UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from...............to...........
Commission File Number 0-22999
TARRAGON REALTY INVESTORS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 94-2432628
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1775 Broadway, 23rd Floor, New York, NY 10019
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 949-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Common Stock, $.01 par value 14,947,739
----------------------------- ------------------------------
(Class) (Outstanding at April 30, 2004)
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended March
31, 2004, have not been audited by independent certified public accountants,
but, in our opinion, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of consolidated financial position,
consolidated results of operations, and consolidated cash flows at the dates and
for the periods indicated have been included.
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
March 31, December 31,
--------- ---------
2004 2003
--------- ---------
Assets
Real estate held for investment (net of accumulated depreciation of
$119,883 in 2004 and $110,817 in 2003) ............................................ $ 488,449 $ 395,095
Homebuilding inventory .............................................................. 225,431 97,234
Contracts receivable ................................................................ 91,631 --
Investments in and advances to partnerships and joint ventures ...................... 26,995 81,764
Cash and cash equivalents ........................................................... 22,552 21,626
Restricted cash ..................................................................... 24,128 6,573
Goodwill ............................................................................ 2,691 2,691
Other assets, net ................................................................... 32,629 18,834
--------- ---------
$ 914,506 $ 623,817
========= =========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable .......................................................... $ 731,656 $ 471,262
Other liabilities ................................................................... 45,065 26,886
--------- ---------
776,721 498,148
Commitments and contingencies........................................................
Minority interests .................................................................. 29,868 22,341
Stockholders' equity
Common stock, $.01 par value; authorized shares, 20,000,000; shares outstanding,
14,954,739 in 2004 and 11,583,973 in 2003 (after deducting 6,112,276 in 2004
and 4,889,821 in 2003 held in treasury) ........................................... 150 115
Special stock, $.01 par value; authorized shares, 7,500,000; shares outstanding, none -- --
Cumulative preferred stock, $.01 par value; authorized shares, 2,500,000; shares
outstanding, 753,333 in 2004 and 2003; liquidation preference, $9,040 in 2004
and 2003, or $12 per share ........................................................ 8 8
Paid-in capital ..................................................................... 308,398 305,562
Accumulated deficit ................................................................. (200,639) (202,357)
--------- ---------
107,917 103,328
--------- ---------
$ 914,506 $ 623,817
========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
2
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
For the Three Months
Ended March 31,
--------------------------
2004 2003
-------- --------
Revenue
Rentals ..................................................................... $ 24,489 $ 20,544
Homebuilding sales .......................................................... 36,066 3,754
Management fees and other (including $117 in 2004 and $95 in 2003 from
affiliates) .............................................................. 192 108
-------- --------
60,747 24,406
-------- --------
Expenses
Property operations ......................................................... 12,786 10,699
Costs of homebuilding sales (including an inventory write-down of $1,571 in
2003) .................................................................... 29,503 5,325
Depreciation ................................................................ 5,485 4,499
General and administrative
Corporate ................................................................ 4,024 3,282
Property ................................................................. 1,115 835
-------- --------
52,913 24,640
-------- --------
Other income and expenses
Equity in income (loss) of partnerships and joint ventures .................. 787 (130)
Minority interests in income of consolidated partnerships and joint ventures (1,603) (486)
Interest income (including $232 in 2004 from affiliates) .................... 326 129
Interest expense (including $2 in 2004 to affiliates) ....................... (6,154) (8,554)
Gain on sale of real estate ................................................. 378 1,223
Gain on disposition of other assets ......................................... 377 --
-------- --------
Income (loss) from continuing operations ...................................... 1,945 (8,052)
Discontinued operations
Income from operations ...................................................... -- 63
Gain on sale of real estate ................................................. -- 9,223
-------- --------
Net income .................................................................... 1,945 1,234
Dividends on cumulative preferred stock ....................................... (226) (166)
-------- --------
Net income allocable to common stockholders ................................... $ 1,719 $ 1,068
======== ========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
3
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Dollars in thousands, except per share data)
(Unaudited)
For the Three Months
Ended March 31,
-------------------------------------
2004 2003
-------------- --------------
Earnings per common share
Income (loss) from continuing operations allocable to common stockholders ......... $ .12 $ (.56)
Discontinued operations ........................................................... -- .63
-------------- --------------
Net income allocable to common stockholders ....................................... $ .12 $ .07
============== ==============
Weighted average shares of common stock used in computing earnings per common share 14,399,455 14,776,763
============== ==============
Earnings per common share - assuming dilution
Income (loss) from continuing operations allocable to common stockholders ......... $ .10 $ (.56)
Discontinued operations ........................................................... -- .63
-------------- --------------
Net income allocable to common stockholders ....................................... $ .10 $ .07
============== ==============
Weighted average shares of common stock used in computing earnings per common
share - assuming dilution ....................................................... 16,691,078 14,776,763
============== ==============
The accompanying notes are an integral part of these Consolidated
Financial Statements.
4
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
For the Three Months
Ended March 31,
--------------------------
2004 2003
-------- --------
Cash Flows from Operating Activities
Net income ........................................................................ $ 1,945 $ 1,234
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Gain on sale of real estate .................................................... (378) (10,446)
Gain on disposition of other assets ............................................ (377) --
Minority interests in income of consolidated partnerships and joint ventures ... 1,603 486
Depreciation and amortization .................................................. 5,986 5,504
Equity in (income) loss of partnerships and joint ventures ..................... (787) 130
Costs of homebuilding sales .................................................... 29,503 5,325
Purchase of homebuilding inventory ............................................. (3,384) --
Noncash compensation related to stock options .................................. 139 103
Excess of homebuilding sales revenue over sales collected attributable to
commissions and closing costs ................................................ (1,016) (69)
Homebuilding renovation and development costs paid ............................. (25,013) (3,012)
Noncash homebuilding sales recorded under percentage of completion method ...... (16,955) --
Changes in other assets and liabilities, net of effects of noncash
investing and financing activities:
Increase in interest receivable ............................................ (229) (19)
(Increase) decrease in other assets ........................................ (1,213) 466
Decrease in other liabilities .............................................. (2,908) (2,164)
Decrease in interest payable ............................................... (891) (110)
-------- --------
Net cash used in operating activities .................................... (13,975) (2,572)
Cash Flows from Investing Activities
Proceeds from the sale of real estate ............................................. 510 13,585
Property capital improvements ..................................................... (2,011) (1,861)
Real estate development costs ..................................................... (856) (6,071)
Earnest money deposits paid, net .................................................. (627) (469)
Advances to partnerships and joint ventures for development costs or for the
purchase of land for development ............................................... (6,587) (3,378)
Net distributions related to property operations of partnerships and joint ventures 1,223 1,265
Other ............................................................................. 222 (265)
-------- --------
Net cash provided by (used in) investing activities ............................ (8,126) 2,806
The accompanying notes are an integral part of these Consolidated
Financial Statements.
