Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO_____________________
COMMISSION FILE NUMBER 0-22999
-------
TARRAGON REALTY INVESTORS, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 94-2432628
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1775 BROADWAY, 23RD FLOOR, NEW YORK, NY 10019
- ---------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 949-5000
----------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
10% CUMULATIVE PREFERRED STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes _X_ No ___
The aggregate market value of the shares of voting and non-voting common equity
held by non-affiliates of the Registrant, computed by reference to the price of
the last trade as reported by the National Association of Securities Dealers
Automated Quotation System as of June 30, 2003 (the last business day of
registrant's most recently completed second fiscal quarter) was an aggregate
value of $92,679,135 based upon a total of 6,369,700 shares held as of June 30,
2003, by persons believed to be non-affiliates of the Registrant. The basis of
this calculation does not constitute a determination by the Registrant that any
persons or entities are affiliates of the Registrant as defined in Rule 405 of
the Securities Act of 1933, as amended. As of March 4, 2004, there were
14,954,739 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission for Registrant's 2003 Annual Meeting of Shareholders to be held in
June 2004 are incorporated by reference into Part III.
1
INDEX TO
ANNUAL REPORT ON FORM 10-K
Page
PART I
Item 1. Business.............................................................. 3
Item 2. Properties............................................................ 18
Item 3. Legal Proceedings..................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders................... 28
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.................................... 29
Item 6. Selected Financial Data............................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............ 49
Item 8. Financial Statements and Supplementary Data........................... 50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 98
Item 9A. Controls and Procedures............................................... 98
PART III
Item 10. Directors and Executive Officers of the Registrant.................... 99
Item 11. Executive Compensation................................................ 99
Item 12. Security Ownership of Certain Beneficial Owners and Management........ 99
Item 13. Certain Relationships and Related Transactions........................ 99
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...... 100
Signature Page........................................................ 102
2
PART I
ITEM 1. BUSINESS
GENERAL
Tarragon Realty Investors, Inc., is a real estate owner, developer, and builder
of homes with over 30 years of experience developing, renovating, operating, and
selling properties. During 2003, we delivered 282 homes with an average price of
$187,000 per home and 29 single-family lots with an average price of $43,000 per
lot. At December 31, 2003, we had 18 residential communities with 2,257 homes or
home sites under development in four states and a backlog of signed contracts
for 774 homes valued in excess of $200 million. As of December 31, 2003, we also
had interests in 14,345 rental apartment units in 62 residential communities and
1.2 million square feet of office and retail space, located in 14 states,
primarily in Florida, Connecticut, and Texas. For more detailed information
about our rental and for-sale communities, please see ITEM 2. "PROPERTIES."
We operate through two business segments:
o Homebuilding Division develops, renovates, builds, and markets homes
in high-density, in-fill locations and in master planned communities
and develops and sells lots in single-family subdivisions.
o Investment Division owns, acquires, and operates residential and
commercial rental properties, including almost 5,000 garden apartment
homes in communities built by Tarragon.
Over the past seven years, we have substantially increased our investment in
homebuilding and development. Homebuilding is now the main focus of our business
in terms of financial investment and human capital. Over two-thirds of our
general overhead is now directly related to the homebuilding division. Because
of the long lead time for large projects in urban areas, we are just starting to
recognize revenues from some of our earliest projects, which began in 2000. In
2003, our for-sale homebuilding revenue reached $154 million (including
unconsolidated ventures) compared to $26 million in 2002. Beginning this year,
we report development of for-sale housing and development of rental communities
together because of their many similarities in terms of personnel, procedures
and skill sets.
Operationally, there is substantial beneficial overlap between the two
divisions, and each is stronger and more efficient because of the presence of
the other. Our asset and property managers who oversee the Investment Division
provide our developers with real time market data and participate actively in
decisions relating to the development of rental and, to a lesser extent,
for-sale properties. We believe that this close involvement of property managers
contributed to the success of Tarragon's most recent rental developments. The
Vintage Cottage Apartments in Orlando, Florida, which opened for rental in April
2003, achieved higher than forecast rents and a quicker lease-up, in part
because of suggested product improvements from the Investment Division. On the
other hand, the Homebuilding Division has contributed its expertise in
purchasing appliances, carpeting, hardware, and cabinets to lower costs for the
Investment Division. Furthermore, executives and engineers in the Homebuilding
Division have materially helped reduce capital expenditures in the Investment
Division through better planning and bidding renovation contracts.
A description of the two segments and financial and other related information
can be found in NOTE 14. "SEGMENT REPORTING" in the Notes to Consolidated
Financial Statements found at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA."
3
OBJECTIVES AND INVESTMENT POLICIES
Our business objective is to increase stockholder value through the application
of management skill, experience, market knowledge, and strategic deployment of
capital. We describe below the strategies we employ in each of our business
segments to achieve this objective.
Homebuilding Division
Our homebuilding division concentrates on five distinct product types.
o Luxury mid- and high-rise condominiums. These properties are designed
from the ground up to offer a luxurious life-style to discriminating
purchasers. For example, homes at Las Olas River House, a 42 story,
1.2 million square foot tower in downtown Ft. Lauderdale, FL, feature
high ceilings, oversized rooms, opulent bathrooms, and prices ranging
from $300,000 to over $5,000,000. Development, construction, and sale
of these projects takes three to five years or more. Besides Las Olas
River House, with 287 apartments, Tarragon's projects in this category
include Alta Mar, with 131 units and a marina in Ft. Myers, Florida,
The Metropolitan in Sarasota, Florida, with 124 units all over 3,400
square feet, and several buildings in northwestern Hoboken and
Edgewater, New Jersey.
o Condominium conversions. For these properties, Tarragon acquires a
residential rental property either from the Investment Division or
from a third party and sells the individual apartments. Before
selling, Tarragon typically renovates or rebuilds the property to make
it attractive to homebuyers. Condominium conversions typically produce
revenue within twelve months. Prices in Tarragon's condominium
conversions range from $130,000 to $890,000, depending largely on
size, location, and view. Tarragon's active conversion projects
include Tuscany on the Intracostal in Boynton Beach, FL, which
Tarragon purchased in June 2003, 5600 Collins Avenue in Miami Beach,
Florida, which is sold out except for four penthouse apartments, and
Pine Crest in Ft. Lauderdale, Florida. The latter two projects were
previously in the Tarragon Investment Division. Tarragon expects to
acquire a fourth Florida condominium conversion property with 231
apartments in March 2004. Tarragon's property managers are helpful in
identifying and evaluating opportunities in this area. They also
manage conversion properties until a majority of the apartment homes
are sold.
o Townhomes, carriage houses, and low-rise condominiums. Tarragon's
projects in this area typically involve locations adjacent to fully
developed areas and include Venetian Bay in Orlando, Florida,
Cheekwood homes in Nashville, Tennessee, and Warwick Grove in Warwick,
New York. Prices range from $149,000 for a three bedroom, fully
furnished holiday villa at Venetian Bay near Disney World in Orlando,
Florida, to over $1,000,000 for a carriage house adjacent to Warner
Park in Nashville, Tennessee. We also include in this product type
age-restricted developments such as Warwick Grove, a 214 home,
traditional new development in Warwick, New York.
o Development of low- and mid-rise rental apartment communities.
Tarragon typically builds rental properties to add to the Investment
Division on completion and rent-up. These include luxury garden
apartments, such as the 296 unit Vintage Cottage Apartments in
Orlando, Florida, and the 390 unit Vintage at Abacoa in Jupiter,
Florida. Tarragon is also the developer for 1118 Adams, a 90 unit
affordable tax credit project in Hoboken, New Jersey.
4
o Renovation and repositioning of older, rental apartments. Tarragon and
its senior executives have specialized in these projects for several
decades. Tarragon's Connecticut apartment portfolio is an example of
this type of activity. Tarragon and its partners acquired eleven
apartment communities between 1997 and 1999, all of which suffered
from neglect, poor management, and physical obsolescence. Through
well-coordinated physical improvements, sensitive management, and
aggressive marketing, these older properties generated sustained
increases in net operating income of 16% annually from their
acquisition through December 31, 2003. Tarragon continues to look for
promising "turn around" properties for acquisition in Connecticut,
Florida, and Texas.
Leveraging Experience and Relationships
Our homebuilding activities have grown out of the experience of Tarragon
executives in commercial and residential development, real estate finance, and
property management. For example, our top three executives, William S. Friedman,
Robert Rohdie, and Robert Rothenberg, have a collective 80 years' experience
developing and repositioning residential and commercial properties. The
expertise and industry contacts developed through these activities is
particularly relevant to the development of high density, in-fill residential
communities which often requires a complex blend of political, design,
construction, finance, and marketing skills. Many of Tarragon's developments are
part of governmental redevelopment plans. Our high-density projects in Hoboken,
New Jersey, Ft. Lauderdale and Sarasota, Florida and Warwick, New York, for
example, all involved extensive interaction with local officials whose approval
was required for many different aspects of these developments. Such projects
also involve substantial community input and review by many different
governmental agencies. We believe that the complexity and cost of the planning
and approval process gives an advantage to well-financed and experienced
developers such as Tarragon. In addition, we believe local officials often
prefer to deal with developers who can demonstrate staying power, a history of
success, and the transparency of a publicly held company.
Target Marketing
Many of our communities are targeted at highly defined market segments. Our
Warwick, New York, community is designed for and exclusively marketed toward
adults, age 55 or older, presently residing in a single-family home within 15
miles of Warwick. Our luxury condominiums in Hoboken are marketed to young
professionals primarily under 30. Other communities in planning will be targeted
toward even more defined market segments in keeping with the more varied
lifestyles often associated with the urban areas in which most of our
homebuilding is concentrated.
We believe the urban in-fill segment of the homebuilding business will continue
to see rapid growth due to a number of factors. Scarcity of suburban land for
development and increased restrictions and controls on growth in many areas are
channeling a large share of new construction into urban areas. Demographic
trends of increased immigration, smaller households, and later marriages produce
increased demand in urban as opposed to suburban areas. At the same time, many
young people in urban areas such as Hoboken, New Jersey, who might ordinarily
have rented are eager prospects for ownership because of the recent investment
performance of residential real estate and the availability and low cost of
mortgage financing.
Tarragon has several competitive advantages in the urban in-fill markets in
which we have chosen to compete. First, Tarragon's executives are familiar with
the greater complexity of doing business in these markets, and
5
Tarragon can make the greater investment that such complexity requires with a
greater sense of certainty of success. Second, as a relatively small public
company, Tarragon's senior executives are able to be personally involved in
prospective projects from the outset, which is especially effective when dealing
with sellers and local political decision makers.
Finally, the fact that Tarragon is active in many different property types is
often an advantage. In Hoboken, for example, the city council wanted to include
affordable housing in the northwest Hoboken redevelopment zone. Tarragon's
experience as owner of over 1,000 affordable apartment units gave us a decided
advantage over our competitors, who had no such experience. This was one factor
that led to the designation of Tarragon and its partners as sole redeveloper of
a portion of the northwest Hoboken redevelopment zone by the city. This
designation entitles us, for those properties we do not already control, to
request the city to exercise eminent domain on our behalf. Increasingly,
most large projects in urban areas involve a combination of uses. Our experience
owning and occasionally developing retail and office properties is valuable in
evaluating opportunities to develop mixed use projects and gives more
credibility to our proposals.
Site Selection, Design, and Construction
We generally contract to acquire land for development subject to or after
receiving zoning and other approvals to reduce development related risk and
preserve capital. Prior to closing the purchase, we will take our design through
the approval process, or we will assist the owner in doing so. For our projects
in less supply-constrained markets, we seek sites that have unique features and
amenities, such as golf courses, nature preserves, water views, and proximity to
employment and shopping, in markets where we have knowledge and management
expertise. For our projects in supply-constrained markets, like Hoboken or
Edgewater, New Jersey, we are more concerned with obtaining sites with a cost
which makes development economically attractive.
Our strategy is to use creativity and flexibility in design to produce the most
cost-efficient and profitable design for each location. We commence the design
and planning by conducting extensive research relating to the market, customer
base, product requirements, pricing, and absorption. Our research effort is
directed by a dedicated project manager specializing in mid- or high-rise
development in conjunction with our in-house marketing department. Based on the
results of this research, we organize an experienced team of architects,
engineers, and specialty consultants, including our in-house marketing and sales
professionals, under the leadership of the project manager to create the design
of the structure. We also contract for the services of an experienced third
party general contractor during the early stages of design to assist in design,
value engineering, and the estimation of construction costs. We design our
communities with amenity packages that meet the lifestyle needs of our targeted
market. These amenities encompass such diverse offerings as luxurious
clubhouses, state-of-the-art fitness centers, indoor basketball courts, resident
business centers, and exercise trails. We retain bonded general contractors and
assign full-time on-site project supervisors to monitor construction progress
and quality. Property management is involved in each rental project from its
planning stages to ensure a smooth transition into leasing and operations.
Marketing and Sale Strategy
We use a variety of techniques to attract prospective purchasers of our for-sale
homes. Targeting first-time, move-up, pre-retirement, and affluent second
homebuyers, we develop and execute multi-media marketing plans for our homes and
communities. We employ an experienced staff of marketing professionals who
supervise and coordinate third-party copywriters, creative art directors, and
graphic designers who are responsible for the design and development of most of
our marketing materials and advertising messages, including newspaper and
magazine print, direct mail, and billboards. Much of our traffic is generated
from our property-specific web sites which give future residents and sales
prospects a virtual tour of our property, as well as descriptions of the
amenities, floor plans, and area information. Brochures, scaled architectural
models, walk-in kitchen and bathroom models, and other marketing materials are
used to assist sales associates in explaining
6
and demonstrating the residences to be built. We use an in-house sales team or
an outside marketing and sales team as dictated by each market.
We commence our sales program prior to completion of the construction of our
communities. Purchasers enter into sales contracts for their respective homes
and are required to pay us a deposit of 10% to 20% of the purchase price.
Purchasers are entitled to cancel purchase agreements within specified periods
after execution in accordance with local statutory requirements. After the
expiration of the statutory rescission period, the deposit becomes
non-refundable. However, purchasers generally have no obligation beyond their
deposit in the event of default.
In certain instances, we take non-binding reservations for our homes prior to
state approval of our condominium documents. These reservations require a
deposit, which is refundable. Upon approval of our condominium documents, we
convert our reservations to sales contracts. We use the reservation system
strategically to monitor pent-up demand for our homes, fine-tune our asking
prices, and get an early read on the market preferences as to unit types and
upgraded decorative finishes.
The closing of a home usually occurs 60-90 days after the later of the contract
date or notification that the construction of the home is complete and has the
required local statutory occupancy approvals.
In 2003, we formed Tarragon Mortgage Company to provide our homebuyers
competitive financing. Tarragon Mortgage acts as a mortgage broker and agent of
various lenders but does not itself fund or hold any mortgages. We began closing
loans in 2004.
Financing
We generally finance our development activities through acquisition,
development, and construction loans, with the required equity from internally
generated funds. These loans generally require a payment guaranty from Tarragon
and may require a minimum number of executed sales contracts prior to funding.
Mortgage financing proceeds and proceeds from the sale of properties generated
by the Investment Division have also been significant sources of funding for our
homebuilding activities to date. See the discussion below in "Disposition
Strategy" and "Financing Strategy" for the Investment Division.
Investment Division
Our investment portfolio of stabilized apartment communities and commercial
properties is the largest segment in terms of assets. The Division has 12,805
stabilized apartments (4,374 owned through unconsolidated partnerships and
joint ventures) located primarily in Florida, Connecticut, and Texas. The
apartments range from one to thirty-eight years old, and the average age of the
portfolio is fourteen years. Over the past six years, Tarragon has developed
almost 5,000 new market-rate apartments for its own portfolio.
New rental communities are typically targeted to the upscale renter in suburban
locations. Amenities in these communities range from elegant clubhouses,
swimming pools, and indoor recreational courts, to state-of-the-art fitness
centers and community business centers.
We invest capital in the balance of our portfolio to maximize economic
performance of the properties. Many of the older properties have been upgraded
and repositioned over the past ten years to meet the needs of the middle-market
renters. Substantially all of our 2,549 Connecticut apartments, for example,
which average over 30 years old, have been upgraded and repositioned over the
last six years.
7
Our Investment Division also includes approximately 1.2 million square feet, of
which 267,000 square feet are owned through unconsolidated partnerships and
joint ventures, in seven office buildings and ten retail properties. We believe
our experience with commercial properties enables us to evaluate and undertake
mixed-use developments such as our proposed 240-unit condominium and 170,000
square foot shopping center in East Hanover, New Jersey.
Funds generated by the operation, sale, or refinancing of properties in the
investment portfolio support our overhead and finance our development
activities. Our goal is to increase revenue and enhance the value of our
investment portfolio through intensive management and consistent capital
improvements.
Acquisition Strategy
We seek to improve the quality of our overall investment portfolio through
selective and opportunistic acquisitions. We expect the number of acquisitions
to vary greatly depending on market conditions. We generally target investment
opportunities in markets where we already have a presence both for the
anticipated return from the asset and to enhance the efficiency of our existing
portfolio. Such opportunities include under-managed and under-performing
apartment communities for which our capital investment and management attention
are expected to result in higher occupancy and rents. In evaluating potential
acquisitions, we place the greatest weight on our subjective forecast of the
future return on investment, adjusted for risk. We adjust our investment focus
from time to time to adapt to changes in markets and phases of the real estate
cycle and to take advantage of market inefficiencies. The actual number and mix
of types of income-producing real estate and real estate interests we acquire
will therefore depend on market conditions and other circumstances existing at
the time of acquisition, as well as the availability of capital. See "Financing
Strategy" below. During the past three years, we have purchased only two
investment apartment communities. However, we continue to seek out and evaluate
Investment Division opportunities.
Management Strategy
We manage our apartment communities with a focus on adding asset value rather
than maximizing cash flow. Capital improvement decisions are based on the
expected return on investment. Engineers in our Homebuilding Division regularly
plan and supervise capital projects at our rental properties.
We have implemented programs to optimize revenue generated by our properties. We
utilize daily value pricing and lease inventory management in order to optimize
rental revenue. We have also developed programs to enhance ancillary income from
cable television, telephone service, high-speed internet services, upgraded
laundry facilities, and vending machines.
We utilize purchasing scale by taking advantage of our homebuilding pricing and
negotiating skills, in addition to utilizing national and/or regional accounts
for bulk purchasing to benefit from favorable pricing offered by such programs.
Disposition Strategy
Selective dispositions have been a part of our strategy to create an efficient
investment portfolio and to provide another source of capital for homebuilding
activities. We seek to sell properties that are not strategically located and
for which alternate investment of the sale proceeds will produce higher returns
than those we would capture by continuing to hold the property. Please see the
discussion under "Liquidity and Capital Resources" in Management's Discussion
and Analysis of Financial Condition and Results of Operations for information
about sales of properties during the past three years.
8
Financing Strategy
We finance acquisitions and capital improvements largely through non-recourse
mortgages, internally generated funds, and, to a lesser extent, property sales.
We expect these sources to provide the bulk of funds for future investments.
Nevertheless, the availability and cost of credit are key factors in our ability
to continue to make new investments.
We may acquire properties which are subject to existing indebtedness and assume
such indebtedness. More often, however, we finance our acquisitions through new
mortgage loans. If we cannot obtain financing on acceptable terms or such
financing is otherwise unavailable, we may purchase a property for cash with the
intent of obtaining a mortgage loan for a portion of the purchase price at a
later time, or we may borrow on our existing lines of credit to fund short-term
liquidity needs. Please see the discussion under "Liquidity and Capital
Resources" in Management's Discussion and Analysis of Financial Condition and
Results of Operations for information about our borrowing activities during the
past three years. Also, please see NOTE 4. "NOTES, DEBENTURES, AND INTEREST
PAYABLE" in the Notes to Consolidated Financial Statements for information about
our mortgages and other notes payable.
We regularly refinance assets in our investment portfolio in order to monetize
the increased property value created through consistent capital improvements and
aggressive management. In the past few years, the proceeds of such financings
have been used in homebuilding activities. For apartment communities which may
be future candidates for conversion to condominium homes for sale, we use
floating rate financing to allow for flexibility in repayment.
CAPITAL MARKET TRANSACTIONS
We may offer debt or shares of our common or preferred stock to the public to
raise capital for general corporate purposes, including, without limitation,
repayment of debt, the acquisition of additional properties, and the development
of currently planned or future projects, or in private transactions in exchange
for property. In January 2001, Tarragon issued 25,000 shares of 10% Cumulative
Preferred Stock in connection with our acquisition of Accord Properties
Associates, LLC. See NOTE 15. "ACQUISITION OF ACCORD PROPERTIES ASSOCIATES, LLC"
in the Notes to Consolidated Financial Statements. In July 2003, Tarragon issued
195,815 shares of 10% Cumulative Preferred Stock in connection with the purchase
of homebuilding inventory. See NOTE 6. "10% CUMULATIVE PREFERRED STOCK" in the
Notes to Consolidated Financial Statements for more information about the
preferred stock.
COMPETITION
The homebuilding industry and real estate development is highly competitive. We
compete against numerous developers and others in the real estate business in
and near the markets where our communities are located. Therefore, we may be
competing for investment opportunities, financing, available land, and potential
buyers with entities that may possess greater financial, marketing, or other
resources. Nevertheless, our size permits our most senior, most experienced
executives to participate directly in acquisition negotiations and decisions.
Contact with ultimate decision makers is particularly important in convincing
sellers that their acceptance of an offer from us will result in a completed
transaction. Moreover, the speed with which we are able to act is often a factor
in closing a purchase.
Ownership of rental properties in which we invest is highly fragmented among
individuals, partnerships, and public and private entities. No single entity or
person dominates the market for such opportunities. We believe
9
that there is and will continue to be a strong demand for housing in the markets
where we seek additional investments and that attractive investment
opportunities will continue to be available.
RISKS RELATED TO TARRAGON
WE ARE HIGHLY LEVERAGED AND MAY NOT BE ABLE TO MEET OUR DEBT SERVICE
OBLIGATIONS.
We had total indebtedness at December 31, 2003, of approximately $469 million
plus $394 million of debt in unconsolidated partnerships and joint ventures.
Substantially all of our assets have been pledged to secure debt. These
borrowings increase our risk of loss because they represent a prior claim on our
assets and require fixed payments regardless of profitability. To service this
debt, we will have to use cash flow from operations. Our highly leveraged
position makes us vulnerable to changes in economic conditions and may limit our
ability to capitalize on significant business opportunities in the future.
OUR NET INCOME HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO DO SO IN THE
FUTURE.
Although our total annual revenues have increased between 1999 and 2003, we have
periodically experienced significant increases in our interest and depreciation
expenses resulting from increases in mortgage indebtedness and property
acquisitions. As a result and as reflected in our historical financial
statements, unless such increased expenses are offset by gains from sales of
real estate, our net income has tended to fluctuate from year to year during
such five-year period. There can be no assurance that our future net income will
continue to increase on a steady basis over current levels, especially as we
expect to continue to actively engage in property development and mortgage
refinancing activities.
As of December 31, 2003, we had approximately $275 million of variable rate debt
plus $201 million of variable rate debt in unconsolidated partnerships and joint
ventures. We may incur additional variable rate indebtedness in the future.
Accordingly, increases in interest rates could materially increase our interest
expense, which could adversely affect our results of operations and financial
condition.
WE MAY REQUIRE SIGNIFICANT ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE ON
COMMERCIALLY FAVORABLE TERMS, IF AT ALL.
We depend primarily on external financing to fund the growth of our business.
Although we currently have adequate cash resources and positive cash flow, we
intend to use substantial portions for:
o new construction and development;
o condominium conversions;
o property acquisitions; and
o working capital.
In addition, we require substantial cash flow to meet interest payment
obligations on indebtedness and other borrowings. If we are unable to generate
sufficient cash flow from operations to satisfy these obligations, or if we are
required to make any substantial principal repayments, we may have to refinance
some or all of our debt or sell assets. If we default on secured indebtedness,
the lender may foreclose and we could lose our entire investment in the asset
securing the loan.
We cannot predict whether additional sources of financing will be available in
the future or the cost of such financing. Our access to debt or equity financing
depends on banks' willingness to lend and on conditions in the capital markets,
and we may not be able to secure additional sources of financing on commercially
acceptable terms, if at all.
10
WE MAY NEED TO SELL PROPERTIES FROM TIME TO TIME FOR CASH FLOW PURPOSES.
Because of the lack of liquidity of real estate investments generally, our
ability to respond to changing circumstances may be impaired. Real estate
investments generally cannot be sold quickly. In the event that we must sell
assets to generate cash flow, we cannot predict whether there will be a market
for those assets in the time period we desire or need to sell them, or whether
we will be able to sell them at a price that will allow us to fully recoup our
investment. We may not be able to realize the full potential value of our
assets, and we may incur costs related to the early pay-off of the debt secured
by such assets.
WE ACQUIRE NEW PROPERTIES FROM TIME TO TIME.
We regularly consider acquiring additional properties. Acquisitions involve
several risks, including but not limited to the following:
o Acquired properties may not perform as well as we expected or ever
become profitable.
o Improvements to the properties may ultimately cost significantly more
than we had estimated.
o The costs of evaluating properties that are not acquired cannot be
recovered.
OUR HIGH DEBT LEVERAGE MAY PREVENT US FROM RESPONDING TO CHANGING BUSINESS AND
ECONOMIC CONDITIONS.
Our high degree of debt leverage could limit our ability to obtain additional
financing or adversely affect the market price of our common stock.
We have a relatively high ratio of debt, a majority of which is non-recourse
mortgage debt, to total market capitalization, which was approximately 1.37 at
December 31, 2003, based on the market value of our outstanding common and
preferred stock and outstanding mortgage and other debt at that date. Our high
leverage may adversely affect our ability to obtain additional financing for
working capital, capital expenditures, acquisitions, development, or other
general corporate purposes and may make us more vulnerable to a downturn in the
economy generally.
We do not expect to repay a substantial amount of the outstanding principal of
our debt prior to maturity or to have funds on hand sufficient to repay this
debt at maturity. As a result, it will be necessary for us to refinance our debt
through new debt financing or through additional equity offerings. If interest
rates are higher at the time of refinancing, our interest expense would
increase, which would adversely affect our results of operations and cash flow.
In addition, in the event we were unable to secure refinancing on acceptable
terms, we might be forced to sell properties on unfavorable terms, which could
result in the recognition of losses and could adversely affect our financial
position, results of operations, and cash flows. If we were unable to make the
required payments on, or refinance when due, any debt secured by a mortgage on
one of our properties, the mortgage lender could take that property through
foreclosure and, as a result, we could lose income and asset value.
We cannot assure you that we will be able to refinance this debt, obtain
renewals or replacement of credit enhancement devices, such as a letter of
credit, or otherwise obtain funds by selling assets or by raising equity. Our
inability to repay or refinance when the debt becomes due could cause the
mortgage lender to foreclose on those properties.
As of the date of this annual report on Form 10-K, we have no mortgages that are
past their stated maturity date. From time to time, a non-recourse mortgage may
become past due, and, if we are unsuccessful in negotiating an extension or
refinancing, the lender could commence foreclosure proceedings.
11
ANY RISE IN INTEREST RATES WOULD INCREASE OUR INTEREST COSTS.
An increase in interest rates will increase the interest expense associated with
our floating-rate debt and the refinancing of any fixed-rate debt originally
financed at a lower rate. At December 31, 2003, including properties accounted
for on the equity method, a 100 basis point increase in interest rates would
have increased the pre-tax interest cost of our variable-rate debt by
approximately $3.2 million (including both mortgage debt and corporate
borrowings) at our share.
THERE IS RISK IN USING DEBT TO FUND PROPERTY ACQUISITIONS.
We have used debt to acquire properties and expect to continue to do so in the
future. Although the use of debt (known as "leverage") is common in the real
estate industry, our use of debt to acquire properties exposes us to financial
risks. If the occupancy of the properties in our Investment Division drops
significantly, and we do not have sufficient cash to pay principal and interest
on our mortgage debt, we could default on our mortgage obligations. If for any
reason we fail to make our mortgage payments, lenders could declare us in
default and foreclose on our properties.
WE ARE DEVOTING INCREASING RESOURCES TO THE DEVELOPMENT OF NEW PROJECTS.
We plan to continue developing new projects as opportunities arise in the
future. Development and construction activities entail a number of risks,
including but not limited to the following:
o We may abandon a project after spending non-recoverable time and money
determining its feasibility.
o Construction costs may materially exceed our original estimates.
o The revenue from a new project may not be enough to make it profitable
or generate a positive cash flow.
o We may not be able to obtain financing on favorable terms for
development of a property, if at all.
o We may not complete construction and lease up on schedule, resulting
in increased development costs.
o We may not be able to obtain, or may be delayed in obtaining,
necessary governmental permits.
WE PLAN TO DEVOTE INCREASING AMOUNTS OF CAPITAL TO HOMEBUILDING AND CONDOMINIUM
CONVERSIONS.
Expansion into homebuilding and condominium conversion is a relatively new
segment of our operations. It involves risks associated with the sale of
property to individuals, in addition to all the other risks of construction and
development. Condominium conversions require substantial legal processes and
costs, which may not be recovered. Some units may be difficult to sell,
requiring a substantial discount from our asking price. We may be left with
unsold inventory that cannot be rented, and the expenses and carrying costs
associated with ownership of those units will continue.
PROPERTY OWNERSHIP THROUGH PARTNERSHIPS AND JOINT VENTURES GENERALLY LIMITS OUR
CONTROL OF THOSE INVESTMENTS.
