net profit of $51.7 million on the
transfer of 11 consolidated and five unconsolidated properties to the Investment
Division upon the determination that they were stabilized.
There are three recently completed apartment communities in lease-up in the
Development Division as of September 30, 2003. Two of these properties with a
total of 638 units are now stabilized and will be reported in the Investment
Division beginning in the fourth quarter of 2003. The Development Division has
no other apartment communities currently under construction. However, in October
2003, we purchased a 19-acre tract of land in Murfreesboro, Tennessee, on which
we plan to build a 262-unit rental apartment community. Additionally, we have
plans to build 90 affordable rental apartments in Hoboken, New Jersey, in 2004.
34
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.
35
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 $262,000 to date. Remediation efforts are underway at a total estimated
cost of $850,000, of which $700,000 has been incurred to date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1. Rule 13a-14(a) certification by William S. Friedman, President
and Chief Executive Officer.
31.2. Rule 13a-14(a) certification by Erin D. Pickens, Executive
Vice President and Chief Financial Officer.
32. Section 1350 certifications by William S. Friedman, President
and Chief Executive Officer, and Erin D. Pickens, Executive
Vice President and Chief Financial Officer.
(b) Reports on Form 8-K:
None.
36
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: November 10, 2003 By: /s/ William S. Friedman
----------------------------- ----------------------------
William S. Friedman
President, Chief Executive
Officer, Director, and
Chairman of the Board of
Directors
Date: November 10, 2003 By: /s/Erin D. Pickens
----------------------------- ----------------------------
Erin D. Pickens
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
37
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
EXHIBIT 31.1 Rule 13a-14(a) certification by William S. Friedman, Page 39
President and Chief Executive Officer
EXHIBIT 31.2 Rule 13a-14(a) certification by Erin D. Pickens, Page 40
Executive Vice President and Chief Financial Officer
EXHIBIT 32 Section 1350 certifications by William S. Friedman, Page 41
President and Chief Executive Officer, and
Erin D. Pickens, Executive Vice President
and Chief Financial Officer
38