5
TARRAGON REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
For the Three Months
Ended March 31,
----------------------------
2004 2003
--------- ---------
Cash Flows from Financing Activities
Proceeds from borrowings .................................................. $ 42,335 $ 30,636
Principal payments on notes payable ....................................... (21,748) (27,372)
Stock repurchases ......................................................... -- (395)
Dividends to stockholders ................................................. (226) (171)
Proceeds from the exercise of stock options ............................... 2,746 28
Other ..................................................................... (80) 275
--------- ---------
Net cash provided by financing activities .............................. 23,027 3,001
--------- ---------
Net increase in cash and cash equivalents ................................... 926 3,235
Cash and cash equivalents, beginning of period .............................. 21,626 18,023
--------- ---------
Cash and cash equivalents, end of period .................................... $ 22,552 $ 21,258
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ............................................................... $ 6,662 $ 8,354
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets written off and liabilities released in connection with the sale of
real estate:
Real estate ............................................................ $ 674 $ 16,045
Other assets ........................................................... -- 52
Notes and interest payable ............................................. (505) (12,546)
Other liabilities ...................................................... (37) (412)
Gain on sale ........................................................... 378 10,446
--------- ---------
Cash received ........................................................ $ 510 $ 13,585
========= =========
Effect on assets and liabilities of the consolidation of four apartment
communities and three homebuilding projects in 2004 and the deconsolidation
of one apartment community in 2003:
Real estate ............................................................ $ 95,962 $ (16,377)
Homebuilding inventory ................................................. 99,882 --
Contracts receivable ................................................... 78,066 --
Investments in and advances to partnerships and joint ventures ......... (61,872) 2,549
Restricted cash ........................................................ 16,833 --
Other assets ........................................................... 13,550 (260)
Cash acquired on consolidation ......................................... 82 --
Notes and interest payable ............................................. (213,645) 13,424
Other liabilities ...................................................... (22,693) 664
Minority interest ...................................................... (6,165) --
--------- ---------
$ -- $ --
========= =========
Liabilities that financed the purchase of homebuilding inventory ............ $ 25,160 $ --
========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
6
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial
statements. Operating results for the three month period ended March 31, 2004,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the Consolidated
Financial Statements and Notes included in our Annual Report on Form 10-K for
the year ended December 31, 2003. Dollar amounts in tables are in thousands.
Certain balances for 2003 have been reclassified to conform to the 2004
presentation.
NOTE 2. STOCK OPTION PLANS
In 2002, we adopted the fair value method defined in Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," in accounting for our stock option plans, where previously we
applied the Accounting Principles Board's Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," and related Interpretations. We
elected to apply it prospectively for all options granted or modified since the
beginning of 2002, as allowed by SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." Because some awards under the plans
vest over periods ranging from one to five years, the cost related to
stock-based employee compensation included in the determination of net income
for the three month periods ended March 31, 2004 and 2003, is less than that
which would have been recognized if the fair value based method had been applied
to all awards since the original effective date of SFAS No. 123. The following
table illustrates the effect on net income and earnings per common share as if
the fair value based method had been applied to all outstanding and unvested
awards in each period.
For The Three Months Ended
March 31,
---------------------------------------
2004 2003
--------------- ---------------
Net income allocable to common stockholders, as reported .................... $ 1,719 $ 1,068
Add:
Stock-based employee compensation expense included in reported net income . 139 103
Deduct:
Total stock-based employee compensation expense determined under fair value
based method for all awards ............................................ (149) (166)
--------------- ---------------
Pro forma net income allocable to common stockholders ....................... $ 1,709 $ 1,005
=============== ===============
Earnings per common share
Net income allocable to common stockholders, as reported .................. $ .12 $ .07
=============== ===============
Net income allocable to common stockholders, pro forma .................... $ .12 $ .07
=============== ===============
Earnings per common share - assuming dilution
Net income allocable to common stockholders, as reported .................. $ .10 $ .07
=============== ===============
Net income allocable to common stockholders, pro forma .................... $ .10 $ .07
=============== ===============
7
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. VARIABLE INTEREST ENTITIES
In December 2003, the Financial Accounting Standards Board issued Interpretation
46-R ("FIN 46R"), "Consolidation of Variable Interest Entities," an
interpretation of Accounting Research Bulletin 51, "Consolidated Financial
Statements." FIN 46R changes the criteria by which one company includes another
entity in its consolidated financial statements. FIN 46R requires a variable
interest entity ("VIE") to be consolidated by a company if that company is
subject to a majority of the risk of loss from the VIE's activities or entitled
to receive a majority of the entity's residual returns or both. Additionally, if
the holders of equity at risk as a group do not have controlling financial
interest, the entity may be defined as a VIE. Once an entity is determined to be
a VIE, the primary beneficiary must consolidate the VIE into its financial
statements.