We have investments in 24 unconsolidated partnerships or joint ventures. The
outside partners have significant participating rights, as defined by the
Financial Accounting Standards Board's Emerging Issues Task Force in its 96-16
Abstract, or important rights, as defined by the American Institute of Certified
Public Accountants'
12
Statement of Position 78-9. Partnership or joint venture investments involve
risks not otherwise present for investments made solely by us, including the
possibility that our partners might become bankrupt, might have or develop
different interests or goals than we do, or might take action contrary to our
instructions, requests, policies, or investment objectives. Another risk of
partnership investments is the possibility of an impasse on decisions, such as a
sale or refinance, or disputes with our partners over the appropriate pricing
and timing of any sale or refinance. There is no limitation under our
organizational documents as to the amount of funds that may be invested in
partnerships or joint ventures.
THE REGIONAL CONCENTRATION OF OUR ASSETS MAY INCREASE THE EFFECTS OF ADVERSE
TRENDS IN THOSE MARKETS.
A substantial number of our assets are located in Florida, Connecticut, New
Jersey, and Texas. Due to this geographic concentration, a deterioration in
economic conditions in these specific markets could have a materially adverse
effect on our business.
OUR PROPERTIES MAY HAVE ENVIRONMENTAL CONTAMINATION.
Various federal, state, and local environmental laws, ordinances, and
regulations subject property owners or operators to liability for the costs of
removal or remediation of hazardous or toxic substances on real property. These
laws often impose liability without regard to whether the owner or operator knew
of, or was responsible for, the presence of the hazardous or toxic substances.
The presence of, or the failure to properly remediate, such substances may
adversely affect the value of a property, as well as our ability to sell or rent
it or to borrow using that property as collateral.
RISKS RELATED TO OUR INDUSTRY
OUR BUSINESS OVERALL IS SUBJECT TO ALL OF THE RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY.
Tarragon is subject to all the risks incident to investment in real estate, many
of which relate to the general lack of liquidity of real estate investments,
including, but not limited to:
o changes in general or local economic conditions;
o changes in interest rates that may make our ability to satisfy our
debt service requirements materially more burdensome;
o lack of availability of financing that may render the purchase, sale,
or refinancing of a property more difficult or unattractive;
o changes in real estate and zoning laws, which may restrict, delay, or
prevent planned developments;
o increases in real estate taxes and insurance costs;
o federal or local economic or rent control; and
o floods, earthquakes, and other similar natural disasters.
OUR BUSINESS IS HIGHLY COMPETITIVE.
The real estate business is highly competitive, and we compete with numerous
entities engaged in real estate activities that have investment objectives
similar to ours, greater financial resources, and better name recognition than
we do. This competition may result in increased prices for suitable investments
and may impair our ability to make acquisitions or develop projects on favorable
terms in the future.
13
SOME OF OUR POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE.
We believe that the real estate assets we own are adequately covered by
insurance. However, certain types of losses, generally of a catastrophic nature,
may be uninsurable or not economically insurable. These excluded risks generally
include war, earthquakes, floods, terrorism, environmental liabilities, and
punitive damage judgments. If any of these kinds of losses occur and are not
covered by insurance, our business could be materially adversely affected.
RISKS CONCERNING CONTROL BY SENIOR MANAGEMENT
OUR PRINCIPAL STOCKHOLDERS EFFECTIVELY CONTROL CORPORATE ACTIONS.
William S. Friedman, our Chairman of the Board, President, and Chief Executive
Officer, and his wife, Lucy N. Friedman, our principal stockholder, together
with members of their family, control approximately 44.5% of our outstanding
common stock. Accordingly, Mr. and Mrs. Friedman and their family are in a
position to elect a number of the members of our Board of Directors and have
substantial influence over our management and affairs. In addition, they
effectively have veto power over a broad range of corporate actions requiring
more than a simple majority vote presently contained in our Articles of
Incorporation, including, without limitation, mergers, business combinations,
change-in-control transactions, substantial asset sales, and other similar and
extraordinary corporate transactions that can affect the value of our company.
WE HAVE AND CONTINUE TO ENGAGE IN TRANSACTIONS WITH RELATED PARTIES.
We have engaged in the past, and continue to engage currently, in transactions
with related parties. These related party transactions include ongoing financial
arrangements with several members of our Board and senior management, including
a $20 million unsecured line of credit facility extended to us by affiliates of
Mr. and Mrs. Friedman, which was approved by our Board of Directors. Our
Articles of Incorporation generally permit related party transactions if
approved by a majority of our independent directors.
OUR GOVERNING DOCUMENTS CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE CONTROL OF TARRAGON.
Our Articles of Incorporation contain provisions designed to discourage attempts
to acquire control of Tarragon by merger, tender offer, proxy contest, or
removal of incumbent management without the approval of our Board of Directors.
As a result, a transaction which otherwise might appear to be in your best
interests as a stockholder could be delayed, deferred, or prevented altogether,
and you may be deprived of an opportunity to receive a premium for your shares
over prevailing market prices. The provisions contained in our Articles of
Incorporation include:
o the requirement of an 80% vote to make, adopt, alter, amend, change,
or repeal Tarragon's Bylaws or certain key provisions of Tarragon's
Articles of Incorporation that embody, among other things, the
aforementioned anti-takeover provisions;
o the requirement of a 66.66% super-majority vote for the removal of a
director from the Board of Directors and certain extraordinary
transactions; and
o the inability of stockholders to call a meeting of stockholders.
Our Board of Directors and management control approximately 47.5% of our
outstanding common stock. In light of this, these anti-takeover provisions could
help entrench the Board of Directors and may effectively give our management the
power to block any attempted change in control of Tarragon.
14
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
In 2003, in connection with the condominium conversion of Pine Crest Village at
Victoria Park, we began and completed remediation of asbestos-containing
materials for a total cost of $800,000.
POLICY WITH RESPECT TO CERTAIN ACTIVITIES
In the past, we have held mortgages secured by real estate as investments,
although additions to mortgage notes receivable during the past three years have
been insignificant. Mortgage notes and interest receivable currently comprise
less than 1% of our assets. We have no present intention of investing in
additional real estate mortgages except to the extent that we may acquire a
mortgage for the purpose of foreclosing on the asset securing it and holding
that asset for investment. We also may make mortgage loans in connection with
the sale of our real estate.
We may invest in interests in other persons and securities of other issuers
engaged in real estate related activities. Although we do not currently have any
plans to invest in the securities of other issuers for the purpose of exercising
control, we may in the future acquire all or substantially all of the securities
or assets of other entities if that investment would be consistent with our
investment policies. We do not intend to underwrite securities of other issuers.
We do not intend that our investment activity require us to register as an
"investment company" under the Investment Company Act of 1940, and we would
divest securities before any such registration would be required.
We have in the past, and may in the future, repurchase or otherwise acquire our
own common stock on the open market or through private transactions. See NOTE 5.
"COMMON STOCK REPURCHASE PROGRAM" in the Notes to Consolidated Financial
Statement for a discussion of common stock repurchases during the past three
years and authorization for repurchases as of December 31, 2003.
We do not presently intend to make investments other than as described above,
although we may do so in the future. Our investment policies may be reviewed and
modified from time to time by our officers and directors without the vote of
stockholders. There are no limitations on the amounts we may invest in any
single property or development, or on the amounts we can borrow for such
purposes.
OTHER INFORMATION
We were incorporated in Nevada on April 2, 1997. We are the ultimate successor
in interest to Vinland Property Trust, a California business trust formed in
July 1973, and National Income Realty Trust, also a California business trust,
organized in October 1978.
Tarragon's common stock is traded on the NASDAQ National Market System under the
symbol "TARR." Our principal executive offices are located at 1775 Broadway,
23rd Floor, New York, New York 10019, and our telephone number is 212-949-5000.
Tarragon has approximately 430 employees, including 280 site-level property
employees (such as property managers and maintenance staff) and 150 corporate
employees.
Tarragon's web site address is www.tarragonrealty.com. Tarragon makes available,
free of charge, on its website its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
reports as soon as reasonably practicable after such material is electronically
filed with the Securities and Exchange Commission. Tarragon issues annual
reports containing audited financial statements to its common stockholders.
15
EXECUTIVE OFFICERS OF THE REGISTRANT
Part III of this 10-K is incorporated by reference to a proxy statement to be
filed with the SEC in connection with our annual meeting of stockholders to be
held in June 2004. Information required by Item 10. "DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT" with respect to Directors will be included in our
proxy statement. The following discussion sets for the information required by
Item 10. "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT" with respect to
Tarragon's executive officers.
William S. Friedman (60) has served as President, Chief Executive Officer and a
director of Tarragon since April 1997. He has also been Chairman of the Board of
Directors since December 2000. He previously served as a Trustee (from March
1988), Chief Executive Officer (from December 1993), President (from December
1988), acting Chief Financial Officer (from May 1990 to February 1991),
Treasurer (from August to September 1989), and acting Principal Financial and
Accounting Officer (from December 1988 to August 1989) of Vinland Property Trust
(until July 1997) and National Income Realty Trust (until November 1998).
Robert C. Rohdie (63) has been director of Tarragon and President and Chief
Executive Officer of Tarragon Development Corporation, a wholly owned subsidiary
of Tarragon responsible for real estate development and renovation projects,
since February 2000. Since 1988, Mr. Rohdie has also served as President of
Rohdhouse Investments, Inc., his wholly owned real estate development company,
which acted as Tarragon's joint venture partner in new construction and
development projects from 1997 through 2000. Mr. Rohdie has been an attorney at
law since 1965.
Robert P. Rothenberg (45) has been director and the Chief Operating Officer of
Tarragon since September 2000. Mr. Rothenberg has been the managing member of
APA Management LLC, a real estate investment and management company, since 1994.
He is also a Managing Member of Ansonia LLC, which together with Tarragon has
acquired over 2,600 apartments in the State of Connecticut since 1997. Mr.
Rothenberg was a co-managing member of Accord Properties Associates, LLC, which
managed the Ansonia portfolio in Connecticut and was acquired by Tarragon in
January 2001.
James M. Cauley, Jr. (41) joined Tarragon as President of Tarragon South
Development Corp., a wholly-owned subsidiary of Tarragon Realty Investors, Inc.,
responsible for the development of for-sale communities in Florida, in January
2004. Mr. Cauley previously served as President and Managing Partner of The
Altman Companies, a regional owner, developer, and manager of luxury apartment
communities, from December 2001 through February 2003, and as President of
Altman Management Company from September 1996 through December 2001.
Chris Clinton (57) has been Senior Vice President - Commercial Asset Management
of Tarragon and its predecessors, Vinland Property Trust and National Income
Realty Trust, since March 1994. He also served as Vice President of Vinland
Property Trust and National Income Realty Trust from October 1988 to March 1994.
Ron Leichtner (42) was appointed Vice President of Tarragon in March 2004. Mr.
Leichtner previously served as a Managing Director of Tarragon from September
2002 through March 2004. Mr. Leichtner served as the chief financial officer of
Batiz.com, a sales, marketing, and web design firm, and as the Managing Member
of WHB Tennis and Sport LLC from July 2001 through September 2002. He served as
Senior Vice President of Omni Development and its affiliate, Omni Funding
Corporation, a privately held finance and real estate development group, from
January 1985 through June 2001.
16
Kathryn Mansfield (43) has been Executive Vice President of Tarragon since
December 1998 and Secretary and Corporate Counsel of Tarragon since May 1998.
She also served as Vice President of Tarragon and its predecessor, National
Income Realty Trust, from May 1998 to December 1998. Ms. Mansfield has been an
attorney at law since 1984.
Todd C. Minor (45) has been Executive Vice President of Tarragon since November
2001 and Treasurer of Tarragon and its predecessors, Vinland Property Trust and
National Income Realty Trust, since December 1996. he also served as Senior Vice
President of Tarragon and its predecessors from March 1994 to December 1998 and
Vice President from April 1991 to July 1993.
Erin D. Pickens (42) has been Executive Vice President and Chief Financial
Officer of Tarragon since December 1998. She previously served as Vice President
and Chief Accounting Officer for Tarragon and its predecessors, Vinland Property
Trust and National Income Realty Trust, from September 1996 to November 1998.
She served as Accounting Manager of Vinland Property Trust and National Income
Realty Trust from June 1995 to August 1996. Ms. Pickens has been a Certified
Public Accountant since 1990.
Charles Rubenstein (45) has been Executive Vice President of Tarragon since
December 1998 and General Counsel since September 1998. He also served as Senior
Vice President for Tarragon and its predecessor, National Income Realty Trust,
from September 1998 to December 1998. Mr. Rubenstein has been an attorney at law
since 1984.
Todd M. Schefler (47) became Executive Vice President - Development for Tarragon
in January 2003. He also served as Senior Vice President - Development from May
2001 to December 2002, and as Vice President - Structured Transactions of
Tarragon from January 2000 through May 2001. Prior to joining Tarragon, Mr.
Schefler was employed by Burroughs Development Corporation of Paramus, New
Jersey as a Senior Vice President - Acquisitions and Finance from April 1998 to
December 1999, and as Vice President from April 1994 to August 1997.
Saul Spitz (52) joined Tarragon as Executive Vice President of Acquisitions in
September 2000. He has been a member of APA Management LLC, a real estate
investment and management company, since September 1994. he has also been a
member of Ansonia LLC, which together with Tarragon has acquired close to 2600
apartments in the state of Connecticut, since November 1997. Mr. Spitz was a
co-managing member of Accord Properties Associates, LLC, which managed the
Ansonia portfolio in Connecticut, from 1998 through January 2001, when it was
acquired by Tarragon.
Eileen A. Swenson (53) joined Tarragon as President of Tarragon Management, Inc.
in September 2000. Ms. Swenson founded and served as President of Accord
Properties Associates, LLC and its predecessor, Accord Ventures, Inc., from
August 1994 through January 2001, when it was acquired by Tarragon. Ms. Swenson
has been a Certified Property Manager since 1987.
William M. Thompson (44) became Executive Vice President - Operations in March
2003. He joined Tarragon as Executive Vice President and Chief Information
Officer in September 2000. He served as Chief Financial Officer of Accord
Properties Associates, LLC from August 1998 through January 2001, when it was
acquired by Tarragon. Mr. Thompson has been a Certified Public Accountant since
1982.
17
ITEM 2. PROPERTIES
At December 31, 2003, our real estate portfolio had 87 properties, including 62
apartment communities, eight office buildings, ten retail properties, and seven
tracts of land. Unconsolidated joint ventures owned 25 of the 87 properties. We
also had five consolidated and six unconsolidated active for-sale communities,
six consolidated single-family home site developments, and a consolidated
cabin-site development. Tarragon, or the consolidated or unconsolidated
subsidiaries, partnerships, or joint ventures that own the properties, generally
have fee simple title to these properties, and most of them are pledged to
secure mortgages. For a detailed listing of these mortgages, see the table below
entitled "Mortgage Loans Secured by Owned Properties." We believe our properties
are adequately covered by liability and casualty insurance, consistent with
industry standards.
The following tables summarize information about our rental apartment and
for-sale communities. Tarragon's ownership interest is presented for communities
owned through unconsolidated joint ventures. Dollar amounts are in thousands.
Tarragon Realty Investors, Inc.
Communities Summarized by Market
December 31, 2003
Rental Communities For-Sale Communities
-------------------------------------------- -----------------------------------------
Number Percentage of Number Number of Percentage of
of Number of Total of Homes or Total
Market Communities Apartments Communities Home Sites
----------------------------------------------------------------- -----------------------------------------
Florida 24 5,728 40% 14 1,576 70%
Connecticut 13 2,549 18%
(1)Texas 8 1,727 11%
New Jersey 2 277 12%
New York 1 214 10%
(1)Tennessee 2 802 6% 1 190 8%
California 2 730 5%
(1)Ohio 1 504 4%
Georgia 1 360 3%
Kentucky 3 424 3%
Maryland 1 459 3%
Louisiana 2 320 2%
(2)South Carolina 1 216 2%
Alabama 1 178 1%
Michigan 1 170 1%
Oklahoma 2 178 1%
-------------------------------------------- -----------------------------------------
62 14,345 100% 18 2,257 100%
============================================ =========================================
- ----------
(1) Includes one rental community currently under reposition and in the
Homebuilding Division.
(2) Represents one rental community currently in lease-up and in the
Homebuilding Division.
18
TARRAGON REALTY INVESTORS, INC.
Rental Apartment Communities
DECEMBER 31, 2003
Year Ended December 31,
-------------------------
2003 2002
Ownership ------------ ------------
Interest If Age Average Average
Joint Number of In Physical Physical
Community Location Venture Apartments Years Occupancy Occupancy
- ----------------------------- ---------------------- ------------ ----------- ------- ------------ ------------
SAME STORE STABILIZED INVESTMENT DIVISION APARTMENTS
Acadian Place Baton Rouge, LA 120 29 93.9% 87.5%
Antelope Pines Lancaster, CA (3) 314 18 96.1% 96.0%
Autumn Ridge East Haven, CT 70% 116 30 93.4% 93.9%
Bayfront Houston, TX 200 32 92.3% 93.9%
Brooks, The Addison, TX 104 34 93.3% 96.0%
Carlyle Towers Southfield, MI 170 33 89.7% 91.5%
Club at Danforth Jacksonville, FL 99% 288 6 95.1% 92.6%
Courtyard at the Park North Miami, FL 127 31 92.2% 94.0%
Creekwood North Altamonte Springs, FL 180 30 90.7% 94.0%
Cross Creek Lexington, KY 144 37 86.9% 86.4%
Desert Winds Jacksonville, FL 152 31 98.1% 98.1%
Dogwood Hills Hamden, CT 70% 46 31 96.9% 96.8%
Forest Oaks Lexington, KY 154 32 81.7% 86.5%
Forest Park Rocky Hill, CT 161 36 95.3% 94.3%
Fountainhead Kissimmee, FL 184 15 89.5% 90.4%
French Villa Tulsa, OK 100 32 93.6% 94.9%
Groton Towers Groton, CT 70% 114 30 94.3% 96.8%
Gull Harbor New London, CT 70% 65 29 93.8% 92.8%
Hamden Centre Hamden, CT 70% 65 33 92.6% 95.4%
Harbour Green Panama City Beach, FL 200 6 96.1% 94.3%
Heather Hill Temple Hills, MD 459 37 94.0% 95.6%
Kirklevington Lexington, KY 126 28 88.9% 87.9%
Lakeview Waterbury, CT 70% 88 15 93.0% 95.0%
Landmark Tallahassee, FL 128 36 91.8% 89.1%
Liberty Building New Haven, CT 90% 124 4 95.1% 96.0%
Links at Georgetown Savannah, GA 99% 360 4 88.2% 91.0%
Martins Landing Lakeland, FL 236 30 94.2% 89.1%
Mayfaire at Windsor Parke Jacksonville, FL 324 6 96.5% 91.7%
Meadowbrook Baton Rouge, LA 200 35 92.8% 96.5%
Mission Trace Tallahassee, FL 96 14 92.2% 90.2%
Morningside Jacksonville, FL 112 30 92.4% 91.9%
Mustang Creek Arlington, TX 120 29 91.1% 93.5%
Nutmeg Woods New London, CT 70% 382 33 95.2% 95.0%
Ocean Beach New London, CT 70% 455 31 93.0% 93.9%
As of December 31,
------------------------------------------
2003 2002 2003
------------ ------------ ----------
Average Average Net
Monthly Monthly Carrying
Community Location Rent/Unit(1) Rent/Unit(1) Value(2)
- ----------------------------- ---------------------- ------------ ------------ ----------
SAME STORE STABILIZED INVESTMENT DIVISION APARTMENTS
Acadian Place Baton Rouge, LA 559 $ 556 $ 3,147
Antelope Pines Lancaster, CA 784 710 15,665
Autumn Ridge East Haven, CT 618 599 1,859
Bayfront Houston, TX 648 645 2,499
Brooks, The Addison, TX 623 665 2,600
Carlyle Towers Southfield, MI 915 915 5,235
Club at Danforth Jacksonville, FL 852 821 14,516
Courtyard at the Park North Miami, FL 770 769 4,181
Creekwood North Altamonte Springs, FL 642 629 3,160
Cross Creek Lexington, KY 573 576 1,007
Desert Winds Jacksonville, FL 596 580 2,048
Dogwood Hills Hamden, CT 1,022 968 2,572
Forest Oaks Lexington, KY 584 616 3,158
Forest Park Rocky Hill, CT 922 860 8,869
Fountainhead Kissimmee, FL 742 739 7,082
French Villa Tulsa, OK 645 657 2,602
Groton Towers Groton, CT 908 860 4,542
Gull Harbor New London, CT 713 697 1,541
Hamden Centre Hamden, CT 892 865 2,796
Harbour Green Panama City Beach, FL 768 751 9,672
Heather Hill Temple Hills, MD 912 862 11,665
Kirklevington Lexington, KY 583 580 2,452
Lakeview Waterbury, CT 808 774 2,854
Landmark Tallahassee, FL 599 594 1,882
Liberty Building New Haven, CT 1,047 991 7,675
Links at Georgetown Savannah, GA 795 793 21,438
Martins Landing Lakeland, FL 590 570 5,468
Mayfaire at Windsor Parke Jacksonville, FL 874 841 19,204
Meadowbrook Baton Rouge, LA 504 497 1,550
Mission Trace Tallahassee, FL 655 641 2,637
Morningside Jacksonville, FL 573 559 2,197
Mustang Creek Arlington, TX 920 958 3,836
Nutmeg Woods New London, CT 815 776 16,278
Ocean Beach New London, CT 688 653 13,415
19
TARRAGON REALTY INVESTORS, INC.
Rental Apartment Communities
DECEMBER 31, 2003
Year Ended December 31,
-------------------------
Ownership 2003 2002
Interest ------------ ------------
If Age Average Average
Joint Number of In Physical Physical
Community Location Venture Apartments Years Occupancy Occupancy
- ------------------------------- ------------------ ----------- ------------ ------- ------------ ------------
SAME STORE STABILIZED INVESTMENT DIVISION APARTMENTS (CONTINUED)
Palm Court North Miami, FL 144 32 95.3% 92.3%
Park Dale Gardens Dallas, TX 224 28 93.5% 92.8%
Parkview Naugatuck, CT 70% 160 32 93.2% 93.9%
The Regents Jacksonville, FL 304 31 94.1% 91.5%
River City Landing Jacksonville, FL 352 38 95.9% 90.0%
Sagamore Hills Middletown, CT 70% 212 35 90.8% 93.9%
Silver Creek Jacksonville, FL 152 31 98.7% 98.3%
Southern Elms Tulsa, OK 78 35 91.3% 93.6%
Summit on the Lake Ft. Worth, TX 198 17 94.2% 93.0%
Vineyard at Eagle Harbor Orange Park, FL 99% 328 5 89.5% 89.3%
Vintage at Legacy Frisco, TX 320 4 94.8% 94.2%
Vintage on the Green Orlando, FL 396 3 89.6% 91.7%
Vistas at Lake Worth Ft. Worth, TX 265 5 92.2% 92.3%
Woodcliff Estates East Hartford, CT 70% 561 34 91.8% 91.3%
Woodcreek Jacksonville, FL 260 28 92.3% 90.7%
Woodcreek Garden Lancaster, CA (3) 416 15 96.4% 96.7%
------------ ------- ------------ ------------
Subtotals/Averages 10,584 19 93.0% 92.9%
------------ ------- ------------ ------------
INVESTMENT DIVISION APARTMENTS IN LEASE UP (4)
Villa Tuscany Orlando, FL 70% 342 2 70.0% 23.2%
Vintage at Abacoa Jupiter, FL 70% 390 .8 66.2% 7.3%
Vintage at Lake Lotta Ocoee, FL 199 2 91.8% 81.6%
Vintage at Madison Crossing Huntsville, AL 178 1 88.4% 41.6%
Vintage at Plantation Bay Jacksonville, FL 240 2 94.2% 84.9%
Vintage at Tampa Palms Tampa, FL 298 2 91.3% 78.6%
Vintage at the Parke Murfreesboro, TN 70% 278 2 92.9% 54.9%
Vintage Cottage Orlando, FL 296 .4 50.2% --
------------ ------- ------------ ------------
Subtotals/Averages (5) 2,221 1 78.5% 48.6%
------------ ------- ------------ ------------
SUBTOTALS/AVERAGES - ALL INVESTMENT DIVISION APARTMENTS 12,805 14 90.5% 86.1%
------------ ------- ------------ ------------
As of December 31,
----------------------------------------------
2003 2002 2003
------------ ------------ ------------
Average Average Net
Monthly Monthly Carrying
Community Location Rent/Unit(1) Rent/Unit(1) Value(2)
- ------------------------------- ------------------ ------------ ------------ ------------
SAME STORE STABILIZED INVESTMENT DIVISION APARTMENTS (CONTINUED)
Palm Court North Miami, FL $ 758 $ 745 $ 2,507
Park Dale Gardens Dallas, TX 617 625 1,951
Parkview Naugatuck, CT 940 940 6,425
The Regents Jacksonville, FL 560 530 5,306
River City Landing Jacksonville, FL 611 581 11,852
Sagamore Hills Middletown, CT 792 801 8,087
Silver Creek Jacksonville, FL 635 617 1,865
Southern Elms Tulsa, OK 573 578 1,428
Summit on the Lake Ft. Worth, TX 569 570 3,992
Vineyard at Eagle Harbor Orange Park, FL 873 874 17,875
Vintage at Legacy Frisco, TX 937 937 25,909
Vintage on the Green Orlando, FL 874 902 28,700
Vistas at Lake Worth Ft. Worth, TX 702 703 14,117
Woodcliff Estates East Hartford, CT 779 781 19,864
Woodcreek Jacksonville, FL 650 628 3,930
Woodcreek Garden Lancaster, CA 785 704 21,550
------------ ------------ ------------
Subtotals/Averages 747 730 386,660
------------ ------------ ------------
INVESTMENT DIVISION APARTMENTS IN LEASE UP (4)
Villa Tuscany Orlando, FL 804 889 22,303
Vintage at Abacoa Jupiter, FL 1,138 1,259 41,889
Vintage at Lake Lotta Ocoee, FL 904 918 17,635
Vintage at Madison Crossing Huntsville, AL 766 753 10,831
Vintage at Plantation Bay Jacksonville, FL 912 892 14,128
Vintage at Tampa Palms Tampa, FL 952 1,011 21,139
Vintage at the Parke Murfreesboro, TN 777 743 14,378
Vintage Cottage Orlando, FL 854 -- 20,114
------------ ------------ ------------
Subtotals/Averages (5) 903 953 162,417
------------ ------------ ------------
SUBTOTALS/AVERAGES - ALL INVESTMENT DIVISION APARTMENTS 774 764 549,077
------------ ------------ ------------
20
TARRAGON REALTY INVESTORS, INC.
Rental Apartment Communities
DECEMBER 31, 2003
Year Ended December 31,
-------------------------
Ownership 2003 2002
Interest ------------ ------------
If Age Average Average
Joint Number of In Physical Physical
Community Location Venture Apartments Years Occupancy Occupancy
- ------------------------------- ----------------- ----------- ------------ ------ ------------ ------------
HOMEBUILDING DIVISION RENTAL APARTMENTS
Arbor Glen Toledo, OH 57% 504 35 68.0% 88.9%
Aspentree Dallas, TX 296 29 83.7% 88.0%
Somerset Park Memphis. TN 524 29 81.0% 86.4%
Vintage at Fenwick Plantation Charleston, SC 70% 216 1 53.9% 23.6%
------------ ------ ------------ ------------
Subtotals/Averages 1,540 18 73.5% 78.7%
------------ ------ ------------ ------------
Total/Averages - All Rental Apartments 14,345 14 88.7% 85.3%
============ ====== ============ ============
As of December 31,
-----------------------------------------------
2003 2002 2003
------------ ------------ --------------
Average Average Net
Monthly Monthly Carrying
Community Location Rent/Unit(1) Rent/Unit(1) Value(2)
- ------------------------------- ----------------- ------------ ------------ --------------
HOMEBUILDING DIVISION RENTAL APARTMENTS
Arbor Glen Toledo, OH $ 399 $ 408 $ 6,773
Aspentree Dallas, TX 603 618 5,909
Somerset Park Memphis. TN 478 480 8,348
Vintage at Fenwick Plantation Charleston, SC 1,028 1,050 16,118
------------ ------------ --------------
Subtotals/Averages 553 563 37,148
------------ ------------ --------------
Total/Averages - All Rental Apartments $ 751 $ 742 $ 586,225
============ ============ ==============
- ----------
(1) Average monthly rent is defined as total possible rent (actual rent for
leased apartments and asking rent for vacant apartments) for the month of
December divided by number of units.
(2) For properties owned by unconsolidated joint ventures, this balance
represents the net carrying value on the books of the joint venture.
(3) Tarragon owns 49% of the partnerships that own these properties. Since
Tarragon has sole decision-making authority and the right to purchase the
balance of the interests for a fixed amount, these properties are
consolidated.
(4) All of these properties were transferred to the Investment Division from
the Homebuilding Division after January 1, 2002. Physical occupancy as of
December 31, 2003, for apartment communities in lease up during 2002 or
2003 was as follows:
Villa Tuscany 95%
Vintage at Abacoa 96%
Vintage at Lake Lotta 95%
Vintage at Madison Crossing 97%
Vintage at Plantation Bay 97%
Vintage at Tampa Palms 93%
Vintage at the Parke 99%
Vintage Cottage 97%
(5) Average physical occupancy for the year ended December 31, 2002, and
average monthly rent per unit as of December 31, 2002, for the Investment
Division Apartments in Lease Up exclude Vintage Cottage because it did not
begin operations until April 2003.
