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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]*
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _________________ TO________________
COMMISSION FILE NUMBER 0-8003
TARRAGON REALTY INVESTORS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 94-2432628
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 MONTICELLO AVENUE, SUITE 200, DALLAS, TX 75205
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 599-2200
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
9% SERIES A SUBORDINATED DEBENTURES DUE JUNE 30, 2003
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of April 5, 1999, the Registrant had 8,391,632 shares of common stock
outstanding. Of the total shares outstanding, 5,460,384 were held by other than
those who may be deemed to be affiliated, for an aggregate value of $67,572,252
based on the last trade as reported by the National Association of Securities
Dealers Automated Quotation System on April 5, 1999. The basis of this
calculation does not constitute a determination by the Registrant that all of
such persons or entities are affiliates of the Registrant as defined in rule 405
of the Securities Act of 1933, as amended.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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INDEX TO
ANNUAL REPORT ON FORM 10-K
Page
PART I
Item 1. Business........................................................................................... 3
Item 2. Properties......................................................................................... 6
Item 3. Legal Proceedings.................................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders................................................ 21
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters................................................................. 22
Item 6. Selected Financial Data............................................................................. 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................................... 41
Item 8. Financial Statements and Supplementary Data........................................................ 42
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................................ 82
PART III
Item 10. Directors and Executive Officers of the Registrant................................................. 82
Item 11. Executive Compensation............................................................................. 88
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 90
Item 13. Certain Relationships and Related Transactions..................................................... 93
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 96
Signature Page..................................................................................... 98
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PART I
ITEM 1. BUSINESS
General
Tarragon Realty Investors, Inc., (the "Company"), a Nevada corporation
incorporated on April 2, 1997, is the successor in interest to National Income
Realty Trust ("NIRT") and Vinland Property Trust ("Vinland"). NIRT was a
California business trust organized on October 31, 1978. It commenced operations
as a real estate investment trust ("REIT") on March 27, 1979. Vinland was also a
California business trust established on July 18, 1973. Vinland commenced
operations on April 2, 1974, as a REIT. In July 1997, Vinland merged with the
Company, its wholly-owned subsidiary.
Effective November 23, 1998, NIRT incorporated as a California corporation and
on November 24, 1998, merged with and into the Company, with the Company as the
survivor. Pursuant to the terms of the Agreement and Plan of Merger dated June
5, 1998, (the "Merger Agreement") entered into by the Company and NIRT, each
share of beneficial interest of NIRT was converted into 1.97 shares of common
stock of the Company. As a result, the shareholders of NIRT became the owners of
85% of the Company's common stock.
FOR ACCOUNTING PURPOSES, THE MERGER IS TREATED AS A REVERSE ACQUISITION OF THE
COMPANY BY NIRT USING THE PURCHASE METHOD OF ACCOUNTING, AND HISTORICAL BALANCES
AND OPERATIONS OF THE COMPANY FOUND IN THIS FORM 10-K ARE THOSE OF NIRT. SHARE
AND PER SHARE INFORMATION HAS BEEN RESTATED RETROACTIVELY TO GIVE EFFECT TO THE
1.97 TO 1 EXCHANGE RATIO IN THE MERGER. REFERENCES TO THE COMPANY IN RELATION TO
DATES PRIOR TO NOVEMBER 24, 1998, ARE INTENDED TO INCLUDE BOTH OF THE COMPANY'S
PREDECESSORS, NIRT AND VINLAND.
Immediately following the merger, the Company acquired Tarragon Realty Advisors,
Inc. ("TRA"), the Company's advisor since March 1, 1994, and NIRT's advisor
since April 1, 1994, from William S. Friedman and his wife, Lucy N. Friedman,
for 100,000 shares of the Company's common stock and options to acquire 350,000
additional shares of the Company's common stock at prices ranging between $13
and $16 per share. William S. Friedman is the President, Chief Executive
Officer, and a Director of the Company and also served as President, Chief
Executive Officer, and a Trustee of NIRT and as Director and Chief Executive
Officer of TRA. The Friedman family owns approximately 34% of the outstanding
shares of common stock of the Company. In addition to the options to acquire
350,000 additional shares received in connection with the Company's purchase of
TRA discussed above, Mr. Friedman also holds options to acquire 450,000
additional shares of the Company's common stock at prices ranging between $12
and $15 per share.
The Company is now an integrated, self-administered, self-managed REIT
controlling approximately 15,000 apartment units and 2.1 million square feet of
retail and office space, primarily in Florida, Texas, Connecticut, California,
and Colorado.
The Company's principal offices are located at 3100 Monticello Avenue, Suite
200, Dallas, Texas 75205. The telephone number is (214) 599-2200 and fax number
is (214) 599-2220.
Business Plan and Investment Policy
The Company's business and only industry segment is investing in and developing
income-producing real estate directly and through partnerships and joint
ventures. At December 31, 1998, the Company's directly owned real estate
portfolio consisted of 78 properties, including 51 apartment communities, 14
shopping centers, four office buildings, one office park, one combination office
building and shopping center, one combination office/ retail/medical facility,
five parcels of land, and one single family residence, located throughout the
continental United States, with concentrations in Florida, Texas, California,
and Colorado. The Company also held
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ITEM 1. BUSINESS (Continued)
Business Plan and Investment Policy (Continued)
investments in 14 unconsolidated real estate partnerships reported on the equity
method (owning three office buildings and 21 apartment communities, two of which
are currently under construction and one on which construction is expected to
begin in mid-1999).
Due to the nature and diversity of the Company's properties and tenants, the
Company's business is not seasonal.