We adopted the provisions of FIN 46R on January 1, 2004, and identified seven
partnerships and joint ventures, over which we exercise significant influence
but do not control, which qualified as VIEs and of which we are the primary
beneficiary. These seven entities, previously accounted for using the equity
method, have been consolidated in accordance with FIN 46R. Their assets and
liabilities were recorded at carrying value. The seven entities consist of three
limited partnerships engaged in homebuilding development and one partnership and
three limited liability companies which own and operate rental apartment
communities with 1,226 operating units. The consolidation of these seven
entities increased assets by $255.7 million as of March 31, 2004. Gross revenue
for the three month period ended March 31, 2004, includes rentals of $3.2
million and homebuilding sales of $17 million produced by these seven newly
consolidated entities. One Las Olas is the most significant of the VIEs
consolidated with $180.8 million in assets. For the three months ended March 31,
2004, the gross revenue of One Las Olas was $17 million. One Las Olas is a
limited partnership currently developing Las Olas River House, a luxury
high-rise condominium development in Ft. Lauderdale, FL.
NOTE 4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
Investments in and advances to partnerships and joint ventures consisted of the
following at March 31, 2004:
Profits Carrying
Interest Amount
-------------- ------------
601 Ninth Street Development, L.L.C....................................... 50% $ 624
801 Pennsylvania Avenue................................................... 50% 4
900 Monroe Street Development, L.L.C...................................... 50% 263
Adams Street Development, L.L.C........................................... 40% 4,680
Ansonia Apartments, L.P................................................... 70% -
Ansonia Liberty, L.L.C.................................................... 90% -
Block 88 Development, L.L.C............................................... 40% 618
Block 99/102 Development, L.L.C........................................... 40% 2,531
Danforth Apartment Owners, L.L.C.......................................... 99% 7
Larchmont Associates, L.P................................................. 57% 2,696
Merritt 8 Acquisitions, L.L.C............................................. 80% 1,014
Merritt Stratford, L.L.C.................................................. 50% 497
Sacramento Nine........................................................... 70% 418
Tarragon Calistoga, L.L.C................................................. 80% 641
Tarragon Savannah I & II, L.L.C........................................... 99% 2,404
Thirteenth Street Development, L.L.C...................................... 50% 9,206
Vineyard at Eagle Harbor, L.L.C........................................... 99% -
Warwick Grove Company, L.L.C.............................................. 50% 1,392
------------
$ 26,995
============
8
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES
(Continued)
We exercise significant influence over but hold noncontrolling interests in each
of the above partnerships or joint ventures or our outside partners have
significant participating rights, as defined in the Financial Accounting
Standard Board's Emerging Issues Task Force's 96-16 Abstract, or important
rights, as defined by the American Institute of Certified Public Accountants'
Statement of Position 78-9, "Accounting for Investments in Real Estate
Ventures." Therefore, we account for our investments in these partnerships and
joint ventures using the equity method.
We have guaranteed $1.8 million of mortgages on two unconsolidated properties;
$925,000 relates to a mortgage that matures in 2012, and $900,000 relates to a
mortgage that matures in 2023. We also guaranteed a $5 million land loan that
was repaid in April 2004. Additionally, we have guaranteed a $24 million
construction loan, with a balance at March 31, 2004, of $8 million, on one
unconsolidated property. We have recorded a liability of $550,000 in connection
with one of these guarantees. Estimated fair values of other guarantees provided
since January 1, 2003, are not significant.
Below are unaudited summarized financial data for our unconsolidated
partnerships and joint ventures for the three month periods ended March 31, 2004
and 2003.
For the Three Months
Ended March 31,
--------------------------
2004 2003
-------- --------
Rental revenue .................................. $ 9,590 $ 10,858
Property operating expenses ..................... (5,060) (5,883)
Interest expense ................................ (3,265) (3,835)
Depreciation expense ............................ (1,702) (2,289)
-------- --------
Net loss ........................................ (437) (1,149)
Elimination of management fees paid to Tarragon . 360 378
-------- --------
Net loss before management fees paid to Tarragon $ (77) $ (771)
======== ========
Equity in loss of partnerships and joint ventures $ (46) $ (538)
Cash distributions in excess of investment ...... 833 408
-------- --------
$ 787 $ (130)
======== ========
9
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 5. EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the weighted average
number of shares of common stock outstanding for the three month periods ended
March 31, 2004 and 2003. Following is a reconciliation of the weighted average
shares of common stock outstanding used in the computation of earnings per share
and earnings per share - assuming dilution. The information presented for 2003
has been restated to give effect to the five-for-four stock split in January
2004.
For the Three Months
Ended March 31,
-----------------------------
2004 2003
---------- ----------
Weighted average shares of common stock outstanding . 14,399,455 14,776,763
Convertible preferred interest of minority partner in
consolidated joint venture ........................ 445,398 --
Stock options ....................................... 1,846,225 --
---------- ----------
Weighted average shares of common stock outstanding -
assuming dilution ................................. 16,691,078 14,776,763
========== ==========
On a weighted average basis, options to purchase 3,614,564 shares of common
stock at a price of $5.66 were outstanding during the three months ended March
31, 2003. Their effect is not reflected in the computation of weighted average
shares of common stock outstanding - assuming dilution because their effect is
antidilutive due to a loss from continuing operations allocable to common
stockholders during this period. During both periods presented, the exercise
prices of all options were less than the market prices of the common stock.
The convertible preferred interest of minority partner in consolidated joint
venture represents the preferred interest of Mr. Robert Rohdie in a joint
venture we consolidate. For the three months ended March 31, 2003, his interest
was convertible into 445,398 shares. However, its effect is not reflected in
weighted average shares of common stock outstanding - assuming dilution because
its effect is antidilutive due to a loss from continuing operations allocable to
common stockholders during this period.
NOTE 6. 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.
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.
10
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. 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 March 31, 2004, include the following.