21
TARRAGON REALTY INVESTORS, INC.
PLANNED RENTAL APARTMENT COMMUNITIES
DECEMBER 31, 2003
Ownership
Interest if Expected
Joint Number of Construction
Community Venture Location Apartments Budgeted Cost Start
- ---------------------------------------------------------------------------------------------
1118 Adams Street 40% Hoboken, NJ 90 $ 20,000 Jun-04
Cason Estates Murfreesboro, TN 262 17,000 Feb-04
Pomeroy Ave Meriden, CT 180 25,000 May-04
------------ ---------------
532 $ 62,000
============ ===============
Tarragon's Development Program includes the construction of the rental
communities presented above. We purchased the land on which we will build Cason
Estates in the fourth quarter of 2003. We expect to purchase the land in
Hoboken, New Jersey, and Meriden, Connecticut, in the first quarter of 2004.
Tarragon plans to finance eighty to eighty-five percent of the cost of Cason
Estates and Pomeroy Avenue with construction loans. The 90-unit property in
Hoboken, New Jersey, will be an affordable apartment community, and Tarragon
will utilize tax credits under a federal program and capital grants and loans
from the New Jersey Housing Finance Agency to pay for the costs of this project.
The remaining costs of Cason Estates and Pomeroy Avenue will be paid out of
escrowed proceeds from the sales of Bay West Apartments and Marina Park
Apartments in 2003.
22
TARRAGON REALTY INVESTORS, INC.
ACTIVE FOR-SALE COMMUNITIES
DECEMBER 31, 2003
Ownership Number of
Interest If Remaining Costs to Construction
Joint Homes or Home Complete (2) Financing
Community Location Venture Sites (1) (in thousands) Available (3)
- --------------------------------------- -------------------- ------------- ---------------- --------------- ---------------
5600 Collins Miami Beach, FL 6 $ 600 $ 600(4)
Alexandria Place Apopka, FL 104 -- --
Alexandria Pointe Deland, FL 123 2,700 2,562
Alta Mar Ft. Myers, FL 131 20,500 20,500
Las Olas River House Ft. Lauderdale, FL 67.5% 287 42,000 40,736
Pine Crest Village I Ft. Lauderdale, FL 17 380 --
Pine Crest Village II Ft. Lauderdale, FL 116 7,200 7,200
Smoky Mountain Ridge Pigeon Forge, TN 190 10,000 --(5)
Tuscany on the Intracoastal Boynton Beach, FL 280 4,600 953
Venetian Bay Village I Kissimmee, FL 29 -- --
Venetian Bay Village II Kissimmee, FL 136 11,300 11,300(6)
Wekiva Crest Apopka, FL 28 -- --
Woods of Lake Helen Lake Helen, FL 105 200 --
XII Hundred Grand Hoboken, NJ 50% 159 31,700 31,000
XIII Hundred Grand Hoboken, NJ 50% 118 23,400 24,000
---------------- --------------- ---------------
1,829 $ 154,580 $ 138,851
================ =============== ===============
Projects without completed budgets (7):
100 East Las Olas Ft. Lauderdale, FL 70% 44
Metropolitan Sarasota, Fl 70% 124
Southridge Pointe Deland, FL 29
Warwick Grove Warwick NY 50% 214
Woods of Southridge Deland, FL 17
----------------
428
================
- ----------
(1) Number of remaining homes or home sites includes both backlog (homes or
home sites sold, not closed) and unsold inventory.
(2) Costs to Complete represent estimated construction costs to complete the
projects. In addition to these costs, we anticipate incurring marketing,
advertising, selling commissions and closing costs, and interest on
mezzanine debt.
(3) Construction financing available represents funds available from
construction loans. For the December 31, 2003, loan balances, please see
the table below entitled "Mortgage Loans Secured by Owned Properties."
(4) We may borrow up to $1 million if our estimated Costs to Complete increase.
(5) We are currently in the process of arranging financing to cover
substantially all of the costs to complete.
(6) We have a $9 million revolving construction loan. As we complete buildings
and close sales, we pay down the loan, which makes additional borrowings
available.
(7) We are in the process of developing our budgets for these projects.
Tarragon's Development Program includes construction or renovation of the above
for-sale communities. Costs to complete in excess of construction financing
available will be paid for with internally generated funds.
23
TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 2003
(Dollars in thousands)
Balance Stated Interest Maturity Balance Due at
Name of Property Dec. 31, 2003 Rate (D) Date Maturity
- -----------------------------------------------------------------------------------------------------------------
Investment Division Consolidated Apartment
Communities
- ------------------------------------------
Acadian Place $ 3,049 6.56% (C) Jan-09 $ 2,765
Antelope Pines 11,700 1.04% (B) Nov-31 2,300
Antelope Pines - supplemental mortgage 1,544 5.93% (C) Mar-10 -
Antelope Pines - supplemental mortgage 3,100 5.93% (C) Mar-10 2,783
Bayfront 3,995 5.99% (C) Nov-08 3,605
Brooks, The 3,011 7.25% (C) Jun-09 2,770
Carlyle Towers 5,116 6.96% (C) Mar-08 4,724
Carlyle Towers - supplemental mortgage 1,747 7.90% (C) Jan-11 1,574
Courtyard at the Park 4,456 7.83% (C) Sep-10 4,083
Creekwood North 4,784 8.02% (C) Aug-10 4,400
Cross Creek 2,532 7.54% (C) Oct-07 2,367
Desert Winds/Silver Creek 7,011 5.03% (C) Jun-13 5,319
Forest Oaks 2,686 8.16% (C) Jun-06 2,501
Forest Park 9,998 5.22% (C) Oct-12 8,531
Fountainhead 7,044 8.06% (C) Jul-10 6,491
French Villa 1,811 6.82% (C) Jan-09 1,648
French Villa - supplemental mortgage 1,204 7.23% (C) Mar-11 1,086
Harbour Green 9,822 2.85% (A) May-06 9,821
Heather Hill 17,025 4.88% (C) Nov-10 14,757
Heather Hill - supplemental mortgage 2,771 5.62% (C) Nov-10 2,470
Heather Hill - supplemental mortgage 4,741 5.95% (C) Oct-12 4,031
Kirklevington 2,851 6.74% (C) Feb-09 2,589
Landmark (E) 1,680 2.92% (A) Jun-05 1,680
Martins Landing 6,956 2.85% (A) May-06 6,956
Mayfaire at Windsor Parke 18,145 7.56% (C) Oct-09 16,713
Meadowbrook 3,471 6.56% (C) Jan-09 3,148
Meadowbrook - supplemental mortgage 616 7.26% (C) Apr-11 556
Mission Trace 2,156 3.42% (A) Sep-07 2,027
Morningside 2,336 2.93% (B) Dec-12 1,661
Mustang Creek 5,724 8.06% (C) Jul-10 5,274
Palm Court 4,500 7.59% (C) Oct-10 4,103
Palm Court - supplemental mortgage 798 6.30% (C) Jan-13 699
Park Dale Gardens 5,410 8.11% (C) Jul-10 4,989
Regents, The 6,114 8.06% (C) Jul-10 5,634
Regents, The - supplemental mortgage 1,985 6.18% (C) Aug-12 1,739
River City Landing 10,307 2.85% (A) May-06 10,307
Southern Elms 1,652 4.67% (B) Apr-07 1,540
Summit on the Lake 4,383 6.35% (C) Aug-27 -
Vintage Cottage 20,800 3.03% (A) May-06 19,680
Vintage at Lake Lotta 13,715 3.42% (A) Nov-05 13,190
Vintage at Legacy 21,431 2.85% (A) May-06 21,431
24
TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 2003
(Dollars in thousands)
Stated
Balance Interest Maturity Balance Due
Name of Property Dec. 31, 2003 Rate (D) Date at Maturity
- ----------------------------------------------------------------------------------------------------------------------------
Investment Division Consolidated Apartment
Communities (continued)
- ------------------------------------------
Vintage at Madison Crossing $ 9,550 3.17% (A) Jan-06 $ 9,176
Vintage at Plantation Bay 14,872 2.85% (A) May-06 14,872
Vintage at Tampa Palms 19,533 3.42% (A) May-05 19,002
Vintage on the Green 25,817 2.85% (A) May-06 25,817
Vistas at Lake Worth 9,149 6.61% (C) Oct-11 8,092
Woodcreek 6,624 6.79% (C) Sep-08 6,057
Woodcreek - supplemental mortgage 1,751 7.90% (C) Jan-11 1,578
Woodcreek Garden 13,330 1.04% (B) Dec-31 2,701
Woodcreek Garden - supplemental mortgage 4,383 6.26% (C) Jun-14 -
Woodcreek Garden - supplemental mortgage 3,050 6.69% (C) Jun-14 2,497
------------- ----------- -------------
352,236 4.63% (F) 301,734
------------- ----------- -------------
Homebuilding Division Rental Apartment
Community
- --------------------------------------
Aspentree 7,275 3.13% (A) Dec-05 7,274
------------- ----------- -------------
Commercial properties and land (G) 39,595 5.30% (F) Oct-04 to 37,850
------------- ----------- Nov-10 -------------
Consolidated Mortgages on Real Estate 399,106 4.67% (F) 346,858
------------- ----------- -------------
Homebuilding Inventory
- ----------------------
Alexandria Place 3,372 6.50% (A) Jun-05 3,372
Alexandria Pointe 390 6.50% (A) Mar-04 390
Forest Ridge 499 6.75% (C) Jul-04 499
Pine Crest Phase I 6,495 3.28% (A) Feb-06 6,495
Pine Crest Phase II 1,438 3.28% (A) Feb-06 1,438
Smoky Mountain Ridge 3,205 6.00% (B) Jan-05 3,205
Smoky Mountain Ridge - supplemental
mortgage 1,712 5.00% (A) Apr-04 1,712
Southridge Pointe 176 6.50% (A) Mar-04 176
Tuscany on the Intracoastal 35,353 3.42% (A) Jun-06 35,353
Venetian Bay 1,624 5.50% (A) Dec-05 1,624
Wekiva Crest 716 6.50% (A) Mar-04 716
Woods of Lake Helen 2,221 6.00% (A) Nov-05 2,221
25
TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 2003
(Dollars in thousands)
Stated
Balance Interest Maturity Balance Due
Name of Property Dec. 31, 2003 Rate (D) Date at Maturity
- ----------------------------------------------------------------------------------------------------------------------
Homebuilding Inventory (continued)
- ----------------------------------
Woods of Lake Helen - supplemental mortgage $ 260 6.50% (C) Apr-05 $ 232
Woods of Southridge 85 6.50% (A) Mar-04 85
------------- ----------- ------------
57,546 4.05% (F) 57,518
------------- ----------- ------------
TOTAL CONSOLIDATED MORTGAGES 456,652 4.59% (F) 404,376
------------- ----------- ------------
Mortgage Debt of Unconsolidated Partnerships
and Joint Ventures
- --------------------------------------------
Investment Division Apartment Communities
- -----------------------------------------
Autumn Ridge 3,193 6.89% (C) Apr-11 2,856
Autumn Ridge - supplemental mortgage 1,031 6.01% (C) Apr-13 888
Club at Danforth 14,481 7.56% (C) Oct-09 13,338
Dogwood Hills 3,073 5.22% (C) Oct-12 2,622
Groton Towers 4,653 7.82% (C) Sep-10 4,263
Groton Towers - supplemental mortgage 1,077 5.96% (C) Oct-10 968
Groton Towers - supplemental mortgage 936 5.98% (C) Oct-12 815
Gull Harbor 1,794 3.67% (A) Apr-12 1,471
Hamden Centre 3,648 5.22% (C) Oct-12 3,113
Lakeview 2,841 8.00% (C) Jul-10 2,615
Liberty Building 9,679 5.19% (C) Oct-12 8,252
Links at Georgetown 13,459 7.31% (C) Jun-09 12,256
Links at Georgetown - supplemental mortgage 246 6.53% (C) Jun-09 228
Links at Georgetown - supplemental mortgage 5,369 6.43% (C) Jun-09 4,972
Nutmeg Woods 13,028 7.68% (C) Sep-10 11,904
Nutmeg Woods - supplemental mortgage 3,088 5.96% (C) Oct-10 2,775
Nutmeg Woods - supplemental mortgage 2,779 5.98% (C) Oct-12 2,419
Ocean Beach 18,376 5.22% (C) Oct-12 15,680
Parkview 6,354 7.86% (C) Aug-10 5,829
Parkview - supplemental mortgage 1,647 6.91% (C) Dec-12 1,464
Parkview - supplemental mortgage 1,099 6.27% (C) Dec-14 917
Sagamore Hills 7,543 7.85% (C) Jul-10 6,925
Villa Tuscany 22,000 3.20% (A) Jun-04 22,000
Villa Tuscany - mezzanine loan 1,227 12.00% (C) Jun-04 1,227
Villa Tuscany - other loans 750 3.20% (A) Dec-03 750
Vineyard at Eagle Harbor 17,892 7.61% (C) Nov-10 16,301
Vintage at Abacoa 40,000 3.03% (A) May-06 37,770
Vintage at the Parke 14,545 2.85% (A) May-06 14,545
26
TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 2003
(Dollars in thousands)
Stated
Balance Interest Maturity Balance Due
Name of Property Dec. 31, 2003 Rate (D) Date at Maturity
- ------------------------------------------------------------------------------------------------------------------------
Mortgage Debt of Unconsolidated
Partnerships and Joint Ventures (continued)
- ----------------------------------------------
Investment Division Apartment Communities
(continued)
- -----------------------------------------
Woodcliff Estates $ 19,420 7.68% (C) Sep-10 $ 17,745
Woodcliff Estates - supplemental mortgage 3,489 7.61% (C) Jan-13 3,084
------------- ----------- -----------
238,717 5.68% (F) 219,992
Homebuilding Division Rental Apartment
Communities
- --------------------------------------
Arbor Glen 4,696 8.02% (C) Jan-06 4,417
Vintage at Fenwick Plantation 14,425 3.17% (A) Sep-04 14,425
------------- ----------- -----------
19,121 4.36% (F) 18,842
------------- ----------- -----------
Commercial properties (H) 23,721 4.96% (F) Jul-08 to 7,501
------------- ----------- Jul-23 -----------
Homebuilding Inventory
- ----------------------
Las Olas River House 68,264 3.97% (A) Apr-05 68,264
Las Olas River House - mezzanine loan 25,000 20.00% (C) Apr-07 25,000
100 East Las Olas 4,125 6.00% (A) Mar-04 4,125
Metropolitan 15,170 3.63% (A) Aug-04 15,170
------------- ----------- -----------
112,559 7.56% (F) 112,559
------------- ----------- -----------
Total unconsolidated mortgages 394,118 6.11% (F) 358,894
------------- ----------- -----------
TOTAL ALL MORTGAGES $ 850,770 5.30% (F) $ 763,270
============= =========== ===========
Summary by interest rate type:
Total variable rate mortgages $ 440,172 3.43% (F) $ 418,095
Total variable rate mortgages subject to cap 32,223 1.86% (F) 11,407
Total fixed rate mortgages 378,375 7.76% (F) 333,768
------------- ----------- -----------
$ 850,770 5.30% (F) $ 763,270
============= =========== ===========
- ---------
(A) Variable rate mortgage.
(B) Variable rate mortgage subject to cap or ceiling.
(C) Fixed rate mortgage.
(D) For loans with variable interest rates, the rate in effect as of December
31, 2003, is presented.
(E) This loan is an advance under the $16.8 million line of credit facility.
(F) Represents weighted average interest rate as of December 31, 2003, computed
based upon the December 31, 2003, balances.
(G) Includes mortgages secured by twelve commercial properties and three tracts
of land.
(H) Includes mortgages secured by two commercial properties.
27
ITEM 3. LEGAL PROCEEDINGS
In April 2003, in connection with the condominium conversion of Pine Crest
Village at Victoria Park, a contractor for 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 the resulting
liability, if any, 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 $308,000 to date. Remediation has been completed at a total cost
of approximately $800,000.
Tarragon is also a party to various claims and routine litigation arising in the
ordinary course of business. We do not believe that the results of these claims
and litigation, individually or in the aggregate, will have a material adverse
effect on our business, financial position, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is listed on the NASDAQ National Market System under the symbol
"TARR." The following table sets forth the high and low bid quotations of our
common stock reported by the NASDAQ system for the periods indicated.
Over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions, and may not necessarily represent actual
transactions. The quotations have been restated to give effect to a 10% stock
dividend paid in April 2002, a three-for-two stock split effective February 14,
2003, and a five-for four stock split effective January 15, 2004.
2003 2002
---------------------- ----------------------
High Low High Low
---------- -------- --------- --------
First quarter $ 11.79 $ 8.05 $ 6.69 $ 6.25
Second quarter 13.07 10.47 8.29 6.62
Third quarter 13.24 11.18 8.26 7.65
Fourth quarter 13.27(a) 11.78 8.58 7.81
- ----------
(a) A bid of $21.56 was reported to NASDAQ by another market center during a
one-second period on October 23, 2003. The highest trade on October 23,
2003, was $12.12.
According to the transfer agent's records, at March 4, 2004, our common stock
was held by approximately 4,847 holders, including beneficial holders. On March
4, 2004, the closing price of our common stock was $14.69.
No cash dividends were paid to common stockholders in 2003 and 2002. In 2000,
the Board of Directors discontinued cash dividends on Tarragon's common stock.
In December 2001, the Board of Directors authorized a 10% common stock dividend
that was paid on April 26, 2002, to holders of record on April 15, 2002. In
January 2003, the Board of Directors approved a three-for-two stock split
effective February 14, 2003. In December 2003, the Board of Directors approved a
five-for-four stock split effective January 15, 2004.
[This space intentionally left blank.]
29
ITEM 6. SELECTED FINANCIAL DATA
Please read the following information along with the Consolidated Financial
Statements and Notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K.
Dollar amounts are in thousands, except per share amounts.
For the Years Ended December 31,
----------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
OPERATING DATA
Rental revenue ............................ $ 84,051 $ 80,362 $ 84,020 $ 86,990 $ 72,977
Homebuilding sales revenue ................ 56,279 26,179 25,950 6,704 --
Total revenue ............................. 141,252 107,121 110,488 94,070 73,588
Equity in income (loss) of partnerships and
joint ventures ......................... 22,476 16,642 7,719 16,081 (716)
Net gain on sale of real estate
Presented in income from continuing
operations .......................... 1,223 1,258 4,994 8,031 11,969
Presented in discontinued operations ... 23,118 6,540 -- -- --
Income (loss) from continuing operations .. $ 7,977 $ (580) $ 903 $ 9,655 $ 5,701
Net income ................................ $ 31,194 $ 5,459 $ 1,229 $ 6,958 $ 5,257
EARNINGS PER COMMON SHARE (1)
Income (loss) from continuing operations
allocable to common stockholders ....... $ .50 $ (.08) $ .02 $ .56 $ .34
Net income allocable to common stockholders $ 2.08 $ .32 $ .04 $ .40 $ .31
EARNINGS PER COMMON SHARE - ASSUMING
DILUTION (1)
Income (loss) from continuing operations
allocable to common stockholders ....... $ .43 $ (.08) $ .02 $ .55 $ .34
Net income allocable to common stockholders $ 1.80 $ .32 $ .04 $ .39 $ .31
Cash dividends per common share (1) ....... $ -- $ -- $ -- $ -- $ .19
For the Years Ended December 31,
----------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
BALANCE SHEET DATA
Real estate held for investment ........... $ 395,095 $ 427,989 $ 373,501 $ 395,351 $ 253,595
Real estate held for sale ................. -- 7,538 29,232 29,558 51,729
Homebuilding inventory .................... 97,234 31,632 31,412 37,926 --
Investments in and advances to partnerships
and joint ventures ..................... 81,764 29,102 31,297 29,882 48,834
Cash and cash equivalents ................. 21,626 18,023 8,989 4,141 3,951
Total assets .............................. 623,817 540,224 503,770 520,932 379,065
Notes, debentures, and interest
payable ................................ 471,262 428,926 399,956 426,285 287,767
Stockholders' equity ...................... 103,328 73,733 73,118 74,126 72,993
Book value per common share (1) ........... $ 6.51 $ 4.53 $ 4.33 $ 4.28 $ 4.02
- ----------
(1) Per share data have been restated to give effect to the 10% stock dividends
declared in December 2000 and December 2001, a three-for-two stock split in
February 2003, and a five-for-four stock split in January 2004.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Please read this discussion along with the Consolidated Financial Statements and
Notes found at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." Dollar
amounts in tables are in thousands.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K
In addition to historical information, this Form 10-K 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
homebuilding 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-K. We undertake no obligation to publicly update or revise any
forward-looking statement in light of new information, future events, or
otherwise.
CRITICAL ACCOUNTING POLICIES
Asset Impairment
- ----------------
We periodically review the carrying values of our properties. Accounting
principles generally accepted in the United States of America ("GAAP") require
that the carrying value of a property held for sale not exceed the lower of its
cost or its estimated fair value less costs to sell. In instances where a
property's estimated fair value less costs to sell is less than its carrying
value at the time of evaluation, we provide an allowance for loss by making a
charge against operations. Our review of properties held for sale generally
includes selective site inspections, comparing the property's current rents to
market rents, reviewing the property's expenses and maintenance requirements,
discussions with the property manager, and a review of the surrounding area. We
may make adjustments to estimated fair values based on future reviews.
We also evaluate our properties held for investment for impairment whenever
events or changes in circumstances indicate that a property's carrying value may
not be recoverable. This evaluation generally consists of reviewing the
property's cash flow and current and projected market conditions, as well as
changes in general and local economic conditions. If we conclude that a property
has been impaired, its carrying value is written down to estimated fair value
with a charge against current earnings.
Investments in Joint Ventures Accounted for Using the Equity Method
- -------------------------------------------------------------------
We use the equity method to account for investments in partnerships and joint
ventures over which we exercise significant influence but do not control. Under
the equity method, our initial investments are increased by our proportionate
share of the partnerships' operating income and additional advances and
decreased by our proportionate share of the partnerships' operating losses and
distributions received. Our interest in intercompany transactions is eliminated.
31
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 of 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 interest 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 joint ventures
has been to reduce consolidated total assets, total liabilities, and gross
revenues and expenses but has had no effect on reported net income or loss
except in instances where we have received distributions from a joint venture in
excess of our investment in the joint venture, with the excess recorded as
income.
Revenue Recognition
- -------------------
Homebuilding sales revenue is typically recognized at the time of closing 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. For mid-rise
and high-rise condominium developments, where construction typically takes
eighteen months or more, the percentage-of-completion method is employed. Under
this method, once construction is beyond a preliminary stage, buyers are
committed to the extent of being unable to require refunds except for
non-delivery of the home, a substantial percentage of homes are under firm
contracts, the sale prices are deemed collectible, and remaining costs and
revenues can be reasonably estimated, revenue is recorded as a portion of the
value of non-cancelable sale contracts. Revenue recognized is calculated based
upon the percentage of construction costs incurred in relation to total
estimated construction costs. Any amounts due under sale contracts, to the
extent recognized as revenue, are recorded as contracts receivable.
Rental revenue is recognized on the straight-line method. 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 method over the lease terms as a reduction to rental revenue. We
accrue percentage rentals only after the tenant's sales have reached the
threshold provided for in the lease.
Interest and management fee revenue are recognized when earned. Revenue from
long term laundry and cable service contracts is deferred and amortized to
income on the straight-line method over the terms of the contracts.
Gains on sales of real estate are recognized when and to the extent permitted by
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 financial
method, whichever is appropriate.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," which, among other things, rescinded SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt." SFAS No. 4
required gains and losses from extinguishments of debt to be classified as
extraordinary items, if material. Under SFAS No. 145, gains and losses on
extinguishments of debt will no longer be classified as extraordinary unless
they meet the unusual in nature and infrequency of occurrence criteria in the
Accounting Principles Board's Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment
32
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," which is expected to be rare. We adopted SFAS No. 145 on January
1, 2003. Therefore, gains or losses on extinguishment of debt prior to maturity
are no longer classified as extraordinary items. 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. There was no impact on our reported net
income. Such items were $846,000 during 2002 and $605,000 in 2001. We also
recognized a gain on debt forgiveness of $420,000 in October 2001 upon the
discounted payoff of the mortgage secured by Orlando Central Park.
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.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities," which was revised December 2003. 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 March 15, 2004. 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.
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 on our financial statements.
ENVIRONMENTAL MATTERS
Under federal, state, and local environmental laws, ordinances, and regulations,
Tarragon may be liable for removal or remediation costs, as well as other costs
(such as fines or injuries to persons and property) where our employees may have
arranged for removal, disposal, or treatment of hazardous or toxic substances.
In addition, environmental laws impose liability for release of asbestos-
containing materials into the air, and third parties can seek recovery from
Tarragon for personal injury associated with those materials. We are not aware
of any liability relating to these matters that would have a material adverse
effect on our business, financial position, or results of operations. However,
there is a matter involving the alleged release of asbestos-containing materials
at one of our condominium conversion projects, as described in Item 3. "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
33
connection with this matter totaling $308,000 to date. Remediation has been
completed at a total cost of $800,000.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash are home sales, Investment Division property
operations, borrowings, and proceeds from the sale of Investment Division
properties. As our Homebuilding Division continues to grow, home sales will
become our primary source of cash. We believe these sources will continue to
meet our cash requirements, including debt service, property maintenance and
improvements, development costs for rental apartment and for-sale 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 home and Investment Division property
sales and borrowings will be completed as planned.
Proceeds from borrowings are expected to continue to be a key source of cash for
Tarragon. During 2004, we expect to generate net proceeds from mortgage
borrowings or other financing transactions on consolidated and unconsolidated
properties of $20 million. We have a $20 million unsecured line of credit with
affiliates of William S. Friedman, our President and Chief Executive Officer and
Chairman of our Board of Directors. 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, the line of credit was extended to January 2006. All
of these funds were available to us as of December 31, 2003, as there was no
outstanding balance. We also have lines of credit with two banks. One is a $16.8
million line of credit, of which $8.6 million is currently available, secured by
mortgages on five properties and Tarragon common stock. Payment terms are
interest only monthly at 175 basis points over the thirty-day LIBOR, with the
outstanding balance due at maturity of June 2005. The other is a fully utilized
$2 million line of credit secured by Tarragon common stock. Payment terms are
interest only monthly at 240 basis points over the thirty day LIBOR, with the
outstanding balance due at maturity of May 2004.
Proceeds from sales of properties are also expected to continue to be a key
source of cash for Tarragon. We expect to generate $14 million in net proceeds
from the sale of consolidated Investment Division properties during 2004.
34
Contractual Commitments
The following table summarizes information regarding contractual commitments.
2005 2007
2004 and 2006 and 2008 Thereafter Total
-------- -------- -------- ---------- --------
Scheduled debt maturities $ 17,768 $243,736 $ 34,608 $172,945 $469,057
Operating leases 894 1,942 2,033 26,173 31,042
-------- -------- -------- -------- --------
18,662 245,678 36,641 199,118 500,099
-------- -------- -------- -------- --------
Guaranteed debt of
unconsolidated partnerships
and joint ventures 57,697 122,809 -- 925 181,431
-------- -------- -------- -------- --------
$ 76,359 $368,487 $ 36,641 $200,043 $681,530
======== ======== ======== ======== ========
In 2005 and 2006, $107 million of the maturing loans contain extension options
($99.7 million with two years and $7.3 million with one year). An $8.1 million
mortgage maturing in 2007 has a five year extension option. We intend to extend
the loans or pay them off largely through refinancings and home sales. We
believe we can arrange such new financing as may be needed to repay maturing
loans.
We have guaranteed $76.2 million of mortgages on six unconsolidated properties;
$54.5 million relates to two mortgages that mature in 2006 and have two-year
extension options, $925,000 relates to a mortgage that matures in 2012, $900,000
relates to a mortgage that matures in 2023, and the balance relates to two
mortgages that mature in 2004. We have also guaranteed construction loans
totaling $146.7 million on three unconsolidated properties, including the $109
million construction loan for the Las Olas River House condominium development.
This construction loan has a December 31, 2003, balance of $68.3 million,
matures in 2005, and contains a one-year extension option. (As of December 31,
2003, sales at this project had reached $146 million - see the discussion below
in "Segment Operating Results" under "Homebuilding Division.") The aggregate
balance of the other construction loans at December 31, 2003, is $37.7 million.
These loans mature in 2004 and have one- or two-year extension options. In
addition, we guaranteed $750,000 in loans that were paid off in January 2004.
35
Sources and Uses of Cash
- ------------------------
The following table presents major sources and uses of cash for the past three
years.
For Years Ended December 31,
-----------------------------------
2003 2002 2001
-------- -------- --------
SOURCES OF CASH:
Net cash flow from property operations ................... $ 15,087 $ 18,066 $ 14,197
Net proceeds from the sale of real estate
Investment Division .................................... 24,244 20,658 3,608
Homebuilding Division .................................. -- 378 4,039
Net proceeds (payments) related to financings and other
borrowings
Investment Division .................................... 45,063 19,204 10,103
Homebuilding Division .................................. -- (8,238) 8,207
Lines of credit ........................................ (3,370) (13,184) 1,558
Net proceeds from home sales ............................. 8,320 14,715 8,122
Other:
Collections of notes and interest receivable ........... 1,052 3,870 5,203
Litigation settlement .................................. -- -- 2,294
-------- -------- --------
Total sources of cash ............................... 90,396 55,469 57,331
-------- -------- --------
USES OF CASH:
Purchase of homebuilding inventory or land for development (16,611) (4,975) (2,474)
Development and renovation costs (net of borrowings) ..... (5,142) (3,869) (12,503)
Advances to partnerships and joint ventures for
homebuilding activities ................................ (35,271) (1,812) (12,289)
-------- -------- --------
Cash used in homebuilding activities ................ (57,024) (10,656) (27,266)
-------- -------- --------
Purchase of Investment Division apartment communities .... -- -- (2,366)
Property capital improvements ............................ (11,161) (16,247) (9,891)
Other:
Stock repurchases ...................................... (4,186) (4,863) (3,234)
General and administrative expenses paid ............... (13,904) (12,943) (8,721)
Dividends to stockholders .............................. (791) (1,325) (497)
Other .................................................. 273 (401) (508)
-------- -------- --------
Total uses of cash .................................. (86,793) (46,435) (52,483)
-------- -------- --------
Net sources of cash ......................................... $ 3,603 $ 9,034 $ 4,848
======== ======== ========
Advances to partnerships and joint ventures for homebuilding activities in 2003
included:
o $15.5 million to Metropolitan Sarasota to purchase land for its
124-unit high-rise, luxury condominium development in Sarasota,
Florida.
o $8.3 million to One Las Olas for development costs of its 287-unit
high-rise, luxury condominium development in Ft. Lauderdale, Florida.
o $1.8 million to East Las Olas for development costs of its 44-unit
mixed-use retail and condominium development in Ft. Lauderdale,
Florida.
o $7.8 million to Thirteenth Street Development for development costs
related to its two mid-rise, luxury condominium developments with a
total of 277 homes in Hoboken, New Jersey.
Advances to partnerships and joint ventures for homebuilding activities in 2002
included:
o $4.6 million to East Las Olas to purchase land.
o $597,000 to Thirteenth Street Development for pre-development costs.
o $1.5 million to Guardian-Jupiter Partners, which had a rental
apartment community under construction.
o Net repayment of advances of $4.8 million from One Las Olas upon
closing of its construction loan.
36
Of advances to partnerships and joint ventures for homebuilding activities for
2001, $8.1 million was to One Las Olas.
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 275,443 shares
of our common stock in open market and negotiated transactions in 2003 at a cost
of $4.2 million. We repurchased 326,982 shares for an aggregate $4.7 million in
2002 and 265,708 shares for an aggregate $3.2 million in 2001. Subject to market
conditions, we expect to repurchase shares of our common stock in 2004 at a rate
consistent with that of the prior three years. As of December 31, 2003, Tarragon
had authority to repurchase an additional 354,963 common shares.
Sales of Consolidated Properties
- --------------------------------
The following table summarizes sales of consolidated properties during the last
three years (in thousands). Except for the sale of a portion of Northwest O'Hare
Office Building in 2003 and the sale of Palm Grove in 2002, the gains on sale in
2002 and 2003 were presented in discontinued operations in accordance with SFAS
No. 144.
Gain
Net Cash (Loss)
Date of Sale Property Sale Price Proceeds on Sale
- --------------------------------------------------------------------------------------------
2003:
Jan-03 Prado Bay Apartments $ 10,315 $ 4,119 $ 5,107
Jan-03 Newport Apartments 10,000 4,106 2,013
Jan-03 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
Sept-03 Marina Park Apartments 10,300 5,931 6,111
Dec-03 Bay West Apartments 12,650 4,076 6,528
-------- -------- --------
56,632 24,244 24,341
-------- -------- --------
2002:
Mar-02 Collegewood Apartments 5,238 3,005 2,267
Oct-02 Lake Highlands Land 420 378 267
Dec-02 Palm Grove Apartments 3,125 1,890 1,258
Dec-02 English Village Apartments 12,900 2,519 4,006
-------- -------- --------
21,683 7,792 7,798
-------- -------- --------
2001:
Feb-01 Park Norton Apartments 1,019 373 -
Mar-01 Rancho Sorrento Office Park 4,050 1,484 499
Apr-01 K-Mart in Charlotte, NC 375 354 174
Jul-01 K-Mart in Temple Terrace, FL 7,729 1,871 1,902
Nov-01 Cornell Apartments 4,100 1,468 1,919
Dec-01 Midland Plaza 950 283 (22)
-------- -------- --------
18,223 5,833 4,472
-------- -------- --------
$ 96,538 $ 37,869 $ 36,611
======== ======== ========
37
Homebuilding Sales and Development
The following table summarizes homebuilding sales and development activities for
2001 through 2003.
2003 2002 2001
-------- -------- --------
Aggregate sales collected ......... $ 52,655 $ 25,207 $ 24,718
Mortgage payments ................. (44,335) (10,492) (16,596)
-------- -------- --------
Net cash proceeds ................. 8,320 14,715 8,122
Renovation costs paid ............. (30,663) (5,128) (13,180)
Proceeds from borrowings .......... 25,553 -- 462
-------- -------- --------
Net cash received (paid) .......... $ 3,210 $ 9,587 $ (4,596)
======== ======== ========
RESULTS OF OPERATIONS
2003 COMPARED TO 2002
Consolidated Properties
- -----------------------
At December 31, 2003, our consolidated apartment communities included 9,251
operating rental apartments, and our consolidated commercial properties had an
aggregate 1.1 million square feet. The following table summarizes aggregate
property level revenues and expenses for all of our consolidated properties for
the years ended December 31, 2003 and 2002.
2003 2002 Change
-------- -------- --------
Rental revenue .................... $ 84,051 $ 80,362 $ 3,689
Property operating expenses ....... (46,979) (42,884) (4,095)
-------- -------- --------
Net operating income .............. 37,072 37,478 (406)
Interest expense .................. (24,368) (21,421) (2,947)
Depreciation expense .............. (20,032) (17,736) (2,296)
-------- -------- --------
$ (7,328) $ (1,679) $ (5,649)
======== ======== ========
The following table presents the impact on property level revenues and expenses
of the operations of recently completed properties in lease-up, properties
undergoing conversion to condominiums for sale, properties consolidated, and one
property sold during the two-year period.
Properties
Consolidated Property Condominium Properties in Other
in April 2002(a) Sold Conversions Lease-up (b) Changes Total
---------------- -------- ----------- ------------- ------- -------
Rental revenue ......... $ 1,997 $ (929) $(1,110) $ 3,818 $ (87) $ 3,689
Property operating
expenses ............. (745) 623 256 (1,595) (2,634) (4,095)
------- ------- ------- ------- ------- -------
Net operating income ... 1,252 (306) (854) 2,223 (2,721) (406)
Interest expense ....... (79) (16) (2,587) (155) (110) (2,947)
Depreciation expense ... (251) -- -- (603) (1,442) (2,296)
------- ------- ------- ------- ------- -------
$ 922 $ (322) $(3,441) $ 1,465 $(4,273) $(5,649)
======= ======= ======= ======= ======= =======
- ----------
(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.
Taking units out of service at Pine Crest Apartments in connection with its
condominium conversion resulted in a $2.1 million decrease in rental revenue and
a $582,000 decrease in property operating expenses. We reported
38
increases in rental revenue of $1 million and net operating income of $506,000
from Tuscany on the Intracoastal, which was purchased as a condominium
conversion in June 2003.
Also in connection with the condominium conversion of Pine Crest, we incurred
prepayment penalties totaling $3.1 million and $241,000 of deferred financing
expenses written off upon the early payoff of two mortgages when we closed a $25
million condominium conversion loan.
The increase in property operating expenses included in Other Changes is related
to higher personnel, landscaping, and other costs incurred in order to maintain
occupancy in highly competitive rental markets. Additionally, property taxes
were higher for newly constructed apartment communities whose values have been
reassessed after completion. Also, weather-related costs, including utilities
and heavy snow removal, were higher, and insurance costs increased.
Other changes for depreciation expense include $1.4 million resulting from
resuming depreciation of two apartment communities upon their reclassification
to real estate held for investment in the second quarter of 2003, including an
adjustment to record depreciation for the period during which they were
classified as held for sale.
Unconsolidated Partnerships and Joint Ventures
The following table summarizes the components of equity in income of
unconsolidated partnerships and joint ventures for 2003 and 2002.
2003 2002 Change
-------- -------- --------
HOMEBUILDING OPERATIONS
Homebuilding sales revenue ................................ $ 97,583 $ -- $ 97,583
Costs of homebuilding sales ............................... (77,381) -- (77,381)
-------- -------- --------
20,202 -- 20,202
-------- -------- --------
RENTAL PROPERTY OPERATIONS
Rental revenue ............................................ $ 47,534 $ 41,639 $ 5,895
Property and other operating expenses ..................... (25,806) (20,851) (4,955)
-------- -------- --------
Net operating income ...................................... 21,728 20,788 940
Interest expense .......................................... (17,576) (14,462) (3,114)
Depreciation expense ...................................... (9,485) (8,311) (1,174)
-------- -------- --------
(5,333) (1,985) (3,348)
-------- -------- --------
Gain on sale of real estate ............................... -- 27,240 (27,240)
Discontinued operations ................................... -- 7,539 (7,539)
Elimination of management fees paid to Tarragon ........... 4,325 1,403 2,922
Outside partners' interests in income of joint ventures ... (5,525) (7,353) 1,828
Distributions in excess of investment ..................... 9,120 6,055 3,065
Loss from investment written off .......................... (313) -- (313)
Reduction in gain recognized for distributions in excess
of investment recognized in 2000 ........................ -- (16,257) 16,257
-------- -------- --------
Equity in income of partnerships and joint ventures ....... $ 22,476 $ 16,642 $ 5,834
======== ======== ========
Income from homebuilding operations was recognized in 2003 when Las Olas River
House, a high-rise condominium development owned by One Las Olas, met the
criteria requiring use of the percentage-of-
39
completion method of accounting for the sale of its units. As of December 31,
2003, construction was 74% completed, and sales of 186 units were under firm
contract.
Gain on sale of real estate for 2002 includes a $25.1 million gain on the sale
of Devonshire Apartment Owners' sole property and $2.1 million in gains on sale
of three properties owned by Ansonia Apartments. The reduction in gain
recognized for distributions in excess of investment recognized in 2000 relates
to Devonshire Apartment Owners. This income was recognized in connection with
the transfer of ownership of The Villages at Gateway to the joint venture in
July 2000 and represented distribution of financing proceeds in excess of our
investment in the joint venture.
Discontinued operations include the net operating results of Stone Creek
Associates and the gain on sale of its only property in December 2002.
Distributions in excess of investment are primarily related to distributions of
financing proceeds of joint ventures in which we have recovered our investment.
In these situations, the joint ventures' debt is non-recourse to Tarragon, and
Tarragon has not committed to fund any cash flow deficits of the joint ventures.
The following table presents the effect of the operations of recently completed
properties in lease-up and properties consolidated, deconsolidated, or sold
during the two-year period on aggregate joint ventures' property level revenues
and expenses.
Properties Properties Property Properties Other
Consolidated Sold Deconsolidated in Lease-up Changes
in 2002 (a) in 2002 (b) in 2003 (c) (d) (e) Total
------------ ----------- -------------- ----------- ------- -------
Rental revenue ............. $(1,405) $(1,357) $ 1,374 $ 6,258 $ 1,025 $ 5,895
Property and other operating
expenses ................. 550 933 (1,303) (3,192) (1,943) (4,955)
------- ------- ------- ------- ------- -------
Net operating income ....... (855) (424) 71 3,066 (918) 940
Interest expense ........... 267 435 (560) (1,816) (1,440) (3,114)
Depreciation expense ....... 243 -- (531) (1,165) 279 (1,174)
------- ------- ------- ------- ------- -------
$ (345) $ 11 $(1,020) $ 85 $(2,079) $(3,348)
======= ======= ======= ======= ======= =======
- -----------
(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 are presented in discontinued operations.
(c) Due to a change in control in connection with forming a joint venture,
Vintage at Fenwick Plantation was deconsolidated in January 2003.
Construction of the property was completed in 2003, and it began leasing in
July 2002.
(d) Includes three partnerships with recently completed properties in lease-up
during most of 2003.
(e) The increase in interest expense resulted from new and supplemental
financing placed on several properties, including prepayment penalties and
the write-off of deferred borrowing costs.
General and Administrative Expenses
- -----------------------------------
Corporate general and administrative expenses increased $3.8 million for 2003
compared to 2002 primarily due to homebuilding-related personnel additions and
compensation increases. We have assimilated a team dedicated to homebuilding to
help create our pipeline of projects, which take two to four years from
inception to generate revenue. Please see the discussion below under "Segment
Operating Results - Homebuilding Division." Additionally, we incurred legal and
other professional fees and costs of relocating residents of $308,000 in 2003 in
connection with a matter relating to the alleged release of asbestos-containing
materials at one of our condominium conversion projects.
Property general and administrative expenses increased $628,000 for 2003
compared to 2002, primarily due to property management personnel additions and
salary increases.
40
2002 COMPARED TO 2001
Consolidated Properties
- -----------------------
At December 31, 2002, our consolidated apartment communities included 9,815
operating rental apartments, and our consolidated commercial properties had an
aggregate 1.2 million square feet. The following table summarizes aggregate
property level revenues and expenses for all of our consolidated properties for
the years ended December 31, 2002 and 2001.
2002 2001 Change
-------- -------- --------
Rental revenue ................. $ 80,362 $ 84,020 $ (3,658)
Property operating expenses .... (42,884) (44,983) 2,099
-------- -------- --------
Net operating income ........... 37,478 39,037 (1,559)
Interest expense ............... (21,421) (26,688) 5,267
Depreciation expense ........... (17,736) (19,597) 1,861
-------- -------- --------
$ (1,679) $ (7,248) $ 5,569
======== ======== ========
The following table presents the impact on property level revenues and expenses
of the operations of recently completed properties in lease-up, properties
undergoing conversion to condominiums, properties consolidated or
deconsolidated, and properties sold during the two-year period.
Properties
Properties Properties Sold
in Consolidated in 2001, Properties Condominium
Lease-up in April 2002 Deconsolidated Conversions Other
(a) 2002 (b) and 2003 (c) in 2001 (d) (e) Changes Total
-------- ------------ ------------ -------------- ----------- -------- --------
Rental revenue .... $ 7,131 4,450 $(11,445) $ (4,097) $ (1,234) $ 1,537 $ (3,658)
Property operating
expenses ........ (2,353) (1,754) 5,777 1,500 841 (1,912) 2,099
-------- -------- -------- -------- -------- -------- --------
Net operating
income .......... 4,778 2,696 (5,668) (2,597) (393) (375) (1,559)
Interest expense... (1,307) (1,029) 3,111 1,846 400 2,246 5,267
Depreciation
expense ......... (1,491) (922) 2,475 880 124 795 1,861
-------- -------- -------- -------- -------- -------- --------
$ 1,980 $ 745 $ (82) $ 129 $ 131 $ 2,666 $ 5,569
======== ======== ======== ======== ======== ======== ========
- -------------
(a) Includes one commercial property and eight apartment communities which were
recently completed properties in lease-up during one or both periods
presented.
(b) In connection with a change in control, Antelope Pines and Woodcreek Garden
were consolidated beginning April 2002.
(c) Includes four commercial properties and eleven apartment communities. The
operations of eight of these apartment communities and one of these
commercial properties were not presented in discontinued operations for
2001 because the effect was not significant.
(d) Due to a change in control in connection with forming joint ventures, The
Club at Danforth, The Links at Georgetown, The Liberty Building, and The
Vineyard at Eagle Harbor were deconsolidated in 2001.
(e) Decreases in rental revenue and expenses are due to taking units out of
service at two properties undergoing condominium conversions.
Other increases in rental revenue are due to a 1% increase in scheduled rents
and a 3% decrease in vacancy losses. Other increases in property operating
expenses are chiefly due to property tax refunds received in 2001, higher costs
of insurance in 2002, and increased management fee expense since out-sourcing
management to many of our properties in 2001 and 2002. These increased expenses
were partially offset by lower utility costs in 2002. Other decreases in
interest expense are due to paying off or paying down mortgages and decreases in
interest rates on our variable rate debt.
41
Unconsolidated Partnerships and Joint Ventures
- ----------------------------------------------
The following table summarizes the components of equity in income of
unconsolidated partnerships and joint ventures for 2002 and 2001.
2002 2001 Change
-------- -------- --------
Rental revenue ......................................... $ 41,639 $ 45,349 $ (3,710)
Property operating expenses ............................ (20,851) (20,962) 111
-------- -------- --------
Net operating income ................................... 20,788 24,387 (3,599)
Interest expense ....................................... (14,462) (14,709) 247
Depreciation expense ................................... (8,311) (6,916) (1,395)
-------- -------- --------
(1,985) 2,762 (4,747)
-------- -------- --------
Gain on sale of real estate ............................ 27,240 1,188 26,052
Discontinued operations ................................ 7,539 484 7,055
Elimination of management fees paid to Tarragon ........ 1,403 1,146 257
Outside partners' interests in income of joint ventures (7,353) (2,003) (5,350)
Distributions in excess of investment .................. 6,055 4,142 1,913
Reduction in gain recognized for distributions in excess
of investment recognized in 2000 ..................... (16,257) -- (16,257)
-------- -------- --------
Equity in income of partnerships and joint ventures .... $ 16,642 $ 7,719 $ 8,923
======== ======== ========
The following table presents the effect of the operations of recently completed
properties in lease-up and properties consolidated, deconsolidated, or sold
during the two-year period on aggregate joint ventures' property level revenues
and expenses.
Properties Properties Properties Properties in
Consolidated Sold in Deconsolidated Lease-up Other
in 2002 (a) 2002 (b) in 2001 (c) (d) Changes Total
------------ ---------- -------------- ------------- ------- -------
Rental revenue ............... $(3,985) $(6,713) 4,350 2,298 $ 340 (3,710)
Property operating expenses .. 1,672 2,804 (1,922) (1,546) (897) 111
------- ------- ------- ------- ------- -------
Net operating income ......... (2,313) (3,909) 2,428 752 (557) (3,599)
Interest expense ............. 1,006 2,250 (1,815) (1,228) 34 247
Depreciation expense ......... 650 875 (847) (887) (1,186) (1,395)
------- ------- ------- ------- ------- -------
$ (657) $ (784) $ (234) $(1,363) $(1,709) $(4,747)
======= ======= ======= ======= ======= =======
- ----------
(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 are presented in discontinued operations.
(c) Due to a change in control in connection with forming joint ventures, The
Club at Danforth, The Links at Georgetown, The Liberty Building, and The
Vineyard at Eagle Harbor were deconsolidated in 2001.
(d) Includes three partnerships with properties recently completed or under
construction that began lease-up in 2001 or 2002.
General and Administrative Expenses
- -----------------------------------
Corporate general and administrative expenses increased $963,000 for 2002
compared to 2001. We incurred $531,000 of expenses in connection with potential
acquisitions or development projects or financing transactions that were not
selected for further investment. Additionally, we recognized expense of $317,000
in 2002 in connection with stock options granted. We adopted the fair value
method of accounting for stock options, as defined in SFAS No. 123, effective
July 1, 2002, and we recognized no expense in 2001 for stock options granted.
Partially offsetting these increases was a $796,000 decrease due to ceasing
amortization of goodwill in connection with the adoption of SFAS No. 142 in
January 2002. The bulk of the remaining increase is related to homebuilding-
related personnel additions and compensation increases.
42
Property general and administrative expenses decreased $409,000 for 2002
compared to 2001, primarily due to a change to third party property management
for certain of our properties and a related reduction in property management
staff during 2001 and 2002.
SEGMENT OPERATING RESULTS
Homebuilding Division
- ---------------------
At December 31, 2003, approximately one-third of our assets were in the
Homebuilding Division. The following table summarizes homebuilding sales in
units and revenue and gross profit in both dollars and as a percentage of sales.
Units sold represent units closed except where we have recorded sales revenue
under the percentage of completion method.
For the Years Ended December 31,
----------------------------------------------------------------------
2003 2002 2001
-------- -------- --------
Number of units sold
5600 Collins Avenue ................... 21 99 125
Las Olas River House (a) .............. 186 -- --
Pine Crest Village I .................. 122 -- --
Tuscany on the Intracoastal ........... 6 -- --
Single-family home sites .............. 29 -- --
Smoky Mountain Ridge .................. 13 -- --
Venetian Bay Village I ................ 133 -- --
-------- -------- --------
Aggregate number of units sold ..... 510 99 125
======== ======== ========
Homebuilding sales revenue
5600 Collins Avenue ................... $ 6,277 $ 26,179 $ 25,950
Las Olas River House (a) .............. 97,583 -- --
Pine Crest Village I .................. 26,452 -- --
Tuscany on the Intracoastal ........... 1,213 -- --
Single-family home sites .............. 1,248 -- --
Smoky Mountain Ridge .................. 2,387 -- --
Venetian Bay Village I ................ 18,702 -- --
-------- -------- --------
Aggregate sales .................... $153,862 $ 26,179 $ 25,950
======== ======== ========
Gross profit on homebuilding sales
5600 Collins Avenue ................... $ (1,571) (25%) $ (2,680) (10%) $ 4,091 16%
Las Olas River House (a) .............. 20,202 21% -- -- -- --
Pine Crest Village I .................. 9,960 38% -- -- -- --
Tuscany on the Intracoastal ........... 218 18% -- -- -- --
Single-family home sites .............. 73 6% -- -- -- --
Smoky Mountain Ridge .................. -- -- -- -- -- --
Venetian Bay Village I ................ 1,167 6% -- -- -- --
-------- -------- -------- -------- -------- --------
Gross profit (loss) ................ $ 30,049 20% $ (2,680) (10%) $ 4,091 16%
======== ======== ======== ======== ======== ========
Less profit previously recognized by
the Investment Division upon the
transfer of Pine Crest Apartments
to the Homebuilding Division ..... (5,640) (21%) -- -- -- --
-------- -------- -------- -------- -------- --------
Gross profit (loss) to the
Homebuilding Division ............ $ 24,409 16% $ (2,680) (10%) $ 4,091 16%
======== ======== ======== ======== ======== ========
- ----------
(a) Sales represent revenues recognized under the percentage of completion
method. At December 31, 2003, sales under firm contracts were $131.6
million, and construction was 74% complete. Tarragon has a 68% profits
interests in this unconsolidated project.
Home sales were $153.9 million in 2003, up from $26.2 million in 2002 and $26
million in 2001. Home sales for 2003 include $97.6 million recognized under the
percentage of completion method for Las Olas River House, a luxury, high-rise
development in Ft. Lauderdale, Florida. Gross profit net of selling expenses on
home
43
sales was 20% for 2003 and 16% in 2001, while we reported a loss on home sales
of 10% in 2002. Net of minority interests in consolidated home sales and outside
partners' interests in home sales of unconsolidated projects, we reported $25.8
million of income from home sales in 2003 and $4.1 million in 2001. We reported
a loss from home sales in 2002 of $2.7 million. This loss was due to an
inventory write-down for 5600 Collins Avenue based on increases in estimated
costs to complete. We recorded another inventory write-down for 5600 Collins
Avenue in 2003 after lowering sale prices to facilitate a quick close-out of the
project. As of February 27, 2004, we had four unsold homes at this project.
In 2003, the Homebuilding Division's gross profit from home sales has been
reduced by $5.6 million for intercompany profit recognized earlier by the
Investment Division when Pine Crest Apartments was transferred to the
Homebuilding Division.
The Homebuilding Division also reported intercompany sales of $144.7 million in
2003, $304 million in 2002, and $108.2 million in 2001. These sales represent
the transfer of stabilized rental properties to the Investment Division at their
then estimated fair values. On an aggregate basis, these estimated fair values
exceeded the properties' carrying values by 15% in 2003 and 2001 and 18% in
2002. Net of outside partners' interests in intercompany sales of unconsolidated
properties, the Homebuilding Division reported income from intercompany sales of
$18.2 million in 2003, $51.7 million in 2002, and $12.2 million in 2001. 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.
Rental properties in the Homebuilding Division reported overall net loss from
operations of $6.1 million in 2003, $3.7 million in 2002, and $7.5 million in
2001. These losses are due to operating, interest, and depreciation expenses
exceeding revenues during lease-up prior to stabilization.
General and administrative expenses allocated to the Homebuilding Division
increased 73% in 2003 to $11.5 million from $6.7 million in 2002, which was up
slightly from $6.1 million in 2001. We have assimilated a team dedicated to
homebuilding in anticipation of our pipeline of projects, which take two to four
years from inception to generate revenue. Please see the table below, which
summarizes backlog for our for-sale communities with active sales as of December
31, 2003.
44
Backlog (1) Unsold Inventory
---------------------- -----------------------
Number of Number of Aggregate Number Estimated
Remaining Homes Homes or Contract of Homes or Remaining
or Home Sites Home Sites Prices Home Sites Sell-Out
--------------- ---------- ---------- ----------- ----------
Consolidated communities
5600 Collins Avenue .......... 6 2 $ 1,150 4 $ 3,300
Alexandria Place ............. 104 104 4,221 -- --
Alexandria Pointe ............ 123 123 4,757 -- --
Alta Mar ..................... 131 -- -- 131 42,800
Pine Crest Village I ......... 17 5 1,377 12 3,300
Pine Crest Village II ........ 116 75 15,056 41 12,800
Smoky Mountain Ridge ......... 190 20 4,007 170 15,000
Tuscany on the Intracoastal .. 280 45 10,438 235 59,300
Venetian Bay Village I ....... 29 29 4,191 -- --
Venetian Bay Village II ...... 136 39 5,731 97 14,200
Wekiva Crest ................. 28 28 1,552 -- --
Woods of Lake Helen .......... 105 105 4,008 -- --
Unconsolidated communities (2)
100 East Las Olas ............ 44 -- -- 44 35,100
Las Olas River House ......... 287 199 146,074 88 122,800
XII Hundred Grand ............ 159 -- -- 159 58,000
XIII Hundred Grand ........... 118 -- -- 118 44,000
-------- -------- -------- -------- --------
1,873 774 $202,562 1,099 $410,600
======== ======== ======== ======== ========
- ----------
(1) Homes or home sites sold, but not yet closed.
(2) Tarragon has profits interests ranging from 50% to 70% in 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 December 31, 2003, approximately two-thirds of our 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 14. "SEGMENT REPORTING" in the Notes to Consolidated Financial
Statements, 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
Homebuilding Division rather than to directly benefit the Investment Division.
Additionally, in the future, it is our intention to convert some of these
apartment communities to condominiums, which affects the manner in which we
operate them. The Investment Division reported net operating income of $59
million in 2003, $60.7 million in 2002, and $46.3 million in 2001. Net operating
income as a percentage of rental revenue was $47.5% in 2003, 49.5% in 2002, and
49.3% in 2001. As discussed previously, operating expenses were higher in 2003
as we devoted greater resources to leasing efforts in highly competitive rental
markets.
45
The following table presents net operating income for our 41 same store
Investment Division apartment communities with 7,752 units (consolidated and
unconsolidated) and the sixteen (nine consolidated and seven unconsolidated)
apartment communities stabilized and moved to the Investment Division during
2002 or 2003. Prior to their stabilization, the operating results of these
sixteen properties were included in the Homebuilding Division.
For the years ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
Same store stabilized apartment communities:
Rental revenue .......................................... $ 62,175 $ 60,259 $ 57,454
Property operating expenses ............................. (34,413) (31,233) (29,723)
-------- -------- --------
Net operating income .................................. $ 27,762 $ 29,026 $ 27,731
======== ======== ========
Net operating income as a percentage of rental revenue ... 44.7% 48.2% 48.3%
Average monthly rental revenue per unit .................. $ 668 $ 648 $ 618
Apartment communities stabilized during period:
Rental revenue ........................................... $ 39,756 $ 29,734 $ --
Property operating expenses .............................. (18,618) (13,276) --
-------- -------- --------
Net operating income .................................. $ 21,138 $ 16,458 $ --
======== ======== ========
Net operating income for our 41 same store stabilized Investment Division
apartment communities with 7,752 units decreased $1.3 million, or 4.35%, in 2003
compared to 2002 and increased $1.3 million, or 4.67% in 2002 compared to 2001.
The decrease in 2003 was mostly due to increases in expenses: 10.18% in 2003
compared to 2002. The increase in 2002 was mostly due to increases in rental
revenue: 4.88% in 2002 compared to 2001. This was partially offset by increases
in expenses: 5.08% in 2002 compared to 2001. Net operating income as a
percentage of rental revenue for these properties was 44.7% in 2003, 48.2% in
2002, and 48.3% in 2001.
Investment Division gains on sale of real estate, including properties owned
through unconsolidated partnerships and joint ventures, were $28.3 million in
2003, $38.4 million in 2002, and $3.5 million in 2001. We sold six consolidated
apartment communities in 2003, three consolidated apartment communities and five
unconsolidated apartment communities in 2002, and two consolidated apartment
communities in 2001. These sales brought decreases in net operating income of
$5.7 million in 2003 compared to 2002 and $3.1 million in 2002 compared to 2001.
We also sold two commercial properties in each of 2003 and 2001. The Investment
Division's gains on sale of real estate have been reduced by $1.3 million in
2003 and $954,000 in 2002 for intercompany profit recognized previously by the
Homebuilding Division upon the transfer of stabilized rental properties to the
Investment Division. The Investment Division also reported gains on intercompany
sales of $5.3 million in 2003, $12.9 million in 2002, and 808,000 in 2001. These
intercompany sales related to the transfer of properties to the Homebuilding
Division for renovation or conversion to condominiums.
Interest expense for the Investment Division increased by $373,000, or 1%, in
2003 compared to 2002. For the 41 same store stabilized apartment communities,
interest expense increased 5% from $16.5 million to $17.3 million due to
additional debt from financings of these properties in 2002 and 2003. A decrease
of $2.9 million came from the sale of Investment Division apartment communities
during 2002 and 2003. An increase of $2.4 million was related to stabilized
apartment communities transferred into the Investment Division.