Number of
Remaining
Homes or Home
Community Location Sites Description
------------------------------------ ---------------------- ---------------- -------------------------------------------------
Consolidated communities
5600 Collins Avenue............ Miami Beach, FL 6 Condominium conversion
Alexandria Place............... Apopka, FL 87 Single-family home site development
Alexandria Pointe.............. Deland, FL 123 Single-family home site development
Alta Mar....................... Ft. Meyers, FL 131 Mid-rise luxury condominium development
Las Olas River House........... Ft. Lauderdale, FL 287 (a) High-rise luxury condominium development
Metropolitan................... Sarasota, FL 124 High-rise luxury condominium development
Pine Crest Village I........... Ft. Lauderdale, FL 10 Condominium conversion
Pine Crest Village II.......... Ft. Lauderdale, FL 116 Condominium conversion
Smoky Mountain Ridge........... Pigeon Forge, TN 188 Cabin site development
Southridge Pointe.............. Deland, FL 29 Single-family home site development
Tuscany on the Intracoastal.... Boynton Beach, FL 231 Condominium conversion
Venetian Bay Village II........ Kissimmee, FL 136 Townhome vacation community
Venetian Bay Village III....... Kissimmee, FL 144 Townhome vacation community
Waterstreet at Celebration..... Celebration, FL 231 Condominium conversion
Wekiva Crest................... Apopka, FL 21 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
----------------
1,986
----------------
Unconsolidated communities
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
----------------
491
----------------
2,477
================
- -------------
(a) We have recognized revenue for sales of 191 homes under the percentage
of completion method as of March 31, 2004.
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. The Homebuilding Division
has 512 apartments in two rental communities.
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 statement for 2003 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 not
represent gains recognizable in accordance with GAAP and, accordingly, are
eliminated for
11
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
purposes of consolidated reporting. Beginning in 2004, properties are
transferred between divisions at cost, and we do not report intercompany sales.
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. The Investment Division has 9,965 consolidated stabilized apartments
and 3,868 stabilized apartments owned through unconsolidated partnerships and
joint ventures. It also has consolidated commercial properties with 1.1 million
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 allocate our general and administrative expenses between the segments based
on the functions of the corporate departments. We allocate other corporate
items, including interest income, management fee and other revenue, and minority
interests in income of consolidated partnerships and joint ventures that are not
directly associated with one of our divisions in the same proportions as general
and administrative expenses are allocated.
Following are operating statements and identifiable assets for our two divisions
and net operating income for our Investment Division.
12
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
HOMEBUILDING DIVISION
Operating Statements
For the Three Months Ended March 31,
-------------------------------------------------------
2004 2003
-------------------------- ---------------------------
Homebuilding sales.................................. $ 36,066 100% $ 3,754 100%
Intercompany sales.................................. - - 30,709 100%
-------------------------- ---------------------------
36,066 100% 34,463 100%
Costs of homebuilding sales......................... (29,503) (82%) (5,325) (142%)
Costs of intercompany sales......................... - - (24,187) (79%)
-------------------------- ---------------------------
(29,503) (82%) (29,512) (86%)
Gross profit (loss) on homebuilding sales........... 6,563 18% (1,571) (42%)
Gross profit from intercompany sales................ - - 6,522 21%
-------------------------- ---------------------------
6,563 18% 4,951 14%
Minority interests in homebuilding sales of
consolidated partnerships and joint ventures...... (1,078) (3%) - -
Outside partners' interests in intercompany sales of
unconsolidated partnerships and joint ventures.... - - (977) (3%)
Additional costs attributable to profits recognized
by the Investment Division on intercompany sales.. (422) (1%) - -
-------------------------- ---------------------------
5,063 14% 3,974 12%
Other income and expenses:
Net loss from property operations.................. (431) (1%) (1,318) (4%)
General and administrative expenses................ (3,373) (9%) (2,581) (7%)
Other corporate items.............................. 608 2% 148 -
Gain on sale of real estate, net of minority
interest......................................... 350 1% - -
Prepayment penalty on early retirement of debt in
connection with condominium conversion........... - - (3,117) (9%)
-------------------------- ---------------------------
Net income (loss)................................... $ 2,217 6% $ (2,894) (8%)
========================== ===========================
13
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
HOMEBUILDING DIVISION
Balance Sheets
March 31, December 31,
---------------------------------------------
2004 2003
---------------------- --------------------
Assets
Real estate held for investment............................. $ 32,414 $ 32,166
Homebuilding inventory...................................... 232,229 104,454
Contracts receivable........................................ 91,631 -
Investments in partnerships and joint ventures.............. 19,860 77,242
Cash........................................................ 20,501 19,365
Restricted cash............................................. 19,281 1,042
Other assets................................................ 19,362 $ 5,746
---------------------- --------------------
$ 435,278 $ 240,015
====================== ====================
Liabilities and Equity
Notes and interest payable.................................. $ 245,248 $ 65,912
Advances from Investment Division........................... 10,228 24,751
Other liabilities........................................... 32,827 11,969
---------------------- --------------------
288,303 102,632
---------------------- --------------------
Minority interest........................................... 9,704 1,824
Equity...................................................... 137,271 135,559
---------------------- --------------------
$ 435,278 $ 240,015
====================== ====================
14
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
INVESTMENT DIVISION
Operating Statements
For the Three Months Ended March 31,
-------------------------------------------
2004 2003
-------------------- --------------------
Rental revenue.............................................. $ 33,275 $ 30,101
Property operating expenses................................. (17,137) (15,334)
-------------------- --------------------
Net operating income........................................ 16,138 14,767
Net gain on sale of real estate............................. - 9,157
Distributions from unconsolidated partnerships and joint
ventures in excess of investment......................... 833 408
Minority interests in income of consolidated partnerships
and joint ventures....................................... (458) (399)
Elimination of management fees paid to Tarragon by
unconsolidated partnerships and joint ventures........... 360 342
Outside partners' interests in losses of unconsolidated
partnerships and joint ventures........................... 90 80
General and administrative expenses......................... (1,766) (1,536)
Other corporate items....................................... 287 89
Interest expense............................................ (9,188) (8,305)
Depreciation expense........................................ (7,736) (6,861)