Investment Division interest expense increased by 30% in 2002 from $27.7 million
in 2001. The 41 same store stabilized apartment communities reported a 5%
decrease in 2002 from $17.3 million in 2001 chiefly because of lower interest
rates on variable rate debt. A $10.2 million increase was the result of the
transfer of stabilized apartment communities into the Investment Division in
2002. An increase of $1.7 million was the result of the transfer of two
stabilized commercial properties into the Investment Division in 2002. A $2.4
million decrease came from the sale of Investment Division apartment communities
during 2001 and 2002.
46
Investment Division depreciation expense was $30 million in 2003, $28.2 million
in 2002, and $17.5 million in 2001. The 41 same store stabilized apartment
communities reported depreciation expense of $13.5 million in 2003, $11.8
million in 2002, and $10.5 million in 2001. Most of the increase for same store
stabilized apartment communities in 2003 was the result of resuming depreciation
of two properties upon their reclassification from Real Estate Held for Sale to
Real Estate Held for Investment. The increase for same store stabilized
apartment communities in 2002 came from depreciation of capital improvements
made in 2001 and 2002. In 2003, an increase of $1.9 million in Investment
Division depreciation expense was related to stabilized apartment communities
transferred into the Investment Division, and a $2.5 million decrease was
related to properties sold during 2002 and 2003. In 2002, a $6.9 million
increase came from stabilized apartment communities transferred into the
Investment Division.
General and administrative expenses allocated to the Investment Division fell to
$5.4 million in 2003 from $5.9 million in each of 2002 and 2001. General and
administrative expenses were 4.4% of divisional revenues in 2003, 4.8% in 2002,
and 6.3% in 2001.
47
Estimated Fair Market Value of Net Assets Per Common Share
- ----------------------------------------------------------
Tarragon also measures its performance by changes in estimated fair market value
of net assets per common share, as presented in the following table. All per
share amounts have been restated to give effect to the April 2002 10% stock
dividend, the February 2003 three-for-two stock split, and the January 2004
five-for-four stock split.
December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
Carrying values of homebuilding inventory, real estate, and
investments in partnerships and joint ventures:
Homebuilding inventory ............................................ $ 97,234 $ 31,632 $ 31,412
Real estate net of accumulated depreciation
Homebuilding .................................................... $ 29,304 $ 69,609 $200,762
Investment ...................................................... 365,791 365,918 201,971
-------- -------- --------
$395,095 $435,527 $402,733
======== ======== ========
Investments in and advances to partnerships and joint ventures
Homebuilding .................................................... $ 74,074 $ 20,258 $ 25,934
Investment ...................................................... 7,690 8,844 5,363
-------- -------- --------
$ 81,764 $ 29,102 $ 31,297
======== ======== ========
Book value per common share (1) ...................................... $ 6.51 $ 4.53 $ 4.33
======== ======== ========
Estimated fair market values (2):
Homebuilding inventory ............................................ $ 97,234 $ 43,727 $ 31,499
Real estate
Homebuilding .................................................... $ 29,656 $ 68,713 $220,600
Investment ...................................................... 549,598 522,953 330,325
-------- -------- --------
$579,254 $591,666 $550,925
======== ======== ========
Investments in and advances to partnerships and joint ventures
Homebuilding .................................................... $ 73,759 $ 20,258 $ 48,410
Investment ...................................................... 77,035 62,628 45,586
-------- -------- --------
$150,794 $ 82,886 $ 93,996
======== ======== ========
Estimated fair market value of net assets per common share (3) ....... $ 23.59 $ 18.90 $ 17.52
======== ======== ========
Estimated fully diluted fair market value of net assets per common
share (3) ......................................................... $ 20.34 $ 16.68 $ 15.72
======== ======== ========
- ----------
(1) Book value per common share represents total stockholders equity less
preferred stock liquidation preference divided by shares outstanding.
(2) Estimated fair market values have been determined using the following
procedures. For properties with appraisals ordered by lenders in connection
with mortgage financing performed within one year, the appraised values are
used. For 2001, we estimated the fair market values of ten properties then
under contract for sale at such contract sale prices. Six of these were
sold in 2002. We estimated the fair market value of a nearly completed
commercial property under construction at the amount of a written offer
less estimated costs to complete construction. We estimated the fair market
values of four properties using contract prices from recently terminated
sale contracts with third parties. For 2002, we estimated the fair market
value of five properties under contract at such contract prices. Three of
these properties were sold in the first quarter of 2003. We estimated the
fair market values of two properties based on written offers to purchase
from third parties. For 2003, we estimated the fair market value of one
property under contract at its contract sale price. For land and all
properties under development or construction or in initial lease-up, the
historical cost basis net carrying values are used. For all other
properties, we engaged Marcus & Millichap, a national real estate
investment brokerage company, to perform Broker's Opinions of Value, and
these values are used. Estimated fair market values of investments in and
advances to partnerships and joint ventures reflect Tarragon's interest in
the estimated fair market values of the net assets (real estate or
homebuilding inventory value less mortgage debt).
(3) The estimated fair market value of our net assets is computed by adding the
excess of our estimated fair market values of our real estate, homebuilding
inventory, and investments in and advances to partnerships and joint
ventures over their book values to and subtracting intangible assets and
deferred charges from book value equity. Estimated fully diluted fair
market value of net assets per common share has been computed assuming all
outstanding stock options have been exercised.
48
ITEM 7A. 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.
At December 31, 2003, Tarragon had four interest rate caps with aggregate
notional values of $35.7 million that mature between December 2005 and December
2006. The carrying values of the caps are adjusted quarterly to their estimated
fair values, with the changes in value charged or credited to interest expense.
At December 31, 2003, if the rates on which the fair values are based had been
100 basis points lower, it would result in a $26,000 increase in annual interest
expense. If the rates on which the fair values are based had been 100 basis
points higher, annual interest expense would be lower by $30,000.
At December 31, 2003, Tarragon had approximately $275 million of variable rate
debt. The primary base rate is the 30-day LIBOR. Using this balance of debt, a
100 basis point (1%) increase in LIBOR or any other indexes on which the rates
are based would reduce our annual pre-tax earnings by approximately $2.38
million (based on our expected level of interest capitalized) and cash flows by
approximately $2.75 million (based on our currently available interest
reserves). On the other hand, a 100 basis point decrease in interest rates would
increase our annual pre-tax earnings by approximately $2.38 million and cash
flows by approximately $2.40 million.
At December 31, 2003, unconsolidated partnerships had approximately $201 million
of variable rate debt. A 100 basis point increase in the index on which the
rates are based would reduce our annual pre-tax earnings by approximately
$813,000 (based on our current operations-sharing ratios in the partnerships and
the expected level of interest capitalized), while a 100 basis point decrease
would increase our annual pre-tax earnings by approximately $813,000. Assuming
these partnerships distribute all of their available cash to the partners, our
annual cash flow would decrease by $922,000 if interest rates increase by 1% and
would increase by $922,000 if interest rates decrease by 1% (based on our
currently available interest reserves).
[This space intentionally left blank]
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Reports of Independent Public Accountants................................. 51
Consolidated Balance Sheets -
December 31, 2003 and 2002 ............................................. 54
Consolidated Statements of Operations -
December 31, 2003, 2002, and 2001...................................... 55
Consolidated Statements of Stockholders' Equity -
December 31, 2003, 2002, and 2001...................................... 57
Consolidated Statements of Cash Flows -
December 31, 2003, 2002, and 2001...................................... 58
Notes to Consolidated Financial Statements................................ 61
Schedule III - Real Estate and Accumulated Depreciation................... 94
All other schedules are omitted because they are not required or are not
applicable or because the information required is included in the Consolidated
Financial Statements or Notes.
50
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Tarragon Realty Investors, Inc.
We have audited the accompanying consolidated balance sheets of Tarragon Realty
Investors, Inc., and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. The financial statements of the Company as of and
for the year ended December 31, 2001, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
financial statements in their report dated March 29, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tarragon Realty
Investors, Inc., and subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statements of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets," and the fair value accounting method of No. 123 "Accounting
for Stock-Based Compensation" in 2002 and No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" in 2003.
As discussed above, the financial statements of the Company as of December 31,
2001, and for the year then ended were audited by other auditors who have ceased
operations. As described in Note 1, these financial statements have been revised
to reclassify the previously reported extraordinary item for the early
extinguishments of debt as required by SFAS 145, and to include the transitional
disclosures required by SFAS 142, which were adopted by the Company as of
January 1, 2003, and January 1, 2002, respectively. Our audit procedures with
respect to the disclosures in Note 1 with respect to 2001 included agreeing the
previously reported extraordinary item for the early extinguishments of debt to
the Company's underlying records obtained from management and testing the
mathematical accuracy of the revision in income from continuing operations
before extraordinary items and discontinued operations and the related
earnings-per-share amounts. In our opinion, the revisions to the financial
statements and related disclosures for 2001 in Note 1 are appropriate and have
been appropriately applied. Our audit procedures with respect to the disclosures
in Note 16 with respect to 2001 included agreeing the previously reported net
income to the previously issued financial statements and the adjustments to
reported net income representing amortization expense recognized in those
periods related to goodwill that is no longer being amortized as a result of
initially applying SFAS 142 to the Company's underlying records obtained from
management. We also tested the mathematical accuracy of the reconciliation of
adjusted net income to reported net income, and the related earnings per share
amounts. In our opinion, the disclosures for 2001 in Note 16 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 financial statements of the Company other than with respect to such
revisions and related disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 financial statements taken as a
whole.
51
We have also audited Schedule III for the years ended December 31, 2003 and
2002. In our opinion, these schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information therein.
/s/ GRANT THORNTON LLP
Dallas, Texas
March 5, 2004
52
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with Tarragon Realty Investors, Inc., and Subsidiaries Annual Report
on Form 10-K for the year ended December 31, 2001. This audit report has not
been reissued by Arthur Andersen LLP in connection with this filing on Form
10-K. The Consolidated Balance Sheets as of December 31, 2001, and the
Consolidated Statements of Operations, Stockholders' Equity, and Cash Flows for
the years ended December 31, 2000, referred to in this report have not been
included in the accompanying Consolidated Financial Statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Tarragon Realty Investors, Inc.
We have audited the accompanying consolidated balance sheets of Tarragon Realty
Investors, Inc., and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tarragon Realty Investors,
Inc., and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
As explained in Note 1 to the accompanying consolidated financial statements,
the Company changed its method of accounting for derivative instruments
effective January 1, 2001.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedule III is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic financial statements taken as
a whole.
/s/ Arthur Andersen LLP
Dallas, Texas
March 29, 2002
53
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
2003 2002
--------- ---------
(dollars in thousands)
Assets
- ------
Real estate held for investment (net of accumulated depreciation of
$110,817 in 2003 and $103,173 in 2002) ................................... $ 395,095 $ 427,989
Real estate held for sale (net of accumulated depreciation of
$301 in 2002) ............................................................ -- 7,538
Homebuilding inventory ..................................................... 97,234 31,632
Investments in and advances to partnerships and joint ventures ............. 81,764 29,102
Cash and cash equivalents .................................................. 21,626 18,023
Restricted cash ............................................................ 6,573 6,115
Goodwill ................................................................... 2,691 2,691
Other assets, net (including $626 in 2002 due from affiliates) ............. 18,834 17,134
--------- ---------
$ 623,817 $ 540,224
========= =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
Notes, debentures, and interest payable .................................... $ 471,262 $ 428,926
Other liabilities (including $150 in 2002 due to affiliates) ............... 26,886 19,042
--------- ---------
498,148 447,968
Commitments and contingencies ..............................................
Minority interest .......................................................... 22,341 18,523
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000; shares
outstanding, 11,583,973 in 2003 and 7,896,760 in 2002 (after deducting
4,889,821 in 2003 and 3,705,382 in 2002 held in treasury) ................ 115 79
Special stock, $.01 par value; authorized shares, 7,500,000; shares
outstanding, none ........................................................ -- --
Preferred stock, $.01 par value; authorized shares, 2,500,000; shares
outstanding, 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 ............................................................ 305,562 306,414
Accumulated deficit ........................................................ (202,357) (232,766)
--------- ---------
103,328 73,733
--------- ---------
$ 623,817 $ 540,224
========= =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
54
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
(dollars in thousands, except per share data)
Revenue
Rentals ....................................................... $ 84,051 $ 80,362 $ 84,020
Homebuilding sales revenue .................................... 56,279 26,179 25,950
Management fees and other (including $429 in 2003, $472 in
2002, and $314 in 2001 from affiliates) .................... 922 580 518
--------- --------- ---------
141,252 107,121 110,488
--------- --------- ---------
Expenses
Property operations ........................................... 46,979 42,884 44,983
Costs of homebuilding sales (including inventory write-downs
of $1,571 in 2003 and $2,680 in 2002) ...................... 46,431 28,859 21,859
Depreciation .................................................. 20,032 17,736 19,597
General and administrative
Corporate .................................................. 13,234 9,472 8,509
Property ................................................... 3,692 3,064 3,473
--------- --------- ---------
130,368 102,015 98,421
--------- --------- ---------
Other income and expenses
Equity in income of partnerships and joint ventures ........... 22,476 16,642 7,719
Minority interests in income of consolidated partnerships
and joint ventures ......................................... (2,590) (1,285) (520)
Interest income (including $678 in 2003 and $265 in 2002
from affiliates) ........................................... 1,605 510 338
Interest expense (including $2 in 2003, $228 in 2002, and
$397 in 2001 to affiliates) ................................ (25,681) (22,968) (28,267)
Net gain on sale of real estate .............................. 1,223 1,258 4,994
Gain on early extinguishment of debt ......................... -- -- 420
Gain (loss) on investments ................................... -- (29) 1,551
Insurance and other claims ................................... 60 84 306
Litigation settlements ....................................... -- 102 2,295
--------- --------- ---------
Income (loss) from continuing operations ........................ 7,977 (580) 903
Discontinued operations
Income (loss) from operations ................................. 99 (501) --
Gain on sale of real estate ................................... 23,118 6,540 --
Cumulative effect of change in accounting principle ............. -- -- 326
--------- --------- ---------
Net income ...................................................... 31,194 5,459 1,229
Dividends on cumulative preferred stock ......................... (785) (683) (657)
--------- --------- ---------
Net income allocable to common stockholders ..................... $ 30,409 $ 4,776 $ 572
========= ========= =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
55
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
For the Years Ended December 31,
---------------------------------------------
2003 2002 2001
------------ ------------ ------------
(dollars in thousands, except per share data)
Earnings per common share
Income (loss) from continuing operations allocable to
common stockholders ................................... $ .50 $ (.08) $ .02
Discontinued operations ................................. 1.58 .40 --
Cumulative effect of change in accounting principle ..... -- -- .02
------------ ------------ ------------
Net income allocable to common stockholders ............. $ 2.08 $ .32 $ .04
============ ============ ============
Weighted average shares of common stock
used in computing earnings per share .................. 14,650,091 15,085,476 15,407,508
============ ============ ============
Earnings per common share - assuming dilution
Income (loss) from continuing operations allocable to
common stockholders ................................... $ .43 $ (.08) $ .02
Discontinued operations ................................. 1.37 .40 --
Cumulative effect of change in accounting principle ..... -- -- .02
------------ ------------ ------------
Net income allocable to common stockholders ............. $ 1.80 $ .32 $ .04
============ ============ ============
Weighted average shares of common stock used in
computing earnings per share - assuming dilution ...... 16,924,535 15,085,476 16,172,034
============ ============ ============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
56
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
--------------------- ------------------------ Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------- ------- ----------- ------- --------- ----------- ------------
(dollars in thousands)
Balance, December 31, 2000 ....... 588,274 $ 6 7,590,112 $ 76 $ 302,205 $ (228,161) $ 74,126
Repurchase of common stock ....... -- -- (265,708) (3) (3,178) -- (3,181)
Retirement of preferred stock .... (41,747) -- 39,875 -- (53) -- (53)
Stock options exercised .......... -- -- 63,147 1 361 -- 362
Acquisition of Accord Properties
Associates, LLC ................ 25,000 -- -- -- 1,292 -- 1,292
Dividends on cumulative preferred
stock ($1.20 per share) ........ -- -- -- -- -- (657) (657)
Net income ....................... -- -- -- -- -- 1,229 1,229
--------- ------- ----------- ------- --------- ---------- ---------
Balance, December 31, 2001 ....... 571,527 6 7,427,426 74 300,627 (227,589) 73,118
Repurchase of common stock ....... -- -- (326,982) (3) (4,728) -- (4,731)
Retirement of preferred stock .... (11,009) -- -- -- (132) -- (132)
Common stock dividend ............ -- -- 736,749 7 9,946 (9,953) --
Dividends on cumulative preferred
stock ($1.20 per share) ........ -- -- -- -- -- (683) (683)
Stock options exercised .......... -- -- 59,567 1 384 -- 385
Compensation expense related to
stock options granted .......... -- -- -- -- 317 -- 317
Net income ....................... -- -- -- -- -- 5,459 5,459
--------- ------- ----------- ------- --------- ---------- ---------
Balance, December 31, 2002 ....... 560,518 6 7,896,760 79 306,414 (232,766) 73,733
Repurchase of common stock ....... -- -- (275,443) (3) (4,148) -- (4,151)
Retirement of preferred stock .... (3,000) -- -- -- (35) -- (35)
Stock options exercised .......... -- -- 38,644 -- 246 -- 246
Three for two common stock split . -- -- 3,924,012 39 (39) -- --
Dividends on cumulative preferred
stock ($1.20 per share) ........ -- -- -- -- -- (785) (785)
Compensation expense related to
stock options granted .......... -- -- -- -- 268 -- 268
Purchase of homebuilding inventory 195,815 2 -- -- 2,856 -- 2,858
Net income ....................... -- -- -- -- -- 31,194 31,194
--------- ------- ----------- ------- --------- ---------- ---------
Balance, December 31, 2003 ....... 753,333 $ 8 11,583,973 $ 115 $ 305,562 $ (202,357) $ 103,328
========= ======= =========== ======= ========= ========== =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
57
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
(dollars in thousands)
Cash Flows from Operating Activities
Net income .................................................. $ 31,194 $ 5,459 $ 1,229
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting principle ......... -- -- (326)
Gain on early extinguishment of debt ........................ -- -- (420)
Insurance and other claims .................................. (60) (84) (306)
(Gain) loss on investments .................................. -- 29 (1,551)
Net gain on sale of real estate ............................. (24,341) (7,798) (4,994)
Minority interests in income of consolidated partnerships
and joint ventures ....................................... 2,590 1,285 520
Depreciation and amortization ............................... 23,678 22,660 23,001
Equity in income of partnerships and joint ventures ......... (22,476) (16,642) (7,719)
Costs of homebuilding sales ................................. 46,431 28,859 21,859
Purchase of homebuilding inventory .......................... (12,450) (1,920) --
Noncash compensation related to stock options ............... 268 317 --
Commissions and closing costs paid on homebuilding sales .... (3,624) (972) (1,232)
Homebuilding renovation and development costs paid .......... (30,663) (5,128) (13,180)
Changes in other assets and other liabilities, net of
effects of non-cash investing and financing activities:
Increase in interest receivable ........................ (705) (139) (9)
(Increase) in other assets ............................. (560) 403 (2,730)
Increase (decrease) in other liabilities ............... (2,568) (1,551) 2,338
Increase in interest payable ........................... 466 2 265
-------- -------- --------
Net cash provided by operating activities .............. 7,180 24,780 16,745
-------- -------- --------
Cash Flows from Investing Activities
Purchase of operating apartment communities ................. -- -- (2,366)
Purchase of land for development ............................ (2,156) (3,055) (2,474)
Proceeds from the sale of real estate ....................... 24,244 7,792 5,833
Property capital improvements ............................... (11,161) (16,247) (9,891)
Real estate development costs ............................... (10,233) (29,485) (41,485)
Earnest money deposits (paid) received, net ................. (2,005) 51 (43)
Note receivable collections ................................. 152 3,499 4,875
Distributions from investing activities of partnerships and
joint ventures ........................................... -- 13,244 1,814
Advances to partnerships and joint ventures for development
costs or for the purchase of land for development ........ (35,271) (6,626) (12,289)
Refund of partnership and joint venture development costs
from construction financing .............................. -- 4,814 533
Net distributions related to property operations of
partnerships and joint ventures .......................... 3,283 2,071 5,159
Distributions to minority partners of consolidated
partnerships and joint ventures .......................... (1,245) (921) (267)
Other ....................................................... -- (98) (300)
-------- -------- --------
Net cash used in investing activities .................... (34,392) (24,961) (50,901)
-------- -------- --------
The accompanying notes are an integral part of these
Consolidated Financial Statements.
58
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
(dollars in thousands)
Cash Flows from Financing Activities
Proceeds from borrowings .................................. $ 230,565 $ 108,459 $ 89,043
Principal payments on notes payable ....................... (204,765) (88,580) (62,123)
Advances (repayment of advances) from affiliates, net ..... -- (12,186) 5,021
Distributions from financing activities of partnerships and
joint ventures ......................................... 8,837 7,096 10,434
Stock repurchases ......................................... (4,186) (4,863) (3,234)
Dividends to stockholders, including amounts accrued in
prior years ............................................ (791) (1,325) (497)
Other ..................................................... 1,155 614 360
--------- --------- ---------
Net cash provided by financing activities .............. 30,815 9,215 39,004
--------- --------- ---------
Net increase in cash and cash equivalents ................... 3,603 9,034 4,848
Cash and cash equivalents, beginning of year ................ 18,023 8,989 4,141
--------- --------- ---------
Cash and cash equivalents, end of year ...................... $ 21,626 $ 18,023 $ 8,989
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ............................................. $ 23,650 $ 23,829 $ 26,508
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in assets and liabilities in connection with the
purchase of operating apartment communities:
Real estate ............................................. $ -- $ -- $ 16,372
Restricted cash ......................................... -- -- 468
Other assets ............................................ -- -- 170
Notes and interest payable .............................. -- -- (14,420)
Other liabilities ....................................... -- -- (224)
--------- --------- ---------
Cash paid ............................................. $ -- $ -- $ 2,366
========= ========= =========
Assets written off and liabilities released in connection
with the sale of real estate:
Real estate ............................................. $ 27,600 $ 12,463 $ 12,702
Allowance for estimated losses .......................... -- -- (71)
Other assets ............................................ 523 (1,654) (873)
Notes and interest payable .............................. (27,394) (10,469) (10,868)
Other liabilities ....................................... (826) (346) (51)
Net gain on sale ........................................ 24,341 7,798 4,994
--------- --------- ---------
Cash received ......................................... $ 24,244 $ 7,792 $ 5,833
========= ========= =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
59
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
(dollars in thousands)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES (Continued):
Effect on assets and liabilities of the consolidation of two
apartment communities in 2002 and the deconsolidation of
one apartment community in 2003 and four apartment
communities in 2001:
Real estate ............................................ $(16,377) $ 38,488 $(65,414)
Investments in and advances to partnerships and joint
ventures ............................................ 2,549 207 5,737
Other assets ........................................... (260) 1,858 (1,349)
Notes and interest payable ............................. 13,424 (31,672) 60,390
Other liabilities ...................................... 664 (284) 636
Minority interest ...................................... -- (8,597) --
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
Liabilities and equity that financed the purchase of
homebuilding inventory:
Notes payable and other liabilities ...................... $ 61,279 $ -- $ --
======== ======== ========
Equity ................................................... $ 2,858 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
60
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Tarragon Realty Investors,
Inc., its subsidiaries, and consolidated partnerships and joint ventures have
been prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP"), the most significant of which are described
in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." The preparation of
financial statements in accordance with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Notes to
Consolidated Financial Statements are an integral part of the Consolidated
Financial Statements. The data presented in the Notes to Consolidated Financial
Statements are as of December 31 of each year and for the years then ended
unless otherwise indicated. Dollar amounts in tables are in thousands, except
per share amounts. Certain balances for 2001 and 2002 have been reclassified to
conform to the 2003 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation. The Consolidated Financial Statements include the
accounts of Tarragon, its subsidiaries, and partnerships and joint ventures
(which consist primarily of limited liability companies) it controls. Tarragon
is deemed to control partnerships or joint ventures which have no unaffiliated
owners or for which Tarragon is designated as the manager and the outside owners
are given no participating rights, as defined in the Financial Accounting
Standard Board's ("FASB") Emerging Issues Task Force's 96-16 Abstract ("EITF
96-16"), or are given no important rights as defined in the American Institute
of Certified Public Accountants' Statement of Position ("SOP") 78-9, "Accounting
for Investments in Real Estate Ventures." All significant intercompany
transactions and balances have been eliminated.
Real estate and depreciation. Real estate held for investment is carried at cost
unless an impairment is determined to exist. We periodically evaluate whether
events or changes in circumstances indicate that the carrying value of any of
our properties held for investment may not be recoverable. This evaluation
generally consists of a review of the property's cash flow and current and
projected market conditions, as well as any changes in general and local
economic conditions. If an impairment loss exists based on the results of this
review, the asset's carrying value is written down to estimated fair value with
a charge against current earnings.
We capitalize improvements and major rehabilitation projects that increase the
value of the respective property and have useful lives greater than one year
except for individual expenditures less than $10,000 that are not part of a
planned renovation project. Under this policy, during 2003, expenditures of $11
million were capitalized, and property replacements of $3.5 million were
expensed. Property replacements expensed include, but are not limited to, such
items as landscaping, common area improvements, and apartment upgrades.
Depreciation is provided against real estate held for investment by the
straight-line method over the estimated useful lives of the assets, ranging from
three to 40 years. Real estate held for sale is not depreciated.
Properties for which executed contracts for sale are in place are reclassified
to held for sale. We cease depreciating the properties in the month following
their reclassification to held for sale. These properties remain classified as
held for sale until sold or until we decide to discontinue marketing efforts.
When properties are reclassified from held for sale to held for investment, we
resume depreciating them in the month of their reclassification, and
depreciation expense is adjusted to record depreciation for the time during
which the properties were classified as held for sale. Real estate held for sale
is carried at the lower of cost or estimated fair value less estimated costs to
sell.
61
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In August 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which, among other things, requires operating results for assets sold
or held for sale to be presented as discontinued operations for current and all
prior years presented. SFAS No. 144 also changed the rules for impairment
testing of real estate held for investment by requiring the use of a probability
weighted holding period for purposes of estimating undiscounted cash flows. We
adopted this statement January 1, 2002. The adoption had no effect on our
reported net income. For the years ended December 31, 2003 and 2002, the
operations of properties for which a plan of disposal was implemented after the
adoption of SFAS No. 144 have been reported in discontinued operations. Total
revenues included in discontinued operations were $3.7 million and $10.2 million
for the years ended December 31, 2003 and 2002. These operations were previously
reported in the Investment Division. We have not restated operating results for
the year ended December 31, 2001, to present the operations of these properties
in discontinued operations due to immateriality.
Homebuilding inventory. Homebuilding inventory consists of land, condominium
conversions, and condominium, townhome, cabin site, and single-family home site
developments. Homebuilding inventory, including capitalized interest and real
estate taxes, is carried at the lower of cost or fair value determined by
evaluation of individual projects. Whenever events or circumstances indicate
that the carrying value of homebuilding inventory may not be recoverable, the
related assets are written down to their estimated fair market value less
selling costs.
Capitalized interest. We capitalize interest on funds used in constructing
property from the date of initiation of construction activities through the time
the property is ready for leasing or sale. Interest of $1.7 million, $850,000,
and $2.8 million was capitalized during 2003, 2002, and 2001, respectively.
Cash equivalents. We consider all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Restricted cash. Restricted cash is primarily escrow accounts, generally held by
the lenders of certain of our mortgage notes payable, for taxes, insurance, and
property repairs and replacements.
Other assets. Other assets consist primarily of notes and interest receivable,
tenant accounts receivable, deferred borrowing costs, and prepaid leasing
commissions. Deferred borrowing costs are amortized on the straight-line method
(which has approximated the effective interest method) over the related loan
terms, and such amortization is included in interest expense. Prepaid leasing
commissions are amortized to leasing commission expense, included in property
operating expenses, on the straight-line method over the related lease terms.
Goodwill. Goodwill was recorded in connection with the acquisitions of Tarragon
Realty Advisors and Accord Properties Associates and, until December 31, 2001,
was amortized on the straight-line method. We adopted SFAS No.142, "Goodwill and
Other Intangible Assets," on January 1, 2002. SFAS No. 142 requires that
goodwill and other intangible assets with indefinite useful lives no longer be
amortized as expenses of operations but rather carried on the balance sheet as
permanent assets. These assets will be subject to at least annual assessment for
impairment by applying a fair-value-based test. There was no transitional
impairment loss at January 1, 2002. Amortization of goodwill amounted to
$796,000 for 2001. See NOTE 16.
62
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
"GOODWILL" for a presentation of income from continuing operations, net income,
earnings per common share, and earnings per common share - assuming dilution for
2001, adjusted to exclude amortization expense related to goodwill.
Revenue Recognition. Homebuilding sales revenue is typically recognized at the
time of closing 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. For mid-rise and high-rise condominium developments, where construction
typically takes eighteen months or more, the percentage-of-completion method is
employed. Under this method, once construction is beyond a preliminary stage,
buyers are committed to the extent of being unable to require refunds except for
non-delivery of the home, a substantial percentage of homes are under firm
contracts, the sale prices are deemed collectible, and remaining costs and
revenues can be reasonably estimated, revenue is recorded as a portion of the
value of non-cancelable sale contracts. Revenue recognized is calculated based
upon the percentage of construction costs incurred in relation to total
estimated construction costs. Any amounts due under sale contracts, to the
extent recognized as revenue, are recorded as contracts receivable.
Rental revenue is recognized on the straight-line method. 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 method over the lease terms as a reduction to rental revenue. We
accrue percentage rentals only after the tenants' sales have reached the
threshold provided for in the lease.
Interest and management fee revenue are recognized when earned. Revenue from
long term laundry and cable service contracts is deferred and amortized to
income on the straight-line method over the terms of the contracts.
Gains on sales of real estate are recognized when and to the extent permitted by
SFAS No. 66 - "Accounting for Sales of Real Estate." Until the requirements of
SFAS No. 66 for full profit recognition have been met, transactions are
accounted for using the deposit, installment, cost recovery, or financing
method, whichever is appropriate.
Investments in noncontrolled partnerships and joint ventures. We use the equity
method to account for investments in partnerships and joint ventures over which
we exercise significant influence but do not control. Under the equity method,
our initial investments are increased by our proportionate share of the
partnerships' or joint ventures' operating income and additional advances and
decreased by our proportionate share of the partnerships' or joint ventures'
operating losses and distributions received. 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 of SOP 78-9. Our interest in intercompany transactions is
eliminated.
Stock split and dividend. In December 2003, the Board of directors approved a
five-for-four stock split effective January 15, 2004. In January 2003, the Board
of Directors approved a three-for-two stock split effective February 14, 2003.
In April 2002, a 10% stock dividend was paid. Weighted average shares of
63
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
common stock outstanding and stock options outstanding, granted, exercised, and
forfeited in NOTE 8. "STOCK OPTIONS" have been restated to give effect to the
stock splits and dividend.
Earnings per common share. Net income per share of common stock is computed
based upon the weighted average number of shares outstanding during each year.
All share and per share data have been restated to give effect to the 10% stock
dividend paid in April 2002, the three-for-two stock split on February 14, 2003,
and the five-for-four stock split on January 15, 2004. See NOTE 7. "EARNINGS PER
COMMON SHARE."
Fair value of financial instruments. Disclosure about fair value of financial
instruments is based on pertinent information available to us as of December 31,
2003 and 2002. Considerable judgment is necessary to interpret market data and
develop estimated fair values. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
values. For these reasons, the estimated fair values presented may differ
significantly from the actual amounts we may realize or pay.
As of December 31, 2003 and 2002, we estimate that the carrying amounts for cash
and cash equivalents and restricted cash approximate fair value because of the
short maturities of these instruments. In addition, the carrying amounts of
notes receivable and other liabilities approximate fair value. The fair values
of notes payable are estimated by discounting future expected cash flows using
current rates for loans with similar terms and maturities. See NOTE 4. "NOTES,
DEBENTURES, AND INTEREST PAYABLE" for the disclosure of fair values of notes
payable.
Stock option plans. In 2002, we adopted the fair value method defined in SFAS
No. 123, "Accounting for Stock-Based Compensation," in accounting for our stock
option plans, where previously we applied Accounting Principles Board's Opinion
No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and related
Interpretations. SFAS No. 123 indicates that the fair value method is the
preferable method of accounting. In December 2002, the FASB amended SFAS No. 123
by issuing SFAS No. 148, "Accounting for Stock-Based Compensation--Transition
and Disclosure," which we adopted upon issuance. We elected to apply the fair
value method prospectively, which is one of three methods established by SFAS
No. 148, for all options granted since the beginning of 2002. Under APB No. 25,
compensation costs related to stock options issued pursuant to compensatory
plans are measured based on the difference between the quoted market price of
the stock at the measurement date (ordinarily the date of grant) and the
exercise price and should be charged to expense over the periods during which
the grantee performs the related services. No stock-based employee compensation
expense was recognized in 2001. Because awards under the plans vest over five
years, the cost related to stock-based employee compensation included in the
determination of net income for 2003 and 2002 is less than that which would have
been recognized if the fair value based method had been applied to all awards
since the original effective date of SFAS No. 123. The following table
illustrates the effect on net income and earnings per common share if the fair
value based method had been applied to all outstanding and unvested awards in
each period. For more information about our stock option plans, see NOTE 8.
"STOCK OPTIONS."
64
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
For the Years Ended December 31,
------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
Net income allocable to common stockholders,
as reported................................... $ 30,409 $ 4,776 $ 572
Add:
Stock-based employee compensation expense
included in reported net income .............. 268 317 --
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards ........................ (465) (568) (335)
---------------- ---------------- ----------------
Pro forma net income allocable to common
stockholders.................................. $ 30,212 $ 4,525 $ 237
================ ================ ================
Earnings per common share
Net income allocable to common stockholders,
as reported................................. $ 2.08 $ .32 $ .04
================ ================ ================
Net income allocable to common stockholders,
pro forma................................... $ 2.06 $ .30 $ .02
================ ================ ================
Earnings per common share - assuming dilution
Net income allocable to common stockholders,
as reported................................. $ 1.80 $ .32 $ .04
================ ================ ================
Net income allocable to common stockholders,
pro forma................................... $ 1.79 $ .30 $ .01
================ ================ ================
Derivatives. In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. This pronouncement
establishes accounting and reporting standards requiring that a derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. We adopted this pronouncement effective
January 1, 2001. Our reverse repurchase agreement with an investment bank,
terminated in 2001, was a derivative. The initial valuation adjustment of
$326,000 was recorded as a cumulative effect of a change in accounting principle
in 2001. Changes in the fair value of the underlying derivative instrument were
recorded in current earnings during 2001 through the date we terminated the
agreement. We have entered into four interest rate cap agreements in connection
with mortgage financings. These caps are presented with "Other assets" in the
accompanying Consolidated Balance Sheets as of December 31, 2003 and 2002. The
carrying values of the caps are adjusted quarterly to fair value with a
corresponding charge or credit to interest expense.
Marketing costs. Marketing costs, including advertising, incurred in connection
with newly constructed rental apartment communities in lease-up are deferred and
amortized to property operating expenses over the lease-up term. Marketing costs
incurred in connection with for-sale communities are deferred and recorded as
cost of sales when sales revenue is recognized. All other advertising costs are
recorded to property operating expenses as incurred.
65
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employee benefit plan. Tarragon has a defined contribution plan covering
substantially all of its employees. Tarragon's contributions are 401(k) matches
determined based on 100% of the first 3% and 50% of the next 2% of the
employee's salary deferrals. Total plan expense was $330,000 in 2003, $273,000
in 2002, and $291,000 in 2001 and is included in corporate and property general
and administrative expenses in the accompanying Consolidated Statements of
Operations.
Income taxes. We recognize deferred tax assets and liabilities based on the
difference between the financial statement and income tax bases of assets and
liabilities using the enacted statutory tax rate. A valuation allowance is
recorded to the extent realization of deferred tax assets is uncertain.
Recent accounting pronouncements. In April 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which, among other things, rescinded SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt." SFAS No. 4 required gains and losses from
extinguishments of debt to be classified as extraordinary items, if material.
Under SFAS No. 145, gains and losses on extinguishments of debt will no longer
be classified as extraordinary unless they meet the unusual in nature and
infrequency of occurrence criteria in the Accounting Principles Board's Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," which is expected to be rare. We adopted
SFAS No. 145 on January 1, 2003. Therefore, gains or losses on extinguishment of
debt prior to maturity are no longer classified as extraordinary items. 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. There was no
impact on our reported net income. Such items were $846,000 during 2002 and
$605,000 in 2001. We also recognized a gain on debt forgiveness of $420,000 in
October 2001 upon the discounted payoff of the mortgage secured by Orlando
Central Park.
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.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities," which was revised December 2003. 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
66
TARRAGON REALTY INVESTORS, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
March 15, 2004. 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.
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 on our financial statements.
NOTE 2. MINORITY INTERESTS
In February 2000, Tarragon entered into an agreement to acquire the interests of
Robert C. Rohdie and certain of his affiliates in ten apartment communities.
Simultaneously, he became a member of our Board of Directors and Chief Executive
Officer of Tarragon Development Corporation, a wholly-owned subsidiary of
Tarragon. Mr. Rohdie, Tarragon's partner in the development of these projects,
contributed his equity interests to Tarragon Development Company, LLC ("TDC"), a
newly formed entity, in exchange for a preferred interest in the entity. For
five of the ten properties that had been completed as of the date of the
agreement, Mr. Rohdie received a preferred interest with a fair value of $5
million. The initial $5 million of purchase consideration was allocated to the
five completed properties based upon their relative fair values. In accordance
with the terms of the agreement, the purchase of the remaining five properties,
which were in various stages of construction or development planning in February
2000, was contingent upon their completion, as defined in the agreement. During
2001, four of the five remaining apartment communities were completed, as
defined in the agreement, and Mr. Rohdie received additional preferred interests
in TDC with an aggregate fair value approximating $3.8 million. Mr. Rohdie
received an additional preferred interest with a fair value of approximately
$1.3 million for one final apartment community in May 2003.
Mr. Rohdie's preferred interest earns a guaranteed return. For 80% of the
preferred interest, it is a guaranteed fixed return of 5% for the first two
years, increasing by 1% per year until it reaches 10% in year seven. The
remaining 20% of the preferred interest is due an amount equal to cash dividends
payable, if any, on 445,398 shares of Tarragon common stock. Mr. Rohdie received
distributions of $267,500 in 2001, $375,889 in 2002, and $577,722 in 2003 in
payment of his guaranteed return.
Mr. Rohdie can convert his preferred interest in TDC into 445,398 shares of our
common stock and preferred stock with a face value of $8 million and a like
dividend to his guaranteed fixed return. If we do not have available an issue of
preferred stock outstanding at the time of the conversion, or at our discretion,
we may pay the cash value of Mr. Rohdie's preferred interest over three years.
Beginning in February 2006, Mr. Rohdie may elect to convert his preferred
interest into cash, payable over three years. The cash value that would be
payable for the conversion of the preferred interest is equal to the sum of (1)
the liquidation preference multiplied by the number of shares of preferred stock
payable upon conversion (425,000 shares as of December 31, 2003) and (2) the
market value of 445,398 shares of our common stock. As of December 31, 2003, the
cash value was $10,982,812.
67
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. MINORITY INTERESTS (Continued)
Tarragon is the sole manager of TDC and makes all decisions regarding the
operation, management, or control of its business and therefore consolidates
this entity. Mr. Rohdie's interest in TDC is presented as a minority interest.
The guaranteed fixed return payable to Mr. Rohdie is being recorded based on an
annual effective yield of 8.53% and is reflected in "Minority interests in
income of consolidated partnerships and joint ventures" in the accompanying
Statements of Operations for the years ended December 31, 2003, 2002, and 2001.
Since April 2002, Tarragon has included in its Consolidated Financial Statements
its interests in Antelope Pines Estates, L.P., and Woodcreek Garden Apartments,
L.P., because of a change in control in these partnerships. The change in
control resulted from the expiration of the rights of the limited partners to
approve the sale or refinancing of the properties owned by the partnerships.
These rights were considered important rights, as defined in SOP 78-9,
"Accounting for Investments in Real Estate Ventures." Therefore, these
interests, acquired in 1998 from affiliates of Mr. Dennis French, were
previously accounted for using the equity method. The affiliates of Mr. French
continue to hold preferred interests in the partnerships of $3.5 million for
Antelope Pines Estates, L.P., and $5.6 million for Woodcreek Garden Apartments,
L.P. Their preferred interests earn a preferred return of 9%, payable quarterly.
The affiliates of Mr. French have a preference on allocations of net income from
the partnerships to the extent of the quarterly payments. If the preferred
return is not paid when due, the affiliates of Mr. French may elect to become
the managing general partners, and Tarragon's interests would convert to that of
limited partners. The interests of the affiliates of Mr. French are presented as
minority interests. The quarterly payments of the preferred return and the
preference on allocations of net income are reflected in "Minority interests in
income of consolidated partnerships and joint ventures" in the accompanying
Statements of Operations for the years ended December 31, 2003 and 2002.
68
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 December 31:
Carrying Amount
Profits -----------------------------------------
Interest 2003 2002
------------------ -------------------- ---------------
601 Ninth Street Development, L.L.C. ............................... 50% $ 477 $ 366
801 Pennsylvania Avenue ............................................ 50% 15 21
Adams Street Development, L.L.C. ................................... 40% 1,567 447
Ansonia Apartments, L.P. ........................................... 70% - 94
Ansonia Liberty, L.L.C. ............................................ 90% - -
Block 88 Development, L.L.C. ....................................... 40% 610 170
Block 99/102 Development, L.L.C. ................................... 40% 233 186
Danforth Apartment Owners, L.L.C. .................................. 99% 80 271
Fenwick Tarragon Apartments, L.L.C. ................................ 70% 1,830 -
Guardian-Jupiter Partners, Ltd. .................................... 70% 3,315 4,359
Lake Sherwood Partners, L.L.C. ..................................... 70% - -
Larchmont Associates, L.P. ......................................... 57% 2,619 2,329
Merritt 8 Acquisitions, L.L.C. ..................................... 80% 907 2,276
Merritt Stratford, L.L.C. .......................................... 50% 497 519
Metropolitan Sarasota, Ltd. ........................................ 70% 15,910 -
One Las Olas, Ltd. ................................................. 68% 33,993 7,998
100 East Las Olas, Ltd., and East Las Olas, Ltd. ................... 70% 6,408 4,607
Sacramento Nine .................................................... 70% 443 535
Summit/Tarragon Murfreesboro, L.L.C. ............................... 70% 416 756
Tarragon Calistoga, L.L.C. ......................................... 80% 557 235
Tarragon Savannah I & II, L.L.C. ................................... 99% 2,514 2,876
Thirteenth Street Development, L.L.C. .............................. 50% 8,393 615
Vineyard at Eagle Harbor, L.L.C. ................................... 99% - 442
Warwick Grove Company, L.L.C. ...................................... 50% 980 -
-------------------- ---------------
$ 81,764 $ 29,102
==================== ===============
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 EITF 96-16, or important
rights, as defined by SOP 78-9. Therefore, we account for our investments in
these partnerships and joint ventures using the equity method.
Ansonia Apartments, L.P. Our joint venture partner in Ansonia Apartments is
Ansonia LLC, the principals of which are Robert Rothenberg, Saul Spitz, Richard
Frary, and Joel Mael. In 2001, the principals of Ansonia LLC met their
obligation to pay Tarragon 30% of the amounts it contributed to the partnership
plus a preferred return through a contribution, made in cash of $232,000 and
issuance of notes totaling $5.3 million in the aggregate. The notes bore
interest at 12%, were secured by pledges of partnership interests, and were
payable from 30% of Ansonia Apartments' net cash flow. In 2002, the notes were
paid in full, as described below. Messrs. Rothenberg and Spitz became executive
officers of Tarragon, and Mr. Rothenberg was appointed to our Board of
Directors, in September 2000.
69
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)
Tarragon's investment in Ansonia Apartments was fully recovered in 2002 from
distributions to the partners of cash proceeds from property sales, mortgage
refinancings, supplemental mortgages, and operations. Distributions in excess of
our investment balance since then have been included in equity in income of
partnerships and joint ventures in the accompanying Consolidated Statements of
Operations and total $8.2 million and $5.3 million, respectively, for the years
ended December 31, 2003 and 2002.
In 2003, Ansonia Apartments received aggregate net proceeds of $9.3 million from
refinanced and supplemental mortgages on seven properties, of which $6.5 million
was distributed to Tarragon.
In 2002, Ansonia Apartments sold three properties for a total of $14.7 million
and recognized gains totaling $2.1 million. Tarragon's proportionate share of
the gains was $1.5 million. Aggregate net cash proceeds of $3.9 million were
distributed to the partners, with Tarragon receiving $2.8 million. Also in 2002,
Ansonia received aggregate net cash proceeds of $8.7 million from refinanced and
supplemental mortgages on six properties, of which $6 million was distributed to
Tarragon. From the cash proceeds of the property sales, the mortgage
refinancings, the supplemental mortgages, and from operations, distributions
were made for the accounts of the members of the outside partner which were used
first to pay off their notes payable to Tarragon, with cash in excess of the
note balances paid to the members.
During 2001, Ansonia received net cash proceeds of $7.1 million from refinanced
and supplemental mortgages on four properties, all of which was paid to
Tarragon, $5.6 million as distributions, with the remaining $1.5 million applied
to interest and principal on the notes due from the members of the outside
partner. Also in 2001, Ansonia sold one property, receiving net cash proceeds of
$2.6 million and realizing a gain of $1.2 million. The net cash proceeds were
paid to Tarragon, $1.8 million as a distribution; the remainder was applied to
interest and principal on the notes due from the members of the outside partner.
Fenwick Tarragon Apartments, L.L.C. On January 1, 2003, Tarragon transferred 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 transfer.
Devonshire Apartment Owners, L.L.C. In February 2002, Devonshire sold its only
property, Villages at Gateway Apartments, for $33.2 million and recognized a
gain of $25.2 million. Net cash proceeds of $8.3 million were distributed to the
partners, with Tarragon receiving $8 million. Our share of the gain was $8.3
million, after reduction for income recognized in 2000 from distributions from
Devonshire in excess of our investment, and is included in equity in income of
partnerships and joint ventures in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2002.
One Las Olas, Ltd. In 2001, One Las Olas began construction of Las Olas River
House, a 287-unit luxury high- rise condominium development. In March 2002, One
Las Olas closed a $90 million construction loan, which was modified and
increased to $109 million in the fourth quarter of 2003, and a $25 million
mezzanine loan to finance construction of the project. Tarragon has provided the
cash required for the development, $18 million
70
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)
as of December 31, 2003, and has guaranteed the construction loan, which had a
December 31, 2003, balance of $68.3 million. See "Loan Guarantees for
Unconsolidated Partnerships and Joint Ventures" below. During 2003, One Las Olas
recorded homebuilding sales of $97.6 million on the percentage of completion
method. As of December 31, 2003, construction was 74% complete, and 65% of the
condominium homes were subject to binding sale contracts pursuant to which the
buyers had made 20% deposits. The difference between the sales revenue recorded
and the 20% deposits received from the buyers has been recorded as contracts
receivable.
Merritt 8 Acquisitions, L.L.C. In November 2003, we offered to buy out the
interests of our outside partner, and in December 2003, the outside partner
agreed to sell its interests. On completion of the purchase in April 2004,
Tarragon will consolidate assets with a fair value of approximately $25 million
and debt of approximately $20 million.
Stone Creek Associates I, L.L.C. In December 2002, Stone Creek Apartments was
sold for $28 million, with a gain on sale of $6.8 million. From net proceeds of
$11.3 million, Tarragon received a distribution of $2.5 million. Our equity in
the income of the joint venture, presented in the accompanying Consolidated
Statement of Operations for the year ended December 31, 2002, includes $1.4
million from the gain on sale and $347,000 of cash distributions in excess of
our investment.
Loan Guarantees for Unconsolidated Partnerships and Joint Ventures. We have
guaranteed $76.2 million of mortgages on six unconsolidated properties; $54.5
million relates to two mortgages that mature in 2006 and have two-year extension
options, $925,000 relates to a mortgage that matures in 2012, $900,000 relates
to a mortgage that matures in 2023, and the balance relates to two mortgages
that mature in 2004. We have also guaranteed construction loans totaling $146.7
million of three unconsolidated properties, including the $109 million
construction loan for the Las Olas River House condominium development. This
construction loan has a December 31, 2003, balance of $68.3 million, matures in
2005, and contains a one-year extension option. The aggregate balance of the
other construction loans at December 31, 2003, is $37.7 million. These loans
mature in 2004 and have one- or two-year extension options. In addition, we have
guaranteed $750,000 in loans that were paid off in January 2004. We have
recorded liabilities totaling $1.7 million in connection with three of these
guarantees. Estimated fair values of other guarantees provided since January 1,
2003, are not significant.
71
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)
Below are unaudited summarized financial data for One Las Olas and our other
unconsolidated partnerships and joint ventures as of and for the periods
indicated. One Las Olas reported no revenues or expenses prior to 2003.
December 31, 2003
All
One Las Olas Other Partnerships
---------------- -------------- ----------------
Real estate...................................... $ -- $ 297,823 $ 297,823
Accumulated depreciation......................... -- (34,078) (34,078)
Homebuilding inventory........................... 62,524 53,669 116,193
Other assets, net................................ 105,193 11,895 117,088
Notes and interest payable....................... (101,211) (302,050) (403,261)
Other liabilities................................ (46,319) (13,131) (59,450)
---------------- -------------- ----------------
Partners' capital................................ $ 20,187 $ 14,128 $ 34,315
================ ============== ================
Our proportionate share of partners' capital..... $ 13,647 $ 22,953 $ 36,600
Cash distributions in excess of investment...... -- 15,479 15,479
Liability established for debt guaranty.......... 776 1,803 2,579
Advances......................................... 23,001 7,536 30,537
Elimination of intercompany interest ............ (3,431) -- (3,431)
---------------- -------------- ----------------
Investments in and advances to partnerships and
joint ventures................................ $ 33,993 $ 47,771 $ 81,764
================ ============== ================
Year Ended December 31, 2003
Homebuilding sales............................... $ 97,583 $ -- $ 97,583
Cost of homebuilding sales....................... (77,381) -- (77,381)
Rental revenue................................... -- 47,534 47,534
Property and other operating expenses............ (16) (25,790) (25,806)
Interest expense................................. -- (17,576) (17,576)
Depreciation expense............................. -- (9,485) (9,485)
---------------- -------------- ----------------
Net income (loss)................................ 20,186 (5,317) 14,869
Elimination of interest and management fees paid
to Tarragon.................................... 2,643 1,682 4,325
---------------- -------------- ----------------
Net income (loss) before interest and management
fees paid to Tarragon.......................... $ 22,829 $ (3,635) $ 19,194
================ ============== ================
Equity in income (loss) of partnerships and
joint ventures................................. $ 16,284 $ (2,615) $ 13,669
================ ============== ================
Cash distributions in excess of investment....... $ -- $ 9,120 $ 9,120
================ ============== ================
Loss from investment written off................. $ -- $ (313) $ (313)
================ ============== ================
72
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)
December 31, 2002
All
One Las Olas Other Partnerships
---------------- -------------- ----------------
Real estate...................................... $ -- $ 276,918 $ 276,918
Accumulated depreciation......................... -- (24,609) (24,609)
Homebuilding inventory........................... 45,893 10,562 56,455
Other assets, net................................ 22,587 9,989 32,576
Notes and interest payable....................... (31,921) (253,677) (285,598)
Other liabilities................................ (36,557) (10,217) (46,774)
---------------- -------------- ----------------
Partners' capital................................ $ 2 $ 8,966 $ 8,968
================ ============== ================
Our proportionate share of partners' capital..... $ 2 $ 8,714 $ 8,716
Cash distributions in excess of investment...... -- 5,708 5,708
Liability established for debt guaranty.......... -- 925 925
Advances......................................... 11,469 5,757 17,226
Elimination of intercompany interest............. (3,473) -- (3,473)
---------------- -------------- ----------------
Investments in and advances to partnerships and
joint ventures................................ $ 7,998 $ 21,104 $ 29,102
================ ============== ================
Year Ended December 31, 2002
Rental revenue................................... $ 41,639
Property operating expenses...................... (20,851)
Interest expense................................. (14,462)
Depreciation expense............................. (8,311)
----------------
Loss before other items.......................... (1,985)
Gain on sale of real estate...................... 27,240
----------------
Income from continuing operations................ 25,255
Discontinued operations
Income from operations (1)..................... 759
Gain on sale of real estate.................... 6,780
----------------
Net income....................................... 32,794
Elimination of management fees paid
to Tarragon.................................... 1,403
----------------
Net income before management fees paid
to Tarragon.................................... $ 34,197
================
Equity in income of partnerships and joint ventures $ 10,587
================
Cash distributions in excess of investment....... $ 6,055
================
- -------------------------------
(1) Includes revenue of $3,369.
73
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)
Year Ended December 31, 2001 All
Partnerships
-----------------
Rental revenue................................... $ 45,349
Property operating expenses...................... (20,962)
Interest expense................................. (14,709)
Depreciation expense............................. (6,916)
-----------------
Income before other items........................ 2,762
Gain on sale of real estate...................... 1,188
-----------------
Income from continuing operations................ 3,950
Discontinued operations (2)...................... 484
-----------------
Net income....................................... 4,434
Elimination of management fees paid
to Tarragon.................................... 1,146
-----------------
Net income before management fees paid to Tarragon
$ 5,580
=================
Equity in income of partnerships and joint
ventures....................................... $ 3,577
=================
Cash distributions in excess of investment....... $ 4,142
=================
- -------------------------------
(2) Includes revenue of $3,230.
74
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. NOTES, DEBENTURES, AND INTEREST PAYABLE
Notes, debentures, and interest payable consisted of the following at
December 31:
2003 2002
------------------------------------- -----------------------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
----------------- ---------------- --------------- ---------------
Mortgages on real estate............................. $ 409,709 $ 399,106 $ 413,417 $ 394,986
Loans on homebuilding inventory...................... 57,556 57,546 18,459 16,711
Other notes payable.................................. 12,405 12,405 14,400 14,400
Debentures........................................... - - 928 928
Accrued interest..................................... 2,205 2,205 1,901 1,901
------------- ------------- ------------ -----------
$ 481,875 $ 471,262 $ 449,105 $ 428,926
============= ============= ============ ===========
Notes payable at December 31, 2003, bear interest at fixed rates from 4.88% to
10% per annum and variable rates currently ranging from 1.04% to 6.5% and mature
from 2004 through 2031. The mortgage notes are generally nonrecourse, with the
exception of construction loans, and are collateralized by deeds of trust on
real estate with an aggregate net carrying value of $459 million.
Debentures were issued in 1993 in connection with a dividend to stockholders.
The debentures were unsecured and bore interest at 9% per annum, payable
semi-annually. In January 2003, Tarragon redeemed the debentures.
Other notes payable for both years include an $8.4 million loan secured by
interests in joint ventures and advances under a bank line of credit that
matures June 2005 and is secured by mortgages on five properties and Tarragon
common stock pledged by affiliates of William S. Friedman, our President and
Chief Executive officer and Chairman of our Board of Directors. See NOTE 9.
"RELATED PARTY TRANSACTIONS." The line of credit was increased from $10 million
at December 31, 2002, to $16.8 million at December 31, 2003. At December 31,
2003, advances of $1.7 million were included in other notes payable, and
advances of $5.3 million were included with mortgages on real estate. We had
$8.6 million available at December 31, 2003, under this line of credit. At
December 31, 2002, advances of $6 million were included in other notes payable,
and advances of $1.7 million were included with mortgages on real estate. Other
notes payable at December 31, 2003, also includes a fully utilized $2 million
bank line of credit that matures May 2004 and is secured by Tarragon common
stock pledged by affiliates of Mr. Friedman. We also have an unused $20 million
line of credit with affiliates of Mr. Friedman. For the terms of this line of
credit, see NOTE 9. "RELATED PARTY TRANSACTIONS."
At December 31, 2003, scheduled principal payments on notes payable are due as
follows:
2004............................................ $ 17,768
2005............................................ 72,328
2006............................................ 171,408
2007............................................ 16,891
2008............................................ 17,717
Thereafter...................................... 172,945
-----------
$ 469,057
===========
75
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. COMMON STOCK REPURCHASE PROGRAM
The Board of directors has authorized a common stock repurchase program. In
2003, 2002, and 2001, Tarragon repurchased 868,133 shares of its common stock in
open market and negotiated transactions at a cost of $12.1 million. Our
cumulative cost of common stock repurchases is $40.8 million. As of December 31,
2003, Tarragon had authorization to repurchase an additional 354,963 common
shares.
NOTE 6. 10% CUMULATIVE PREFERRED STOCK
The 10% Cumulative Preferred Stock pays a fixed dividend of $1.20 per year and
has a liquidation value of $12 per share. Shares may be redeemed at Tarragon's
option at any time after June 30, 2003, at the liquidation value plus a premium
of $0.50 per share which declines by $0.10 per share each year thereafter. No
mandatory redemption or "sinking fund" is required.
NOTE 7. EARNINGS PER COMMON SHARE
Following is a reconciliation of the weighted average shares of common stock
outstanding used in the computation of earnings per share and earnings per share
- - assuming dilution. The information has been restated to give effect to the
stock dividend paid in April 2002, the three-for-two stock split in February
2003, and the five-for-four stock split in January 2004.
For the Years Ended December 31,
------------------------------------------------------------
2003 2002 2001
----------------- ------------------ -----------------
Weighted average shares of common stock
outstanding................................................ 14,650,091 15,085,476 15,407,508
Convertible preferred interest of minority
partner in consolidated joint venture...................... 445,398 - 399,620
Stock options................................................. 1,829,046 - 364,906
----------------- ------------------ -----------------
Weighted average shares of common stock
outstanding - assuming dilution............................ 16,924,535 15,085,476 16,172,034
================= ================== =================
The convertible preferred interest of minority partner in consolidated joint
venture represents the preferred interest of Mr. Rohdie in a joint venture we
consolidate (see NOTE 2. "MINORITY INTERESTS.") His preferred interest became
convertible in February 2001. For the year ended December 31, 2002, his interest
was convertible into 445,398 shares. However, their effect is not reflected in
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.
On a weighted average basis, options to purchase 3,631,243 shares of common
stock at a price of $5.75 were outstanding during 2003. During 2003, the
exercise prices of all options were less than the market prices of the common
stock.
On a weighted average basis, options to purchase 3,443,896 shares at $5.51 per
share and 1,369,758 shares at $6.01 per share in 2002 and 2001, respectively,
were outstanding during those years but were not reflected in the computation of
weighted average shares of common stock outstanding - assuming dilution because
their effect was antidilutive.