-------------------- --------------------
Net income (loss)........................................... $ (1,440) $ 7,742
==================== ====================
INVESTMENT DIVISION
Balance Sheets
March 31, December 31,
---------------------------------------------
2004 2003
---------------------- --------------------
Assets
Real estate held for investment............................. $ 499,371 $ 395,507
Investments in partnerships and joint ventures.............. 43,942 50,677
Cash........................................................ 2,051 2,261
Restricted cash............................................. 4,847 5,531
Other assets................................................ 13,267 13,088
Advances to Homebuilding Division........................... 10,228 $ 24,751
---------------------- --------------------
$ 573,706 $ 491,815
====================== ====================
Liabilities and Equity
Notes and interest payable.................................. $ 486,408 $ 405,350
Other liabilities........................................... 12,238 14,917
---------------------- --------------------
498,646 420,267
---------------------- --------------------
Minority interest........................................... 24,152 20,517
Equity...................................................... 50,908 51,031
---------------------- --------------------
$ 573,706 $ 491,815
====================== ====================
15
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months Ended March 31,
-----------------------------------------------------------------
2004 2003
--------------------------- ---------------------------
Summary of investment division net operating income:
Rental revenue
Same store stabilized apartment communities ......... $ 25,102 100% $ 24,202 100%
Apartment communities stabilized during period ...... 4,282 100% -- --
Apartment communities targeted for reposition in 2003 -- -- 917 100%
Apartment communities sold during period ............ -- -- 1,332 100%
Commercial properties ............................... 3,891 100% 3,650 100%
-------- -------- -------- --------
33,275 100% 30,101 100%
Property operating expenses
Same store stabilized apartment communities ......... (12,711) (51%) (12,117) (50%)
Apartment communities stabilized during period ...... (2,419) (56%) -- --
Apartment communities targeted for reposition in 2003 -- -- (777) (85%)
Apartment communities sold during period ............ -- -- (764) (57%)
Commercial properties ............................... (2,007) (52%) (1,676) (46%)
-------- -------- -------- --------
(17,137) (52%) (15,334) (51%)
Net operating income
Same store stabilized apartment communities ......... 12,391 49% 12,085 50%
Apartment communities stabilized during period ...... 1,863 44% -- --
Apartment communities targeted for reposition in 2003 -- -- 140 15%
Apartment communities sold during period ............ -- -- 568 43%
Commercial properties ............................... 1,884 48% 1,974 54%
-------- -------- -------- --------
$ 16,138 48% $ 14,767 49%
======== ======== ======== ========
16
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. SEGMENT REPORTING (Continued)
For the Three Months Ended
March 31,
--------------------------
2004 2003
-------- --------
Reconciliation of divisional revenues to consolidated revenue:
Homebuilding division total revenue ....................................... $ 36,066 $ 34,463
Investment division rental revenue ........................................ 33,275 30,101
-------- --------
69,341 64,564
Less homebuilding revenue from intercompany sales ......................... -- (30,709)
Less investment division rental revenue presented in discontinued
operations ............................................................. -- (1,405)
Add management fee and other revenue included in other corporate items .... 192 108
Add rental revenues from homebuilding properties presented in net loss
from property operations ............................................... 804 2,706
Less rental revenues of unconsolidated partnerships and joint ventures .... (9,590) (10,858)
-------- --------
Consolidated total revenue ................................................ $ 60,747 $ 24,406
======== ========
Reconciliation of divisional net income to consolidated net income:
Homebuilding division net income (loss) ................................... $ 2,217 $ (2,894)
Less homebuilding division profit from intercompany sales ................. -- (5,545)
Add additional costs attributable to profits recognized by investment
division on intercompany sales ......................................... 422 --
Add depreciation on higher basis resulting from intercompany sales ........ 30 7
-------- --------
Homebuilding division contribution to consolidated net income ............. 2,669 (8,432)
-------- --------
Investment division net income (loss) ..................................... (1,440) 7,742
Add reduction to investment division gain on sale of real estate for profit
previously recognized by homebuilding division ......................... -- 1,289
Add depreciation on higher basis resulting from intercompany sales ........ 716 635
-------- --------
Investment division contribution to consolidated net income ............... (724) 9,666
-------- --------
Consolidated net income ................................................... $ 1,945 $ 1,234
======== ========
March 31, December 31,
----------- -----------
2004 2003
----------- -----------
Reconciliation of divisional total assets to consolidated total assets:
Homebuilding division total assets .................................... $ 435,278 $ 240,015
Investment division total assets ...................................... 573,706 491,815
----------- -----------
1,008,984 731,830
Less intercompany advances ............................................ (10,228) (24,751)
Less higher basis resulting from intercompany sales ................... (86,941) (85,953)
Add goodwill .......................................................... 2,691 2,691
----------- -----------
Consolidated total assets ............................................. $ 914,506 $ 623,817
=========== ===========
17
TARRAGON REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 7. INCOME TAXES
No current or deferred income tax expense has been recognized for the three
month period ended March 31, 2004, due to the expected application of net
operating loss carryforwards. At December 31, 2003, Tarragon had Federal net
operating loss carryforwards of approximately $71.2 million. At March 31, 2004,
Tarragon's net deferred tax assets were approximately $9.2 million and had a
valuation allowance of the same amount.
NOTE 8. DISCONTINUED OPERATIONS
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," operating
results for properties for which we implemented plans of disposals after the
adoption of this statement have been reported in discontinued operations.
Discontinued operations for the three month period ended March 31, 2003, include
the operations of seven properties sold during 2003. Total revenues for these
properties for the three month period ended March 31, 2003, were $1.4 million.
The operations of these properties were previously reported in the Investment
Division.
NOTE 9. 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
$326,000 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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Please read this discussion along with the Consolidated Financial Statements and
Notes included elsewhere in this report. Dollar amounts in tables are in
thousands except for per unit or per share amounts.
Risks Associated with Forward-Looking Statements Included in this Form 10-Q
In addition to historical information, this Form 10-Q contains forward-looking
statements. Forward-looking statements are expressions of our current beliefs
and expectations, based on information currently available to us, estimates, and
projections about our industry, and certain assumptions made by our management.