76
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. STOCK OPTIONS
Tarragon has an Independent Director Stock Option Plan (the "Director Plan") and
a Share Option and Incentive Plan (collectively, the "Option Plans"). Under
Tarragon's Director Plan, Independent Directors receive annual awards of options
to purchase up to 2,000 shares of Tarragon common stock on January 1 of each
year. The options are immediately exercisable and expire on the earlier of the
first anniversary of the date on which the director ceases to serve as a
director or ten years from the date of grant.
Under Tarragon's Share Option and Incentive Plan, incentive stock options have
been awarded to officers and employees of Tarragon and its subsidiaries. These
stock options vest between one and five years from the date of grant and expire
ten years thereafter, unless the optionees' relationship with Tarragon
terminates earlier.
As of December 31, 2003, a total of 132,522 shares of common stock were
available for grant under the Director Plan, and a total of 423,466 shares of
common stock were available under the Share Option and Incentive Plan.
Tarragon granted options to purchase 62,500 shares in connection with the
purchase of homebuilding inventory in 2003. Tarragon granted options to purchase
408,375 shares in connection with the purchase of interests in Accord Properties
Associates, LLC, in January 2001. See NOTE 15. "ACQUISITION OF ACCORD PROPERTIES
ASSOCIATES, LLC." The fair value of these options, estimated using the
Black-Scholes pricing model, represents a portion of the purchase consideration
in the acquisition of Accord.
The following table summarizes stock option activity:
For the Years Ended December 31,
---------------------------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Prices Options Prices Options Prices
---------------------------------------------------------------------------------------------
Outstanding at January 1 3,427,253 $ 5.52 3,299,760 $ 5.36 3,053,681 $ 5.33
Granted 338,751 9.88 275,344 6.48 444,675 4.66
Exercised (47,218) 4.89 (126,301) 3.25 (121,671) 2.82
Forfeited (29,558) 7.24 (21,550) 4.89 (76,925) 4.23
---------------------------------------------------------------------------------------------
Outstanding at December 31 3,689,228 $ 5.90 3,427,253 $ 5.52 3,299,760 $ 5.36
=============================================================================================
Exercisable at December 31 3,194,047 $ 5.61 2,940,624 $ 5.50 2,697,093 $ 5.49
=============================================================================================
Weighted average grant-date fair
value of options granted:
To employees and directors $ 3.85 $ 2.55 $ 2.28
============ ============ =============
In connection with acquisitions $ 5.00 $ 2.84
============ =============
77
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. STOCK OPTIONS (Continued)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
For the Years Ended December 31,
--------------------------------------- -- --------------- - --------------------------------------
2003 2002 2001
--------------------------------------- --------------- --------------------------------------
Granted in
Connection with
Acquisition of Granted to Granted to Granted in Granted to
Homebuilding Employees Employees Connection with Employees
Inventory and Directors and Directors Acquisition of APA and Directors
--------------------- --------------- --------------- ------------------- ---------------
Dividend yield.................. -- -- -- -- --
Expected volatility............. 22% 22% 22% 30% 30%
Risk-free interest rate......... 3.78% 3.90% 5.25% 4.98% 4.98%
Expected lives (in years)....... 8 8 8 8 8
Forfeitures..................... -- 1.4% 3% -- 2.7%
The following table summarizes information about the options outstanding at
December 31, 2003:
Outstanding Exercisable
------------------------------------------------------------- ---------------------------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Options Contractual Life Exercise Price Options Exercise Price
- ----------------------- ------------ ------------------- --------------------- ------------ ---------------------
$ 2.03 - 4.85 1,135,950 6.38 $ 4.50 1,125,514 $ 4.50
5.04 - 5.73 1,064,498 5.13 5.40 1,021,845 5.42
6.36 - 7.05 1,172,531 5.61 6.65 969,188 6.70
8.13 - 12.50 316,249 8.42 9.85 77,500 10.61
- ----------------------- ------------ ------------------- ---------------------- ------------ ----------------------
$ 2.03 - 12.50 3,689,228 5.95 $ 5.90 3,194,047 $ 5.61
======================= ============ =================== ===================== ============ ======================
In January 2004, we granted options covering 12,500 shares under the Director
Plan, all of which were immediately exercisable, and 38,125 under the Stock
Option and Incentive Plan. Also, 454,204 of the options outstanding at December
31, 2003, were exercised in the first two months of 2004.
78
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. RELATED PARTY TRANSACTIONS
At December 31, 2003, Tarragon had $20 million available under an unused line of
credit with affiliates of William S. Friedman, our President and Chief Executive
Officer and Chairman of our Board of Directors, under an arrangement approved by
the Board of Directors. Advances under the line of credit bear interest at LIBOR
plus 1% per annum, which totaled $2,000 in 2003, $228,000 in 2002, and $397,000
in 2001. Upon its maturity in January 2004, the line of credit was extended for
an additional two years until January 2006.
As an accommodation to Tarragon, Mr. Friedman or his affiliates have pledged
approximately 1.5 million shares of Tarragon common stock to secure a $16.8
million line of credit with a bank. In addition, Mr. Friedman or his affiliates
have pledged approximately 375,000 shares of Tarragon common stock to secure a
$2 million line of credit with another bank. Tarragon has indemnified Mr.
Friedman or his affiliates from any loss, cost, or liability associated with the
accommodation pledges or the lines of credit. As collateral for the
indemnification obligations, Tarragon has agreed to pledge to Mr. Friedman and
his affiliates an equal number of shares of Tarragon treasury stock.
During 2002, Tarragon received payment in full on notes receivable of $1.6
million and $541,000, respectively, from Robert P. Rothenberg, Chief Operating
Officer and a member of the Board of Directors of Tarragon, and Saul Spitz,
Executive Vice President of Acquisitions for Tarragon. These loans were made to
Messrs. Rothenberg and Spitz in connection with their required contributions to
Ansonia Apartments, L.P., in 2001. The notes were paid from the proportionate
share of distributions to Messrs. Rothenberg and Spitz from Ansonia. Tarragon
recognized interest income totaling $136,000 in 2002 and $130,000 in 2001 from
these two notes.
Tarragon provides property management services for several properties owned by
affiliates of Mr. Friedman. Tarragon received property management fees of
$15,000, $28,000, and $145,000 for 2003, 2002, and 2001, respectively, from
these properties. In addition, in 2002, Tarragon received $97,000 for services
in refinancing several properties owned by affiliates of Mr. Friedman.
Tarragon provides asset and property management services for several properties
owned by partnerships and joint ventures accounted for by the equity method.
Tarragon received management fees of $1.7 million, $1.4 million, and $1.3
million for 2003, 2002, and 2001, respectively, and recognized as income
$414,000, $346,000, and $169,000 for 2003, 2002, and 2001, respectively, for the
portion of the fee allocable to our joint venture partners. The remainder of the
fees was recorded as a return of our investment.
In 2003 and 2002, Tarragon recognized as interest income $678,000 and $129,000,
respectively, on advances to One Las Olas, Ltd., a partnership that we account
for on the equity method.
In 2003, Tarragon recognized income of $291,000 in connection with development
and construction of one of our homebuilding projects in which outside partners
hold an interest. The income represents the portion of a manager's fee
chargeable to the outside partners' interest.
79
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. INCOME TAXES
No current or deferred income tax expense was recognized in 2003, 2002, or 2001
due to the application of net operating loss carryforwards. A reconciliation of
computed income taxes to actual income taxes follows:
Years Ended December 31,
------------------------------------------------------
2003 2002 2001
----------------- ---------------- ----------------
Income before taxes $ 31,194 $ 5,459 $ 1,229
Statutory Federal income tax rate 34% 34% 34%
----------------- ---------------- ----------------
Income taxes at statutory rate 10,606 1,856 418
State income taxes, net of Federal benefit 1,348 310 111
Amortization -- -- 271
Other 24 21 22
Utilization of net operating loss carryforward (11,978) (2,187) (822)
----------------- ---------------- ----------------
Income tax provision $ -- $ -- $ --
================= ================ ================
The following table discloses the components of the deferred tax amounts at
December 31, 2003, 2002, and 2001:
December 31,
----------------------------------------------------
2003 2002 2001
----------------- --------------- ---------------
Deferred tax assets - temporary differences
Equity in earnings of partnerships and joint ventures $ 968 $ 477 $ 762
Bad debt allowance 57 - 34
Prepaid rent 22 7 76
Deferred revenue 161 118 170
Provision for losses -- -- 187
Other 248 81 4
Depreciation -- 1,951 --
----------------- --------------- ---------------
Total deferred tax assets - temporary differences 1,456 2,634 1,233
Net operating loss carryforward 24,197 17,097 15,938
----------------- --------------- ---------------
Total deferred tax assets 25,653 19,731 17,171
----------------- --------------- ---------------
Deferred tax liabilities - temporary differences
Distributions from partnerships and joint ventures in
excess of basis 6,621 8,995 6,936
Provision for losses -- 421 --
Depreciation 9,210 - 847
Straight-line rent -- 240 234
----------------- --------------- ---------------
Total deferred tax liabilities 15,831 9,656 8,017
Net deferred tax assets 9,822 10,075 9,154
Less valuation allowance (9,822) (10,075) (9,154)
----------------- --------------- ---------------
Net deferred tax $ -- $ -- $ --
================= =============== ===============
80
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. INCOME TAXES (Continued)
At December 31, 2003, Tarragon had Federal net operating loss carryforwards
(NOLs) of approximately $71.2 million. If not utilized, the NOLs will expire
between years 2004 and 2020. The future availability of the NOLs may be limited
if Tarragon experiences an ownership change of more than 50 percent, as defined
by IRS regulations. Tarragon's stock is publicly traded, and we cannot assure
that future trading will not result in an ownership change, as defined by IRS
regulations, which would limit availability of the NOLs. Due to these
uncertainties regarding possible utilization of the NOLs, as well as Tarragon's
history of operating losses, a valuation allowance was recorded to fully reserve
the computed net deferred tax assets.
NOTE 11. RENTALS UNDER OPERATING LEASES
Tarragon's rental operations include the leasing of office buildings and
shopping centers subject to leases with terms greater than one year. The leases
thereon expire at various dates through 2020. The following is a schedule of
future minimum rentals on non-cancelable operating leases as of December 31,
2003:
2004............................................ $ 8,436
2005............................................ 6,995
2006............................................ 4,944
2007............................................ 3,767
2008............................................ 2,678
Thereafter...................................... 16,100
-----------
$ 42,920
===========
NOTE 12. COMMITMENTS AND CONTINGENCIES
Tarragon is not aware of any liability relating to federal, state, and local
environmental laws, ordinances, and regulations that would have a material
adverse effect on our business, financial position, or results of operations.
However, in April 2003, in connection with the condominium conversion of Pine
Crest Village at Victoria Park, a contractor for 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
$308,000 to date. Remediation has been completed at a total cost of $800,000.
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.
81
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)
The following is a schedule of future minimum lease payments due on a ground
lease in Paramus, New Jersey, that expires in 2061, and on leases for office
space occupied by Tarragon that expire in 2009. Under terms of the ground lease,
the minimum lease payments increase by 10% every fifth year. Tarragon has the
right to acquire the land on expiration of the lease at 70% of its fair market
value as determined at that time.
Ground Office Space
Lease
------------- -------------
2004............................... $ 260 $ 634
2005............................... 260 706
2006............................... 262 714
2007............................... 286 725
2008............................... 286 736
Thereafter......................... 25,904 269
------------- -------------
$ 27,258 $ 3,784
============= =============
NOTE 13. LITIGATION SETTLEMENT
In June 2001, Tarragon received a net distribution of $2.3 million, after
deducting attorney's fees and expenses, in connection with the settlement of a
derivative lawsuit.
NOTE 14. SEGMENT REPORTING
Our business is divided into two principal segments - homebuilding and the
operation of our investment portfolio. Our Homebuilding Division has become the
main focus of our business in terms of financial and human capital. Our
activities in the Homebuilding Division encompass condominium conversions of
existing apartment communities, the development of town homes, carriage homes,
and new, mid-rise or high-rise condominiums for sale to residents, the sale of
single-family home sites to homebuilders, and development of new investment
properties, primarily apartment communities, which, upon stabilization, become
part of our investment portfolio. From the beginning of 2002 until the fourth
quarter of 2003, we reported development of for-sale housing and development of
new rental properties separately. We now view these activities as consistent
with the objectives of the Homebuilding Division and report them together.
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 homebuilding activities. We reclassify
rental properties from the Homebuilding Division to the Investment Division once
they have achieved stabilized operations, as defined below. We reclassify
properties from the Investment Division to the Homebuilding Division if we have
initiated renovation, reposition, or condominium conversion activities.
82
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. SEGMENT REPORTING (Continued)
Homebuilding. For-sale assets in this division include luxury mid-rise and
high-rise condominiums and townhouses under development and existing apartment
communities under conversion to condominiums. They also include single-family
home sites for sale to homebuilders. Communities under development and/or being
marketed for sale at December 31, 2003, include the following.
Number of
Remaining
Homes or
Community Location Home Sites Description
------------------------------------ ---------------------- ------------- ----------------------------------------------------
Consolidated communities
5600 Collins Avenue............ Miami Beach, FL 6 Condominium conversion
Alexandria Place............... Apopka, FL 104 Single-family home site development
Alexandria Pointe.............. Deland, FL 123 Single-family home site development
Alta Mar....................... Ft. Myers, FL 131 Mid-rise luxury condominium development
Pine Crest Village I........... Ft. Lauderdale, FL 17 Condominium conversion
Pine Crest Village II.......... Ft. Lauderdale, FL 116 Condominium conversion
Smoky Mountain Ridge........... Pigeon Forge, TN 190 Cabin site development
Southridge Pointe.............. Deland, FL 29 Single-family home site development
Tuscany on the Intracoastal.... Boynton Beach, FL 280 Condominium conversion
Venetian Bay Village I......... Kissimmee, FL 29 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
-------------
1,311
-------------
Unconsolidated communities
Las Olas River House........... Ft. Lauderdale, FL 287 (a) High-rise luxury condominium development
100 East Las Olas.............. Ft. Lauderdale, FL 44 Mixed-use retail and condominium development
Metropolitan................... Sarasota, FL 124 High-rise luxury condominium development
Warwick Grove.................. Warwick, NY 214 Traditional new development - flats, townhomes,
and condominiums
XII Hundred Grand.............. Hoboken, NJ 159 Mid-rise luxury condominium development
XIII Hundred Grand............. Hoboken, NJ 118 Mid-rise luxury condominium development
-------------
946
-------------
2,257
------------------------------------ =============
(a) One Las Olas, the partnership that owns this community, has recognized
revenue for sales of 186 homes under the percentage of completion method as
of December 31, 2003.
Also included in the Homebuilding Division are rental communities under
development or in initial lease-up, existing rental communities under renovation
or reposition, and land held for development or sale. Apartments in lease-up or
under reposition include 820 consolidated units and 720 units owned through
unconsolidated partnerships and joint ventures. A commercial property under
reposition with 151,387 square feet is also included in this division.
We measure the performance of our Homebuilding Division primarily by gross
profit from home sales. Intercompany sales, which represent the transfer of
properties from the Homebuilding Division to the Investment Division, are also
included in the following operating statements for the Homebuilding Division.
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
83
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. SEGMENT REPORTING (Continued)
not represent gains recognizable in accordance with GAAP and, accordingly, are
eliminated for purposes of consolidated reporting.
Investment. This division includes properties with stabilized operations. We
consider a property stabilized when development or renovation is substantially
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 8,431 consolidated stabilized
apartments and 4,374 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.
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 Homebuilding
Division 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. The following operating statements for the
Investment Division also include gains on intercompany sales representing
transfers of properties from the Investment Division to the Homebuilding
Division for renovation or conversion to condominiums.
We allocate our general and administrative expenses between the 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, litigation
settlement, and insurance and other claims, and, prior to January 1, 2002,
amortization of goodwill that are not directly associated with one of our
divisions in the same proportions as general and administrative expenses are
allocated.
Following are operating statements and identifiable assets for our two divisions
and net operating income for our Investment Division. Dollar amounts in the
tables are in thousands. In 2002, we presented For-Sale Housing and Development
Divisions separately. Amounts presented separately for these two divisions in
prior years have been combined and presented under our Homebuilding Division
consistent with the 2003 presentation.
84
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. SEGMENT REPORTING (Continued)
HOMEBUILDING DIVISION
Operating Statements
For the Years Ended December 31,
-----------------------------------------------------------------------------
2003 2002 2001
-------------------------- -------------------------- ----------------------
Homebuilding sales ................................. $ 153,862 100% $ 26,179 100% $ 25,950 100%
Intercompany sales.................................. 144,709 100% 303,959 100% 108,150 100%
-------------------------- -------------------------- ----------------------
298,571 100% 330,138 100% 134,100 100%
Costs of homebuilding sales ........................ (123,813) (80%) (28,859) (110%) (21,859) (84%)
Costs of intercompany sales......................... (122,496) (85%) (249,546) (82%) (91,904) (85%)
-------------------------- -------------------------- ----------------------
(246,309) (82%) (278,405) (84%) (113,763) (85%)
Gross profit (loss) on homebuilding sales........... 30,049 20% (2,680) (10%) 4,091 16%
Gross profit from intercompany sales................ 22,213 15% 54,413 18% 16,246 15%
-------------------------- -------------------------- ----------------------
52,262 18% 51,733 16% 20,337 15%
Minority interests in homebuilding sales of
consolidated joint ventures ...................... (409) -- -- -- -- --
Outside partners' interests in homebuilding sales of
unconsolidated partnerships and joint ventures.... (3,887) (1%) -- -- -- --
Outside partners' interests in intercompany sales of
unconsolidated partnerships and joint ventures ... (3,988) (1%) (2,754) (1%) (4,041) (3%)
Profit recognized by the Investment Division upon
the transfer of Pine Crest Apartments to the
Homebuilding Division............................. (5,640) (2%) -- -- -- --
-------------------------- -------------------------- ----------------------
38,338 13% 48,979 15% 16,296 12%
Other income and expenses:
Net loss from property operations ................. (6,069) (2%) (3,719) (1%) (7,536) (6%)
General and administrative expenses ............... (11,500) (4%) (6,659) (2%) (6,066) (5%)
Other corporate items ............................. 1,896 1% 656 -- 2,428 2%
Gain on sale of real estate........................ -- -- -- -- 3,528 3%
Prepayment penalty on early retirement of debt in
connection with condominium conversion........... (3,117) (1%) -- -- -- --
Gain on debt forgiveness........................... -- -- -- -- 420 --
Write-off of investment in joint venture .......... (313) -- -- -- -- --
-------------------------- -------------------------- ----------------------
Net income ......................................... $ 19,235 6% $ 39,257 12% $ 9,070 7%
========================== ========================== ======================
85
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. SEGMENT REPORTING (Continued)
HOMEBUILDING DIVISION
Balance Sheets
December 31,
---------------------------------------------
2003 2002
---------------------- --------------------
ASSETS
Real estate held for investment ...................... $ 29,304 $ 69,609
Homebuilding inventory................................ 97,234 31,632
Investments in partnerships and joint ventures........ 74,074 20,258
Cash.................................................. 19,365 14,938
Restricted cash....................................... 1,042 489
Other assets.......................................... 5,746 4,153
---------------------- --------------------
$ 226,765 $ 141,079
====================== ====================
LIABILITIES AND EQUITY
Notes and interest payable............................ $ 65,912 $ 56,766
Advances from Investment Division..................... 72,136 65,236
Other liabilities..................................... 11,969 5,933
---------------------- --------------------
150,017 127,935
---------------------- --------------------
Minority interest..................................... 1,824 93
Equity................................................ 74,924 13,051
---------------------- --------------------
$ 226,765 $ 141,079
====================== ====================
86
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. SEGMENT REPORTING (Continued)
INVESTMENT DIVISION
Operating Statements
For the Years Ended December 31,
----------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- -------------------
Rental revenue ............................................. $ 124,174 $ 122,487 $ 93,879
Property operating expenses................................. (65,185) (61,833) (47,568)
-------------------- -------------------- -------------------
Net operating income ....................................... 58,989 60,654 46,311
Net gain on sale of real estate ............................ 28,342 20,658 3,462
Gain on sale of real estate of unconsolidated partnerships
and joint ventures....................................... - 17,762 -
Distributions from unconsolidated partnerships and joint
ventures in excess of investment......................... 9,120 6,055 4,009
Minority interests in income of consolidated partnerships
and joint ventures ...................................... (1,770) (1,028) (257)
Elimination of management fees paid to Tarragon by
unconsolidated partnerships and joint ventures 1,525 1,333 831
Outside partners' interests in (income) losses of
unconsolidated partnerships and joint ventures........... 614 (8,380) (1,400)
General and administrative expenses......................... (5,426) (5,877) (5,916)
Other corporate items ...................................... 693 591 2,643
Interest expense ........................................... (36,422) (36,049) (27,706)
Depreciation expense ....................................... (29,884) (28,266) (17,509)
-------------------- -------------------- -------------------
Net income ................................................. $ 25,781 $ 27,453 $ 4,468
==================== ==================== ===================
INVESTMENT DIVISION
Balance Sheets
December 31,
-------------------------------------------
2003 2002
------------------- --------------------
ASSETS
Real estate held for investment ...................... $ 365,791 $ 365,918
Investments in partnerships and joint ventures........ 7,690 8,844
Cash.................................................. 2,261 3,085
Restricted cash....................................... 5,531 5,626
Other assets.......................................... 13,088 12,981
Advances to Homebuilding Division..................... 72,136 65,236
------------------- --------------------
$ 466,497 $ 461,690
==================== ====================
LIABILITIES AND EQUITY
Notes and interest payable............................ $ 405,350 $ 372,160
Other liabilities..................................... 14,917 13,109
------------------- --------------------
420,267 385,269
------------------- --------------------
Minority interest..................................... 20,517 18,430
Equity................................................ 25,713 57,991
------------------- --------------------
$ 466,497 $ 461,690
=================== ====================
87
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. SEGMENT REPORTING (Continued)
For the Years Ended December 31,
---------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- ----------------------
INVESTMENT DIVISION NET OPERATING INCOME:
Rental revenue
Same store stabilized apartment communities........ $ 62,175 100% $ 60,259 100% $57,454 100%
Apartment communities stabilized during period..... 39,756 100% 29,734 100% -- --
Apartment communities acquired during period....... 1,693 100% 1,499 100% 273 100%
Apartment community targeted for condominium
conversion in 2002.............................. -- -- -- -- 3,374 100%
Apartment communities targeted for reposition
in 2003......................................... 2,550 100% 4,028 100% 4,235 100%
Apartment communities sold during period........... 3,737 100% 15,814 100% 20,594 100%
Commercial properties.............................. 14,263 100% 11,153 100% 7,949 100%
---------- --------- -------- ---------- ---------- ----------
124,174 100% 122,487 100% 93,879 100%
Property operating expenses
Same store stabilized apartment communities........ (34,413) (55%) (31,233) (52%) (29,723) (52%)
Apartment communities stabilized during period..... (18,618) (47%) (13,276) (45%) -- --
Apartment communities acquired during period....... (688) (41%) (721) (48%) (87) (32%)
Apartment community targeted for condominium
conversion in 2002 -- -- -- -- (1,352) (40%)
Apartment communities targeted for reposition in
2003............................................ (2,536) (99%) (2,972) (74%) (2,847) (67%)
Apartment communities sold during period........... (2,224) (60%) (8,588) (54%) (10,300) (50%)
Commercial properties.............................. (6,706) (47%) (5,043) (45%) (3,259) (41%)
---------- ---------- ------- ---------- ---------- ----------
(65,185) (52%) (61,833) (50%) (47,568) (51%)
Net operating income
Same store stabilized apartment communities........ 27,762 45% 29,026 48% 27,731 48%
Apartment communities stabilized during period..... 21,138 53% 16,458 55% -- --
Apartment communities acquired during period....... 1,005 59% 778 52% 186 68%
Apartment community targeted for condominium
conversion in 2002.............................. -- -- -- -- 2,022 60%
Apartment communities targeted for reposition in
2003............................................ 14 1% 1,056 26% 1,388 33%
Apartment communities sold during period........... 1,513 40% 7,226 46% 10,294 50%
Commercial properties.............................. 7,557 53% 6,110 55% 4,690 59%
---------- ---------- ------- ---------- ---------- ----------
$ 58,989 48% $60,654 50% $46,311 49%
========== ========== ======= ========== ========== ==========
88
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. SEGMENT REPORTING (Continued)
For the Years Ended December 31,
------------------------------------------------
2003 2002 2001
------------- ------------- -------------
RECONCILIATION OF DIVISIONAL REVENUES TO CONSOLIDATED REVENUE:
Homebuilding division total revenue........................................ $ 298,571 $ 330,138 $ 134,100
Investment division rental revenue......................................... 124,174 122,487 93,879
------------- ------------- -------------
422,745 452,625 227,979
Less homebuilding revenue from intercompany sales.......................... (144,709) (303,959) (108,150)
Less homebuilding revenue of unconsolidated partnerships and joint ventures (97,583) -- --
Less investment division rental revenue presented in discontinued
operations.............................................................. (3,737) (10,158) --
Less investment division rental revenue of unconsolidated partnerships and
joint ventures presented in discontinued operations..................... -- (3,369) (3,230)
Add management fee and other revenue included in other corporate items..... 922 580 518
Add rental revenues from homebuilding properties presented in net loss
from property operations................................................ 11,148 13,041 38,720
Less rental revenues of unconsolidated partnerships and joint ventures..... (47,534) (41,639) (45,349)
------------- ------------- -------------
Consolidated total revenue................................................. $ 141,252 $ 107,121 $ 110,488
============= ============= =============
RECONCILIATION OF DIVISIONAL NET INCOME TO CONSOLIDATED NET INCOME:
Homebuilding division net income........................................... $ 19,235 $ 39,257 $ 9,070
Less homebuilding division profit from intercompany sales.................. (18,225) (51,659) (12,205)
Add reduction to homebuilding division profit for gain previously
recognized by investment division....................................... 5,640 -- --
Add depreciation on intercompany profit.................................... 104 47 47
------------- ------------- -------------
Homebuilding division contribution to consolidated net income.............. 6,754 (12,355) (3,088)
------------- ------------- -------------
Investment division net income............................................. 25,781 27,453 4,468
Less investment division gain on intercompany sales........................ (5,290) (12,860) (808)
Add reduction to investment division gain on sale of real estate for
profit previously recognized by homebuilding division.................. 1,291 954 --
Add depreciation on intercompany profit.................................... 2,658 2,267 657
------------- ------------- -------------
Investment division contribution to consolidated net income................ 24,440 17,814 4,317
------------- ------------- -------------
Consolidated net income.................................................... $ 31,194 $ 5,459 $ 1,229
============= ============= =============
December 31,
------------------------------
2003 2002
------------- -------------
RECONCILIATION OF DIVISIONAL TOTAL ASSETS TO CONSOLIDATED TOTAL ASSETS:
Homebuilding division total assets......................................... $ 226,765 $ 141,079
Investment division total assets........................................... 466,497 461,690
------------- -------------
693,262 602,769
Less intercompany advances................................................. (72,136) (65,236)
Add goodwill............................................................... 2,691 2,691
------------- -------------
Consolidated total assets.................................................. $ 623,817 $ 540,224
============= =============
89
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. ACQUISITION OF ACCORD PROPERTIES ASSOCIATES, LLC
Pursuant to an Acquisition Agreement dated November 15, 2000, but effective
January 1, 2001, Tarragon acquired 100% of the membership interest in Accord
Properties Associates, LLC, a Connecticut limited liability company, from Robert
Rothenberg, Saul Spitz, and Eileen Swenson. Accord managed the Ansonia portfolio
and other properties in Connecticut.
Tarragon acquired the membership interest in Accord for $300,000 in cash, 25,000
shares of Tarragon 10% Cumulative Preferred Stock, and options to acquire
408,375 shares of Tarragon common stock (adjusted to give effect to the April
2002 10% stock dividend, the February 2003 three-for-two stock split, and the
January 2004 five-for-four stock split) issued to Messrs. Rothenberg and Spitz
and Ms. Swenson under Tarragon's Share Option and Incentive Plan. The options
vested over three years, have ten-year terms, and have an exercise price of
$4.63. The fair value of the options was estimated using the Black-Scholes
pricing model. The total fair value of the purchase consideration was $1.6
million.
Mr. Rothenberg, Ms. Swenson, and Mr. Spitz joined Tarragon as executive officers
in September 2000, and Mr. Rothenberg was appointed as a member of Tarragon's
Board of Directors on September 25, 2000.
NOTE 16. GOODWILL
Goodwill was recorded in connection with the acquisitions of Tarragon Realty
Advisors and Accord Properties Associates and, until December 31, 2001, was
amortized on the straight-line method. We adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," on January 1, 2002. SFAS No. 142 requires that
goodwill and other intangible assets with indefinite useful lives no longer be
amortized as expenses of operations but rather carried on the balance sheet as
permanent assets. These assets are subject to at least annual assessment for
impairment by applying a fair-value-based test. There was no transitional
impairment loss at January 1, 2002.
90
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. GOODWILL (Continued)
Following is a presentation of income (loss) from continuing operations, net
income, earnings per common share, and earnings per common share - assuming
dilution for 2001, adjusted to exclude amortization expense related to goodwill.
For the Years Ended December 31,
-------------------------------------------------------
2003 2002 2001
--------------- --------------- ----------------
Income (loss) from continuing operations............................. $ 7,977 $ (580) $ 903
Add back amortization expense:
Goodwill.......................................................... -- -- 796
--------------- --------------- ----------------
Adjusted income (loss) from continuing operations.................... $ 7,977 $ (580) $ 1,699
=============== =============== ================
Net income .......................................................... $ 31,194 $ 5,459 $ 1,229
Add back amortization expense:
Goodwill.......................................................... -- -- 796
--------------- --------------- ----------------
Adjusted net income.................................................. $ 31,194 $ 5,459 $ 2,025
=============== =============== ================
Earnings per common share
Income (loss) from continuing operations allocable to
common stockholders............................................... $ .50 $ (.08) $ .02
Amortization of goodwill.......................................... -- -- .05
--------------- --------------- ----------------
Adjusted income (loss) from continuing operations
allocable to common stockholders.................................. $ .50 $ (.08) $ .07
=============== =============== ================
Net income allocable to common stockholders.......................... $ 2.08 $ .32 $ .04
Amortization of goodwill.......................................... -- -- .05
--------------- --------------- ----------------
Adjusted net income allocable to common stockholders................. $ 2.08 $ .32 $ .09
=============== =============== ================
Earnings per common share - assuming dilution
Income (loss) from continuing operations allocable to
common stockholders............................................... $ .43 $ (.08) $ .02
Amortization of goodwill.......................................... -- -- .04
--------------- --------------- ----------------
Adjusted income (loss) from continuing operations
allocable to common stockholders.................................. $ .43 $ (.08) $ .06
=============== =============== ================
Net income allocable to common stockholders.......................... $ 1.80 $ .32 $ .04
Amortization of goodwill.......................................... -- -- .04
--------------- --------------- ----------------
Adjusted net income allocable to common stockholders................. $ 1.80 $ .32 $ .08
=============== =============== ================
91
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 2003 and 2002 (unaudited). The quarterly results of
operations have been restated to present the operating results of nine
properties sold in 2003 and 2002 in discontinued operations in accordance with
SFAS No. 144 and to reflect the adoption of the fair value expense recognition
provisions of SFAS No. 123 effective July 1, 2002.
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- --------------- --------------
2003
Revenue................................................ $ 24,406 $ 31,579 $ 42,096 $ 43,171
Expenses............................................... (24,639) (29,533) (36,519) (39,677)
Other income and expenses:
Equity in income (loss) of partnerships and joint
ventures.......................................... (130) (763) 7,169 16,200
Minority interests in income of consolidated
partnerships and joint ventures................... (486) (632) (1,166) (306)
Interest income..................................... 129 123 412 941
Interest expense.................................... (8,554) (5,829) (5,538) (5,760)
Gain on sale of real estate......................... 1,223 -- -- --
Insurance and other claims.......................... -- -- -- 60
--------------- -------------- --------------- ---------------
Income (loss) from continuing operations............... (8,051) (5,055) 6,454 14,629
Discontinued operations
Income (loss) from operations....................... 62 56 10 (29)
Gain on sale of real estate......................... 9,223 -- 7,367 6,528
--------------- -------------- --------------- --------------
Net income (loss)...................................... 1,234 (4,999) 13,831 21,128
Dividends on cumulative preferred stock................ (166) (167) (226) (226)
--------------- -------------- --------------- --------------
Net income (loss) allocable to common stockholders..... $ 1,068 $ (5,166) $ 13,605 $ 20,902
=============== =============== ================ ===============
Earnings per common share
Income (loss) from continuing operations
allocable to common stockholders.................... $ (.56) $ (.35) $ .43 $ 1.00
Discontinued operations................................ .63 -- .50 .44
--------------- -------------- --------------- --------------
Net income (loss) allocable to common stockholders..... $ .07 $ (.35) $ .93 $ 1.44
=============== =============== ================ ===============
Weighted average shares of common stock used
in computing earnings per common share(1)........... 14,776,763 14,746,259 14,581,036 14,500,105
=============== =============== ================ ===============
Earnings per common share-- assuming dilution
Income (loss) from continuing operations
allocable to common stockholders.................... $ (.56) $ (.35) $ .37 $ .86
Discontinued operations................................ .63 -- .43 .38
--------------- -------------- --------------- --------------
Net income (loss) allocable to common stockholders..... $ .07 $ (.35) $ .80 $ 1.24
=============== =============== ================ ===============
Weighted average shares of common stock used
in computing earnings per common share--
assuming dilution(1)................................ 14,776,763 14,746,259 16,958,936 16,904,157
=============== ============== ================ ===============
- -------------------------------------------------------
(1) Restated for five-for-four stock split in January 2004.
92
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (Continued)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
2002
Revenue ............................................................ $ 27,843 $ 26,424 $ 26,087 $ 26,767
Expenses ........................................................... (25,810) (25,333) (25,099) (25,773)
Other income and expenses:
Equity in income of partnerships and joint ventures ............. 9,633 396 4,821 1,792
Minority interests in income of consolidated
partnerships and joint ventures ............................... (149) (313) (462) (361)
Interest income ................................................. 146 188 106 70
Interest expense ................................................ (5,485) (6,294) (5,601) (5,588)
Gain on sale of real estate ..................................... -- -- -- 1,258
Loss on investments ............................................. -- -- (13) (16)
Insurance and other claims ...................................... -- -- 84 --
Litigation settlement ........................................... -- -- 102 --
------------ ------------ ------------ ------------
Income (loss) from continuing operations ........................... 6,178 (4,932) 25 (1,851)
Discontinued operations
Income (loss) from operations ................................... 125 (291) (144) (191)
Gain on sale of real estate ..................................... 2,267 -- -- 4,273
------------ ------------ ------------ ------------
Net income (loss) .................................................. 8,570 (5,223) (119) 2,231
Dividends on cumulative preferred stock ............................ (171) (171) (171) (170)
------------ ------------ ------------ ------------
Net income (loss) allocable to common stockholders ................. $ 8,399 $ (5,394) $ (290) $ 2,061
============ ============ ============ ============
Earnings per common share
Income (loss) from continuing operations
allocable to common stockholders ................................ $ .39 $ (.34) $ (.01) $ (.14)
Discontinued operations ............................................ .16 (.02) (.01) .28
------------ ------------ ------------ ------------
Net income (loss) allocable to common stockholders ................. $ .55 $ (.36) $ (.02) $ .14
============ ============ ============ ============
Weighted average shares of common stock used
in computing earnings per common share(1) ....................... 15,276,971 15,179,755 15,036,435 14,854,265
============ ============ ============ ============
Earnings per common share - assuming dilution
Income (loss) from continuing operations
allocable to common stockholders ................................ $ .37 $ (.34) $ (.01) $ (.14)
Discontinued operations ............................................ .14 (.02) (.01) .28
------------ ------------ ------------ ------------
Net income (loss) allocable to common stockholders ................. $ .51 $ (.36) $ (.02) $ .14
============ ============ ============ ============
Weighted average shares of common stock used
in computing earnings per common share -
assuming dilution(1) ............................................ 16,454,565 15,179,755 15,036,435 14,854,265
============ ============ ============ ============
- ------------------------------
(1) Restated for three-for-two stock split in February 2003 and five-for-four
stock split in January 2004.
93
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
----------------------- TO ACQUISITION -------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ---------------------------- ------------ ---- -------------- ------------ ---- ------------ -----
PROPERTIES HELD FOR INVESTMENT
Apartments
Acadian Place $ 3,049 $ 897 $ 2,608 $2,390 $ 897 $ 4,998 $ 5,895
Baton Rouge, LA
Antelope Pines 16,344 3,079 14,333 418 3,370 14,460 17,830
Lancaster, CA
Aspentree 7,275 876 3,506 2,814 876 6,320 7,196
Dallas, TX
Bayfront 3,995 457 2,052 2,651 457 4,703 5,160
Houston, TX
The Brooks 3,011 558 2,230 314 548 2,554 3,102
Addison, TX
Carlyle Towers 6,863 559 5,939 2,802 559 8,741 9,300
Southfield, MI
Cason Estates (B) -- 2,155 1 6 2,156 6 2,162
Murfreesboro, TN
Courtyard at the Park 4,456 768 3,086 2,065 768 5,151 5,919
Miami, FL
Creekwood North 4,784 532 2,127 2,262 532 4,389 4,921
Altamonte Springs, FL
Cross Creek 2,532 221 883 638 225 1,517 1,742
Lexington, KY
Desert Winds (C) 7,011 354 1,399 1,241 354 2,640 2,994
Jacksonville, FL
Forest Oaks 2,686 691 2,685 1,030 691 3,715 4,406
Lexington, KY
Forest Park 9,998 1,670 6,680 1,022 1,719 7,653 9,372
Rocky Hill, CT
Fountainhead 7,044 1,572 6,291 903 1,572 7,194 8,766
Kissimmee, FL
French Villa 3,015 447 1,786 854 447 2,640 3,087
Tulsa, OK
Harbour Green 9,822 718 10,460 435 718 10,895 11,613
Panama City, FL
Heather Hill 24,537 643 14,562 8,885 766 23,324 24,090
Temple Hills, MD
Kirklevington 2,851 490 1,961 1,325 490 3,286 3,776
Lexington, KY
Landmark 1,680 376 1,504 721 373 2,228 2,601
Tallahassee, FL
LIFE ON
WHICH
DEPRECIATION
IN LATEST
STATEMENT OF
ACCUMULATED DATE OF DATE OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ------------------------------ ------------ ------------ -------- --------------
PROPERTIES HELD FOR INVESTMENT
Apartments
Acadian Place $ 2,748 1974 Mar-84 3 - 40 years
Baton Rouge, LA
Antelope Pines 2,165 1985 Apr-02 3 - 40 years
Lancaster, CA
Aspentree 1,287 1974 Nov-98 3 - 40 years
Dallas, TX
Bayfront 2,661 1971 Feb-87 3 - 40 years
Houston, TX
The Brooks 502 1969 Nov-98 3 - 40 years
Addison, TX
Carlyle Towers 4,065 1970 Nov-88 3 - 40 years
Southfield, MI
Cason Estates (B) -- -- Oct-03 --
Murfreesboro, TN
Courtyard at the Park 1,738 1972 Jul-97 3 - 40 years
Miami, FL
Creekwood North 1,761 1973 Nov-92 3 - 40 years
Altamonte Springs, FL
Cross Creek 735 1966 Nov-92 3 - 40 years
Lexington, KY
Desert Winds (C) 946 1972 June-98 3 - 40 years
Jacksonville, FL
Forest Oaks 1,248 1971 Nov-94 3 - 40 years
Lexington, KY
Forest Park 503 1967 Oct-01 3 - 40 years
Rocky Hill, CT
Fountainhead 1,684 1988 Jun-97 3 - 40 years
Kissimmee, FL
French Villa 485 1971 Nov-98 3 - 40 years
Tulsa, OK
Harbour Green 1,941 1997 Feb-00 3 - 40 years
Panama City, FL
Heather Hill 12,425 1966 May-86 3 - 40 years
Temple Hills, MD
Kirklevington 1,324 1975 Nov-92 3 - 40 years
Lexington, KY
Landmark 719 1967 Oct-97 3 - 40 years
Tallahassee, FL
94
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
----------------------- TO ACQUISITION -------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ------------------------------ ------------ ---- -------------- ------------ ---- ------------ -----
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
Martin's Landing $ 6,956 $1,038 $ 4,201 $ 2,406 $1,041 $ 6,604 $ 7,645
Lakeland, FL
Mayfaire at Windsor Parke 18,145 3,086 18,843 760 3,086 19,603 22,689
Jacksonville, FL
Meadowbrook 4,087 306 1,230 715 306 1,945 2,251
Baton Rouge, LA
Mission Trace 2,156 563 2,252 288 563 2,540 3,103
Tallahassee, FL
Morningside 2,336 426 1,678 897 426 2,575 3,001
Jacksonville, FL
Mustang Creek 5,724 718 2,872 2,436 720 5,306 6,026
Arlington, TX
Palm Court 5,298 598 2,393 1,453 598 3,846 4,444
Miami, FL
Park Dale Gardens 5,410 354 1,416 1,858 531 3,097 3,628
Dallas, TX
The Regents 8,099 303 1,212 5,676 304 6,887 7,191
Jacksonville, FL
River City Landing 10,307 1,237 5,602 8,619 1,237 14,221 15,458
Jacksonville, FL
Silver Creek (C) -- 301 1,206 1,067 322 2,252 2,574
Jacksonville, FL
Somerset Park -- 2,075 6,225 5,203 2,075 11,428 13,503
Memphis, TN
Southern Elms 1,652 304 1,216 276 304 1,492 1,796
Tulsa, OK
Summit on the Lake 4,383 895 3,582 1,123 907 4,693 5,600
Fort Worth, TX
Vintage at Lake Lotta 13,715 2,013 701 16,189 2,280 16,623 18,903
Ocoee, FL
Vintage at Legacy 21,431 4,545 -- 24,519 2,685 26,379 29,064
Frisco, TX
Vintage at Madison Crossing 9,550 522 245 10,726 622 10,871 11,493
Huntsville, AL
LIFE ON
WHICH
DEPRECIATION
IN LATEST
STATEMENT OF
ACCUMULATED DATE OF DATE OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ------------------------------ ------------ ------------ -------- --------------
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
Martin's Landing $2,177 1973 Nov-94 3 - 40 years
Lakeland, FL
Mayfaire at Windsor Parke 3,485 1997 Feb-00 3 - 40 years
Jacksonville, FL
Meadowbrook 701 1968 Oct-95 3 - 40 years
Baton Rouge, LA
Mission Trace 466 1989 May-96 3 - 40 years
Tallahassee, FL
Morningside 804 1973 Feb-97 3 - 40 years
Jacksonville, FL
Mustang Creek 2,190 1974 May-95 3 - 40 years
Arlington, TX
Palm Court 1,937 1971 Oct-89 3 - 40 years
Miami, FL
Park Dale Gardens 1,677 1975 Dec-91 3 - 40 years
Dallas, TX
The Regents 1,885 1972 Sep-95 3 - 40 years
Jacksonville, FL
River City Landing 3,606 1965 Jun-96 3 - 40 years
Jacksonville, FL
Silver Creek (C) 709 1972 Jun-98 3 - 40 years
Jacksonville, FL
Somerset Park 5,155 1974 May-93 3 - 40 years
Memphis, TN
Southern Elms 368 1968 Nov-98 3 - 40 years
Tulsa, OK
Summit on the Lake 1,608 1986 Mar-94 3 - 40 years
Fort Worth, TX
Vintage at Lake Lotta 1,268 2001 Feb-00 3 - 40 years
Ocoee, FL
Vintage at Legacy 3,155 1999 May-98 3 - 40 years
Frisco, TX
Vintage at Madison Crossing 662 2002 Feb-00 3 - 40 years
Huntsville, AL
95
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
----------------------- TO ACQUISITION -------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ------------------------------ ------------ ---- -------------- ------------ ---- ------------ -----
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
Vintage at Plantation Bay $14,872 $2,231 $ 64 $13,050 $2,231 $13,114 $15,345
Jacksonville, FL
Vintage at Tampa Palms 19,533 4,180 17 18,689 4,180 18,706 22,886
Tampa, FL
Vintage Cottage 20,800 2,806 249 17,419 2,806 17,668 20,474
Orlando, FL
Vintage on the Green 25,817 3,933 10,469 17,391 4,283 27,510 31,793
Orlando, FL
Vistas at Lake Worth 9,149 752 92 16,310 752 16,402 17,154
Fort Worth, TX
Woodcreek Garden 20,763 3,989 19,815 408 4,642 19,570 24,212
Lancaster, CA
Woodcreek 8,375 472 4,977 2,878 451 7,876 8,327
Jacksonville, FL
Office Buildings
1505 Highway 6 2,669 720 2,877 848 720 3,725 4,445
Houston, TX
Emerson Center (D) 6,523 131 8,781 505 1,048 8,369 9,417
Atlanta, GA
NW O'Hare 2,700 1,990 7,965 (5,027) 566 4,362 4,928
Des Plaines, IL
Orlando Central Park 5,636 1,888 7,605 722 1,888 8,327 10,215
Orlando, FL
Park 20 West 1,582 688 2,754 354 688 3,108 3,796
Tallahassee, FL
Shopping Centers
Emerson Center (D) 889 -- 363 62 -- 425 425
Atlanta, GA
Jackson Square -- 1,113 4,451 (1,465) 1,113 2,986 4,099
Jackson, MS
LIFE ON
WHICH
DEPRECIATION
IN LATEST
STATEMENT OF
ACCUMULATED DATE OF DATE OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ------------------------------ ------------ ------------ -------- --------------
PROPERTIES HELD FOR INVESTMENT
Apartments (Continued)
Vintage at Plantation Bay $1,217 2001 Jun-00 3 - 40 years
Jacksonville, FL
Vintage at Tampa Palms 1,747 2001 Aug-00 3 - 40 years
Tampa, FL
Vintage Cottage 360 2003 Apr-02 3 - 40 years
Orlando, FL
Vintage on the Green 3,093 2000 Feb-00 3 - 40 years
Orlando, FL
Vistas at Lake Worth 3,037 1998 Dec-94 3 - 40 years
Fort Worth, TX
Woodcreek Garden 2,662 1988 Apr-02 3 - 40 years
Lancaster, CA
Woodcreek 4,397 1975 Nov-86 3 - 40 years
Jacksonville, FL
Office Buildings
1505 Highway 6 756 1983 Oct-98 3 - 40 years
Houston, TX
Emerson Center (D) 5,929 1974 Jul-86 3 - 40 years
Atlanta, GA
NW O'Hare 2,855 1972 Apr-86 3 - 40 years
Des Plaines, IL
Orlando Central Park 1,324 1966 May-99 3 - 40 years
Orlando, FL
Park 20 West 565 1972 Nov-98 3 - 40 years
Tallahassee, FL
Shopping Centers
Emerson Center (D) 119 1974 Jul-86 3 - 40 years
Atlanta, GA
Jackson Square 2,958 1970 Jan-96 3 - 40 years
Jackson, MS
96
SCHEDULE III
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
COSTS (A)
CAPITALIZED GROSS CARRYING AMOUNTS
INITIAL COST TO COMPANY SUBSEQUENT AT END OF YEAR
----------------------- TO ACQUISITION -----------------------------------
BUILDINGS AND -------------- BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ------------------------------ ------------ ---- -------------- ------------ ---- ------------ -----
PROPERTIES HELD FOR INVESTMENT
Shopping Centers (Continued)
Lakeview Mall $ -- $ 513 $ 2,050 $ 625 $ 341 $ 2,847 $ 3,188
Manitowoc, WI
Mariner Plaza 1,630 295 1,180 1,053 295 2,233 2,528
Panama City, FL
Midway Mills Crossing 3,660 588 2,365 1,844 1,227 3,570 4,797
Carrollton, TX
Northside Center -- 1,591 3,712 880 1,611 4,572 6,183
Gainesville, FL
Paramus Container Store 8,127 -- 2,854 4,895 -- 7,749 7,749
Paramus, NJ
Stewart Square 3,292 294 1,460 875 294 2,335 2,629
Las Vegas, NV
Times Square 880 125 499 103 125 602 727
Lubbock, TX
University Center 57 578 2,430 1,293 525 3,776 4,301
Waco, TX
Land
820 Land (D) 1,950 2,205 -- 390 2,595 -- 2,595
Fort Worth, TX
820 Land (D) -- 263 -- 16 279 -- 279
Fort Worth, TX
Charlotte, NC -- 571 1,333 (1,878) 26 -- 26
Kansas City, MO -- 802 1,871 (2,365) 308 -- 308
Vistas Observatory (E) -- 707 -- 78 785 -- 785
Fort Worth, TX
----------------------------------------------------------------------------------------------
$399,106 $69,772 $229,200 $206,940 $69,304 $436,608 $505,912
==============================================================================================
LIFE ON
WHICH
DEPRECIATION
IN LATEST
STATEMENT OF
ACCUMULATED DATE OF DATE OPERATIONS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ------------------------------ ------------ ------------ -------- --------------
PROPERTIES HELD FOR INVESTMENT
Shopping Centers (Continued)
Lakeview Mall $ 1,731 1968 Apr-87 3 - 40 years
Manitowoc, WI
Mariner Plaza 500 1968 Aug-97 3 - 40 years
Panama City, FL
Midway Mills Crossing 1,855 1986 Oct-91 3 - 40 years
Carrollton, TX
Northside Center 1,426 1977 Dec-91 3 - 40 years
Gainesville, FL
Paramus Container Store 327 2002 Aug-01 3 - 40 years
Paramus, NJ
Stewart Square 1,207 1971 Oct-87 3 - 40 years
Las Vegas, NV
Times Square 282 1985 Jul-89 3 - 40 years
Lubbock, TX
University Center 1,680 1959 Jul-91 3 - 40 years
Waco, TX
Land
820 Land (D) -- -- Oct-99 --
Fort Worth, TX
820 Land (D) -- -- Oct-99 --
Fort Worth, TX
Charlotte, NC -- -- Dec-91 --
Kansas City, MO -- -- Dec-91 --
Vistas Observatory (E) -- -- Apr-98 --
Fort Worth, TX
--------
$110,817
========
(A) Includes property improvements, impairment charges, and amounts written off
in connection with sales of portions of certain properties.
(B) Construction of this property will begin in February 2004.
(C) Mortgage is collateralized by both Desert Winds and Silver Creek.
(D) The loan is collateralized by both portions of this property.
(E) This property has been pledged as additional collateral for the $1.95
million loan which financed the acquisition of the 820 land in Ft. Worth,
TX.
97
SCHEDULE III
(Continued)
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
2003 2002 2001
-------------- -------------- ---------------
(dollars in thousands)
Reconciliation of real estate
Balance at January 1,.............................................. $ 539,001 $ 489,967 $ 539,171
Additions
Acquisitions or joint venture consolidations ................. 2,156 44,276 18,846
Capital improvements.......................................... 12,252 16,433 12,743
Development costs............................................. 9,910 27,734 43,834
Deductions
Sales or joint venture deconsolidations....................... (57,407) (15,022) (85,225)
Transfers to homebuilding inventory........................... -- (24,387) (39,402)
--------------- --------------- ----------------
Balance at December 31,............................................ $ 505,912 $ 539,001 $ 489,967
============== ============== ===============
Reconciliation of accumulated depreciation
Balance at January 1,.............................................. $ 103,474 $ 87,234 $ 76,265
Additions
Depreciation.................................................. 20,773 20,167 19,597
Acquisitions or joint venture consolidations.................. -- 2,733 --
Deductions
Sales or joint venture deconsolidations....................... (13,430) (2,559) (7,109)
Transfers to homebuilding inventory........................... -- (4.101) (1,476)
Write-offs.................................................... -- -- (43)
-------------- -------------- ---------------
Balance at December 31, ........................................... $ 110,817 $ 103,474 $ 87,234
============== ============== ===============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed as of the end of the
period covered by this Form 10-K, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective at December 31, 2003, 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 changes in the Company's internal controls over
financial reporting during the quarter ended December 31, 2003, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
98
PART III
The information required by Part III has been omitted from this report. We will
file a definitive proxy statement with the SEC pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
Certain information to be included in the proxy statement is incorporated by
reference into this report. Only those sections of the proxy statement which
specifically address Items 10 through 13 below are incorporated by reference.
Such incorporation does not include the performance graph included in the proxy
statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to our proxy
statement to be filed with the SEC in connection with our annual meeting of
stockholders to be held in June 2004.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our proxy
statement to be filed with the SEC in connection with our annual meeting of
stockholders to be held in June 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to our proxy
statement to be filed with the SEC in connection with our annual meeting of
stockholders to be held in June 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to our proxy
statement to be filed with the SEC in connection with our annual meeting of
stockholders to be held in June 2004.
99
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Reports of Independent Public Accountants - Grant Thornton LLP
Arthur Andersen LLP
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Operations -
Years Ended December 31, 2003, 2002, and 2001
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2003,
2002, and 2001
Consolidated Statements of Cash Flows - Years Ended December 31, 2003, 2002, and
2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or because the
required information is shown in the Consolidated Financial Statements or the
notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this report:
Exhibit
Number Description
- ------- --------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated June 5, 1998, by and between
Tarragon Realty Investors, Inc., and National Income Realty Trust
(incorporated by reference to Exhibit 3.6 to Registration Statement
No. 333-60527 on Form S-4).
2.2 Stock Purchase Agreement dated June 5, 1998, among Tarragon Realty
Investors, Inc., Tarragon Realty Advisors, Inc., William S.
Friedman, and Lucy N. Friedman (incorporated by reference to Exhibit
3.7 to Registration Statement No. 333-60527 on Form S-4).
3.1 Articles of Incorporation of Tarragon Realty Investors, Inc.
(incorporated by reference to Exhibit 3.2 to Form 8-K dated July 10,
1997).
100
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
Exhibit
Number Description
- ------- --------------------------------------------------------------------
3.2 Bylaws of Tarragon Realty Investors, Inc. (incorporated by reference
to Exhibit 3.3 to Form 8-K dated July 10, 1997).
4.1 Indenture Agreement dated September 15, 1993, between Vinland
Property Trust and American Stock Transfer and Trust Company
(incorporated by reference to Exhibit 4.7 to Registration Statement
No. 33-66294 on Form S11).
10.1 Limited Liability Company Agreement of Tarragon Development LLC
dated February 7, 2000, between Tarragon Realty Investors, Inc., and
The Rohdie Family LLC (incorporated by reference to Exhibit 10.1 to
Form 10-K for the fiscal year ended December 31, 1999).
10.2 Employment Agreement dated February 7, 2000, between Tarragon Realty
Investors, Inc., and Robert C. Rohdie (incorporated by reference to
Exhibit 10.2 to Form 10-K for the fiscal year ended December 31,
1999).
10.3 Employment Agreement dated September 25, 2000, between Tarragon
Realty Investors, Inc., and Robert P. Rothenberg (incorporated by
reference to Exhibit 10.7 to Form 10-K for the fiscal year ended
December 31, 2000).
21.1* Subsidiaries of the Registrant.
23.1* Consent of Grant Thornton LLP.
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.
99.1* Financial Statements of One Las Olas, Ltd.
* Filed herewith
(b) No reports on Form 8-K were filed during the fourth quarter covered
by this report or with respect to events occurring after the period
covered by this report but prior to the filing of this report.
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TARRAGON REALTY INVESTORS, INC.
Dated: March 8, 2004 By: /s/ William S. Friedman
------------------------- ------------------------------------
William S. Friedman
President, Chief Executive Officer,
Director, and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Capacities In Which Signed Date
/s/ William S. Friedman President, Chief Executive Officer, March 8, 2004
- ---------------------------------------- Director, and Chairman of the Board -------------------------------
William S. Friedman (Principal Executive Officer)
/s/ Erin D. Pickens Executive Vice President and March 8, 2004
- ---------------------------------------- Chief Financial Officer -------------------------------
Erin D. Pickens (Principal Financial and
Accounting Officer)
/s/ Willie K. Davis Director March 8, 2004
- ---------------------------------------- -------------------------------
Willie K. Davis
/s/Lance Liebman Director March 1, 2004
- ---------------------------------------- -------------------------------
Lance Liebman
/s/ Robert C. Rohdie Director March 8, 2004
- ---------------------------------------- -------------------------------
Robert C. Rohdie
/s/ Robert P. Rothenberg Director March 8, 2004
- ---------------------------------------- -------------------------------
Robert P. Rothenberg
/s/ Lawrence G. Schafran Director March 8, 2004
- ---------------------------------------- -------------------------------
Lawrence G. Schafran
/s/ Raymond V.J. Schrag Director March 8, 2004
- ---------------------------------------- -------------------------------
Raymond V. J. Schrag
/s/ Carl B. Weisbrod Director March 8, 2004
- ---------------------------------------- -------------------------------
Carl B. Weisbrod
102
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- --------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated June 5, 1998, by and between
Tarragon Realty Investors, Inc., and National Income Realty Trust
(incorporated by reference to Exhibit 3.6 to Registration Statement
No. 333-60527 on Form S-4).
2.2 Stock Purchase Agreement dated June 5, 1998, among Tarragon Realty
Investors, Inc., Tarragon Realty Advisors, Inc., William S.
Friedman, and Lucy N. Friedman (incorporated by reference to Exhibit
3.7 to Registration Statement No. 333-60527 on Form S-4).
3.1 Articles of Incorporation of Tarragon Realty Investors, Inc.
(incorporated by reference to Exhibit 3.2 to Form 8-K July 10,
1997).
3.2 Bylaws of Tarragon Realty Investors, Inc. (incorporated by reference
to Exhibit 3.3 to Form 8-K dated July 10, 1997).
4.1 Indenture Agreement dated September 15, 1993, between Vinland
Property Trust and American Stock Transfer and Trust Company
(incorporated by reference to Exhibit 4.7 to Registration Statement
No. 33-66294 on Form S11).
10.1 Limited Liability Company Agreement of Tarragon Development LLC
dated February 7, 2000, between Tarragon Realty Investors, Inc., and
the Rohdie Family LLC (incorporated by reference to Exhibit 10.1 to
Form 10-K for the fiscal year ended December 31, 1999).
10.2 Employment Agreement dated February 7, 2000, between Tarragon Realty
Investors, Inc., and Robert C. Rohdie (incorporated by reference to
Exhibit 10.2 to Form 10-K for the fiscal year ended December 31,
1999).
10.3 Employment Agreement dated September 25, 2000, between Tarragon
Realty Investors, Inc., and Robert P. Rothenberg (incorporated by
reference to Exhibit 10.7 to Form 10-K for the fiscal year ended
December 31, 2000).
21.1* Subsidiaries of the Registrant.
23.1* Consent of Grant Thornton LLP.
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.
99.1* Financial Statements of One Las Olas, Ltd.
* Filed herewith
103