These statements are not historical facts. We use words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions to identify our forward-looking statements, which include, among
other things, our anticipated financings and sales of properties and
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-Q. We undertake no obligation to publicly update or revise any
forward-looking statement in light of new information, future events, or
otherwise.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). Preparation of these financial statements requires management to make
judgments and estimates. Some accounting policies have a significant impact on
amounts reported in these financial statements. We have identified certain
accounting policies that we consider critical to understanding our business and
our results of operations, and we have provided below additional information on
those policies.
Asset Impairment
We periodically review the carrying values of our properties. GAAP requires 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.
19
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, except
for those required to be consolidated under FIN 46R. 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.
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 18 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 income 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.
20
Recent Accounting Pronouncements
In December 2003, the FASB issued Interpretation 46-R, "Consolidation of
Variable Interest Entities" (FIN 46R). FIN 46R 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 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 46R are 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. We adopted the provisions
of FIN 46R in the first quarter of 2004 and, as a result, consolidated seven
variable interest entities. See NOTE 3. Variable Interest Entities in the Notes
to Consolidated Financial Statements for further discussion.
Environmental Matters
Under federal, state, and local environmental laws, ordinances, and regulations,
Tarragon may be liable for removal or remediation costs, as well as other costs
(such as fines or injuries to persons and property) where our employees may have
arranged for removal, disposal, or treatment of hazardous or toxic substances.
In addition, environmental laws impose liability for release of
asbestos-containing materials into the air, and third parties can seek recovery
from Tarragon for personal injury associated with those materials. We are not
aware of any liability relating to these matters that would have a material
adverse effect on our business, financial position, or results of operations.
However, there is a matter involving the alleged release of asbestos-containing
materials at one of our condominium conversion projects, as described in Part
II, Item 1. "LEGAL PROCEEDINGS." As of this date, we are unable to determine the
outcome of this matter and whether it will have a material impact on our
financial statements. We have incurred legal and other professional fees and
costs of relocating residents in connection with this matter totaling $326,000
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 the remainder of 2004, we expect to generate net proceeds from
mortgage borrowings or other financing transactions on consolidated and
unconsolidated properties of $17.1 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 2006. All of these funds are available to us as
of March 31, 2004, 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 $4.7
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.
21
Proceeds from sales of properties are also expected to continue to be a key
source of cash for Tarragon. We expect to generate $23.8 million in net proceeds
from the sale of consolidated Investment Division properties during the
remainder of 2004.
Principal payments on mortgages totaling $46.6 million come due during the
remainder of 2004, including $42.9 million of balloon payments. 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 $1.8 million of mortgages on two unconsolidated properties;
$925,000 relates to a mortgage that matures in 2012, and $900,000 relates to a
mortgage that matures in 2023. We also guaranteed a $5 million land loan that
was repaid in April 2004 in connection with closing a construction loan.
Additionally, we have guaranteed a $24 million construction loan, with a balance
at March 31, 2004, of $8 million, on one unconsolidated property.
Sources and Uses of Cash
The following table presents major sources and uses of cash for the three month
periods ended March 31, 2004 and 2003.
For Three Months Ended
March 31,
--------------------------
2004 2003
-------- --------
Sources of cash:
Net cash flow from property operations ........................... $ 2,958 $ 2,510
Net proceeds from the sale of real estate
Investment Division ............................................ -- 13,585
Homebuilding Division .......................................... 510 --
Net proceeds (payments) related to financings and other borrowings
Investment Division ............................................ 4,643 --
Lines of credit ................................................ 1,645 (2,928)
Net proceeds from home sales ..................................... 683 3,685
Other:
Proceeds from the disposition of other assets .................. 377 --
Proceeds from the exercise of stock options .................... 2,746 28
Other .......................................................... 151 131
-------- --------
Total sources of cash ....................................... 13,713 17,011
-------- --------
Uses of cash:
Purchase of homebuilding inventory or land for development ....... (4,011) (469)
Development and renovation costs (net of borrowings) ............. 6,393 (3,181)
Advances to partnerships and joint ventures for homebuilding
activities ..................................................... (6,587) (3,378)
-------- --------
Cash used in homebuilding activities ........................ (4,205) (7,028)
-------- --------
Property capital improvements .................................... (2,011) (1,861)
Other:
Stock repurchases .............................................. -- (395)
General and administrative expenses paid ....................... (6,345) (4,321)
Dividends to stockholders ...................................... (226) (171)
-------- --------
Total uses of cash .......................................... (12,787) (13,776)
-------- --------
Net sources of cash ................................................. $ 926 $ 3,235
======== ========
22
Common Stock Repurchase Program
The Board of Directors has authorized a common stock repurchase program. Since
the beginning of 2001, we have repurchased almost 900,000 shares of our common
stock because we believe the fair market value of our net assets per share is
substantially greater than the market price of our common stock. However, we
expect to repurchase fewer shares of our common stock during 2004 than we have
in the past three years. As of March 31, 2004, Tarragon had authority to
repurchase an additional 854,302 common shares.
Homebuilding Sales and Development
The following table summarizes homebuilding sales and development activities for
the three month periods ended March 31, 2004 and 2003.
Three Months Ended
March 31,
--------------------------
2004 2003
-------- --------
Aggregate sales collected ........... $ 18,095 $ 3,685
Mortgage payments ................... (17,412) --
-------- --------
Net cash proceeds ................... 683 3,685
Renovation and development costs paid (25,013) (3,012)
Proceeds from borrowings ............ 33,014 --
-------- --------
Net cash received ................... $ 8,684 $ 673
======== ========
Proceeds from borrowings in 2004 include a $12 million special advance under the
Pine Crest condominium conversion loan that will be repaid from future home sale
proceeds.
Results of Operations
Consolidated Properties
At March 31, 2004, our consolidated apartment communities included 10,477
operating units, 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 three month
periods ended March 31, 2004 and 2003.
Three Months Ended March 31,
--------------------------------------------
2004 2003 Change
-------- -------- --------
Rental revenue ............ $ 24,489 $ 20,544 $ 3,945
Property operating expenses (12,786) (10,699) (2,087)
-------- -------- --------
Net operating income ...... 11,703 9,845 1,858
Interest expense .......... (5,855) (8,282) 2,427
Depreciation expense ...... (5,485) (4,499) (986)
-------- -------- --------
$ 363 $ (2,936) $ 3,299
======== ======== ========
23
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, and properties consolidated for
the three month periods ended March 31, 2004 and 2003.
Properties Properties in Condominium Other
Consolidated (a) Lease-up (b) Conversions Changes Total
---------------- ------------ ----------- ------- -----
Rental revenue ............ $ 3,226 $ 818 $ (338) $ 239 $ 3,945
Property operating expenses (1,451) (329) 177 (484) (2,087)
------- ------- ------- ------- -------
Net operating income (loss) 1,775 489 (161) (245) 1,858
Interest expense .......... (854) (176) 3,500 (43) 2,427
Depreciation expense ...... (726) (147) -- (113) (986)
------- ------- ------- ------- -------
$ 195 $ 166 $ 3,339 $ (401) $ 3,299
======= ======= ======= ======= =======
- ---------------------
(a) Includes four apartment communities owned by four joint ventures
consolidated on January 1, 2004, in connection with the adoption of the
provisions of FIN 46R.
(b) Includes two recently completed apartment communities that were in lease-up
during one or both periods presented.
The decrease in interest expense for Condominium Conversions is the result of
prepayment penalties totaling $3.1 million and $241,000 of deferred financing
expenses written off upon the early payoff of two mortgages secured by Pine
Crest Apartments in the first quarter of 2003. The mortgages were paid off in
connection with the closing of a $25 million loan to finance the condominium
conversion of this property.
Unconsolidated Partnerships and Joint Ventures
The following table summarizes the components of equity in income (loss) of
unconsolidated partnerships and joint ventures for the three month periods ended
March 31, 2004 and 2003.
Three Months Ended March 31,
----------------------------------------------------
2004 2003 Change
-------------- -------------- --------------
Rental revenue..................................................... $ 9,590 $ 10,858 $ (1,268)
Property operating expenses........................................ (5,060) (5,883) 823
-------------- -------------- --------------
Net operating income............................................... 4,530 4,975 (445)
Interest expense................................................... (3,265) (3,835) 570
Depreciation expense............................................... (1,702) (2,289) 587
-------------- -------------- --------------
(437) (1,149) 712
-------------- -------------- --------------
Elimination of management fees paid to Tarragon.................... 360 378 (18)
Outside partners' interests in loss................................ 31 233 (202)
Distributions in excess of investment.............................. 833 408 425
-------------- -------------- --------------
Equity in income (loss) of partnerships and joint ventures......... $ 787 $ (130) $ 917
============== ============== ==============
The following table presents the effect of properties consolidated in 2004 on
aggregate joint ventures' property level revenues and expenses.
Properties
Consolidated
in 2004 (a) Other Changes Total
----------- ------------- -----
Rental revenue ............ $(1,762) $ 494 $(1,268)
Property operating expenses 1,138 (315) 823
------- ------- -------
Net operating income ...... (624) 179 (445)
Interest expense .......... 712 (142) 570
Depreciation expense ...... 617 (30) 587
------- ------- -------
$ 705 $ 7 $ 712
======= ======= =======
- --------------------
(a) Includes four apartment communities consolidated as of January 1, 2004,
in connection with our adoption of the provisions of FIN 46R.
24
General and Administrative Expenses
Corporate general and administrative expenses increased $742,000 for the first
quarter of 2004 compared to the first quarter of 2003 primarily due to
homebuilding-related personnel additions and compensation increases.
Property general and administrative expenses increased $280,000 for the first
quarter of 2004 compared to the first quarter of 2003 primarily due to property
management personnel additions and salary increases.
Segment Operating Results
Homebuilding Division
The following table summarizes homebuilding sales in units and revenues 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 Three Months Ended March 31,
-----------------------------------------
2004 2003
------------- ------------
Number of units sold
5600 Collins Avenue.................................. - 12
Las Olas River House (a)............................. 5 -
Pine Crest Village I................................. 7 -
Tuscany on the Intracoastal.......................... 49 -
Single-family home sites............................. 24 -
Smoky Mountain Ridge................................. 2 -
Venetian Bay Village I............................... 29 -
------------- ------------
Aggregate number of units sold.................... 116 12
============= ============
Homebuilding sales revenue
5600 Collins Avenue.................................. $ - $ 3,754
Las Olas River House (a)............................. 16,955 -
Pine Crest Village I................................. 2,010 -
Tuscany on the Intracoastal.......................... 11,489 -
Single-family home sites............................. 987 -
Smoky Mountain Ridge................................. 429 -
Venetian Bay Village I............................... 4,196 -
------------- ------------
Aggregate sales................................... $ 36,066 $ 3,754
============= ============
Gross profit (loss) on homebuilding sales
5600 Collins Avenue.................................. $ - - $ (1,571) (42%)
Las Olas River House (a)............................. 3,191 19% - -
Pine Crest Village I................................. 731 36% - -
Tuscany on the Intracoastal.......................... 2,074 18% - -
Single-family home sites............................. 29 3% - -
Smoky Mountain Ridge................................. - - - -
Venetian Bay Village I............................... 538 13% - -
------------- ----------- ------------ -----------
Gross profit (loss)............................... $ 6,563 18% $ (1,571) (42%)
============= =========== ============ ===========
- -------------------------
(a) Sales represent revenues recognized under the percentage of completion
method. At March 31, 2004, sales under firm contracts were $138 million, and
construction was 83% complete. Through December 31, 2003, this was an
unconsolidated project. Beginning January 1, 2004, Las Olas is being
reported as a consolidated project in connection with the adoption of the
provisions of FIN 46R.
25
The following table summarizes back-log for our for-sale communities with active
sales as of March 31, 2004.
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....................... 87 87 3,492 - -
Alexandria Pointe...................... 123 123 4,757 - -
Alta Mar............................... 131 25 8,057 106 36,000
Las Olas River House (2) .............. 287 195 141,871 92 125,400
Metropolitan........................... 124 - - 124 299,500
Pine Crest Village I................... 10 5 1,305 5 1,500
Pine Crest Village II.................. 116 90 19,749 26 8,300
Smoky Mountain Ridge................... 188 7 1,528 181 17,100
Southridge Pointe...................... 29 29 1,761 - -
Tuscany on the Intracoastal............ 231 37 8,237 194 50,800
Venetian Bay Village II................ 136 129 19,183 7 1,100
Venetian Bay Village III............... 144 106 16,601 38 6,100
Waterstreet at Celebration............. 231 - - 231 43,000
Wekiva Crest........................... 21 21 1,157 - -
Woods of Lake Helen.................... 105 105 4,008 - -
Woods of Southridge.................... 17 17 1,032 - -
Unconsolidated communities (3)
XII Hundred Grand...................... 159 - - 159 63,600
XIII Hundred Grand..................... 118 - - 118 44,100
------------- -------------- ------------ ---------------- --------------
2,263 978 $ 233,888 1,285 $ 699,800
============= ============== ============ ================ ==============
- ------------------------
(1) Homes or home sites sold, but not yet closed.
(2) One Las Olas, the partnership that owns this community, has recognized
revenue of $114.5 million for sales of 191 homes under the percentage
of completion method as of March 31, 2004.
(3) Tarragon has profits interests of 50% in these projects.
Investment Division
Tarragon measures the performance of its Investment Division primarily by net
operating income (rental revenue less property operating expenses). The
Investment Division reported net operating income of $16.1 million for the three
months ended March 31, 2004, and $14.8 million for the three months ended March
31, 2003. Net operating income as a percentage of rental revenue was 48.5% for
the three months ended March 31, 2004, and 49.1% for the three months ended
March 31, 2003. The following table presents net operating income for our 54
same store Investment Division apartment communities with 11,599 units
(consolidated and unconsolidated) and the six (five consolidated and one
unconsolidated) apartment communities stabilized and moved to the Investment
Division since March 31, 2003. Prior to their stabilization, the operating
results of these six properties were included in the Homebuilding Division.
For the Three Months
Ended March 31,
---------------------------
2004 2003
-------- --------
Same store stabilized apartment communities:
Rental revenue ....................................... $ 25,102 $ 24,202
Property operating expenses .......................... (12,711) (12,117)
-------- --------
Net operating income .............................. $ 12,391 $ 12,085
======== ========
Net operating income as a percentage of rental revenue 49.4% 49.9%
Average monthly rental revenue per unit .............. $ 721 $ 696
Apartment communities stabilized during period:
Rental revenue ....................................... $ 4,282 $ --
Property operating expenses .......................... (2,419) --
-------- --------
Net operating income .............................. $ 1,863 $ --
======== ========
26
Net operating income for our 54 same store stabilized apartment communities
increased $306,000, or 2.5 %, in the first quarter of 2004 compared to the first
quarter of 2003. This increase was mostly due to a 3.7% increase in rental
revenues, which was partially offset by a 4.9% increase in property operating
expenses. The ratio of net operating income to rental revenue for these
properties decreased .5 % in the first quarter of 2004 compared to the first
quarter of 2003. Increased property operating expenses included personnel,
landscaping, and other costs incurred in connection with leasing efforts in
highly competitive rental markets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Tarragon is exposed to market risk from changes in interest rates that may
adversely affect our financial position, results of operations, and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage such
exposure through our regular operating and financing activities. We do not trade
or speculate in financial instruments. There have been no material changes to
Tarragon's market risk since December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed as of the end of the
period covered by this Form 10-Q, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective at March 31, 2004, 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 March 31, 2004, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
27
PART II. OTHER INFORMATION
ITEM 1. 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 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
$326,000 to date. Remediation has been completed at a total cost of $800,000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Tarragon's Board of Directors authorized the repurchase of up to 1 million
shares of its common stock under a share repurchase program implemented in
September 2001. Through December 31, 2003, we had repurchased 645,698 shares of
our common stock pursuant to this repurchase program. We did not repurchase
shares of our common stock during the first quarter of 2004. In March 2004, the
Board of Directors authorized the repurchase of up to an additional 500,000
shares. As of March 31, 2004, Tarragon had authority to repurchase an additional
854,302 shares of its common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Rule 13a-14(a) certification by William S. Friedman, President
and Chief Executive Officer.
31.2 Rule 13a-14(a) certification by Erin D. Pickens, Executive
Vice President and Chief Financial Officer.
32 Section 1350 certifications by William S. Friedman, President
and Chief Executive Officer, and Erin D. Pickens, Executive
Vice President and Chief Financial Officer.
(b) Reports on Form 8-K:
Date of Event Date Filed Items Reported
------------- ---------- --------------
April 22, 2004 May 5, 2004 Item 5. Other Events and
Regulation FD Disclosure
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TARRAGON REALTY INVESTORS, INC.
Date: May 10, 2004 By: /s/ William S. Friedman
---------------------------------------
William S. Friedman
President, Chief Executive
Officer, Director, and Chairman of the
Board of Directors
Date: May 10, 2004 By: /s/ Erin D. Pickens
---------------------------------------
Erin D. Pickens
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
29
TARRAGON REALTY INVESTORS, INC.
INDEX TO EXHIBITS
EXHIBIT 31.1 Rule 13a-14(a) certification by William S. Friedman, Page 31
President and Chief Executive Officer
EXHIBIT 31.2 Rule 13a-14(a) certification by Erin D. Pickens, Page 32
Executive Vice President and Chief Financial Officer
EXHIBIT 32 Section 1350 certifications by William S. Friedman, Page 33
President and Chief Executive Officer, and
Erin D. Pickens, Executive Vice President
and Chief Financial Officer
30