The Company's acquisition strategy is opportunistic but focused on acquiring
properties that add to the efficiency of the Company's portfolio. For example,
all ten of the operating apartment properties purchased by the Company since the
beginning of 1996 were in markets where the Company already had a presence. The
Company acquires older and often troubled properties that are not considered of
institutional quality as well as better performing, new, or high quality
properties. The Company has a policy of continuously improving and upgrading its
older properties in order to achieve increased revenues. During 1998, $12.9
million in capital expenditures were made to the operating apartment portfolio.
In addition, $1.5 million ($179 per unit) was expensed for recurring
replacements and repairs and maintenance. Management believes that a significant
portion of such capital expenditures was required to remedy deferred maintenance
existing at the time of acquisition and to upgrade maintenance and curb appeal.
Accordingly, such expenses are expected to decline on a per unit basis as the
proportion of stabilized properties in the Company's portfolio increases.
The Company has financed acquisitions and capital improvements largely through
mortgages and internally generated funds. As a matter of policy, cash
distributions have been held to less than fifty percent of funds from operations
("FFO"), as defined by the National Association of Real Estate Investment Trusts
(see ITEM 6. "SELECTED FINANCIAL DATA - Other Data" for the definition of FFO).
Funds for investment have also been generated by property sales and from the
collection of mortgages receivable, which will not be a material future source.
Accordingly, property sales and proceeds realized from financing or refinancing
are expected to provide the bulk of funds available for investment. In this
regard, the availability and cost of long term mortgage funds are key factors in
the Company's ability to continue to make new investments without additional
equity offerings.
Management of the Company
The Board of Directors, elected annually by the shareholders or appointed by the
incumbent Board until the next annual shareholder meeting, is responsible for
managing the affairs of the Company. There are currently nine members on the
Board, eight of whom are independent. Until November 1998, day-to-day management
was performed by TRA, which operated under the supervision of the Board pursuant
to a written advisory agreement approved by shareholders (terminated following
the merger). TRA's duties included, among other things, locating, investigating,
evaluating, and recommending real estate investment and sale opportunities and
financing and refinancing sources for the Company. TRA also served as a
consultant in connection with the business plan and investment policy decisions
made by the Board.
Prior to the November 1998 acquisition of TRA, the Company had no employees.
Employees of TRA provided services to the Company, such as accounting, legal,
and administrative services. Currently, the Company has approximately 420
employees, including 330 site-level property employees (such as property
managers and maintenance staff) and 90 corporate employees. The Company has an
employment contract only with William S. Friedman, President and Chief Executive
Officer. See ITEM 11. "EXECUTIVE COMPENSATION" for the terms of his employment
contract. Management of the Company believes employee relations to be good.
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ITEM 1. BUSINESS (Continued)
Property Management
From April 1994 through November 1998, the Company paid property management fees
of 4.5% of the monthly gross rents collected on apartment properties and 1.5% to
5% of the monthly gross rents collected on commercial properties to TRA and/or
Tarragon Management, Inc. ("TMI"), a wholly-owned subsidiary of TRA. TRA
subcontracted with third parties to provide property level management services
to most of the retail and office properties and the apartment properties located
in California, Connecticut, and Colorado. Since the Company acquired TRA in
November 1998, the Company is no longer required to pay management fees on the
directly owned properties managed in-house, although it continues to pay
management fees on those properties under contract with outside management
companies.
Competition
The Company has not experienced difficulty in locating investment opportunities.
Management believes that ownership of properties in which the Company invests is
highly fragmented among individuals, partnerships, public and private
corporations, and other REITs. No single entity or person dominates the market
for such properties. At any given time, a significant number of apartment
properties are available for purchase in the various markets where the Company
seeks additional acquisitions. Management believes that there is and will
continue to be a strong demand for well-maintained, affordable housing in these
markets and that the factors discussed above provide a market where a sufficient
number of attractive investment opportunities will be available to allow the
Company to continue to expand through acquisitions as well as through the
development of new properties. However, since the success of any multifamily
real estate investment is impacted by other factors outside the control of the
Company, including general demand for apartment living, interest rates,
operating costs, and job growth, there can be no assurances that the Company
will be successful in its plan to continue to expand through acquisitions.
Certain Factors Associated with Real Estate and Related Investments
The Company is subject to the risks associated with ownership, operation, and
financing of real estate. These risks include, but are not limited to, liability
for environmental hazards; changes in general or local economic conditions;
changes in interest rates and the availability of permanent mortgage financing
which may render the acquisition, sale, or refinancing of a property difficult
or unattractive and which may make debt service burdensome; changes in real
estate and zoning laws; changes in income taxes, real estate taxes, or federal
or local economic or rent controls; floods, earthquakes, and other acts of
nature; and other factors beyond the control of the Company. The illiquidity of
real estate investments generally may impair the ability of the Company to
respond promptly to changing circumstances. The Company's management believes
that some of these risks are partially mitigated by the diversification by
geographic region and property type of the Company's real estate. However, to
the extent new investments continue to be concentrated in any particular region
or property type, the advantages of diversification may diminish.
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ITEM 2. PROPERTIES
Details of the Company's real estate portfolio at December 31, 1998, are set
forth in Schedule III to the Consolidated Financial Statements and NOTE 4. "REAL
ESTATE AND DEPRECIATION" of the Notes to Consolidated Financial Statements, both
included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The
discussion below provides summary information about the Company's real estate.
To continue to qualify for federal taxation as a REIT, the Company is required,
among other things, to hold at least 75% of the value of its assets in real
estate assets, government securities, and cash and cash equivalents at the close
of each quarter of each taxable year. At December 31, 1998, the Company's assets
consisted of 82% equity investments in real estate, 10% investments in
partnerships that own real estate, and about 1% cash and cash equivalents. The
remaining 7% were restricted cash and other assets. It should be noted, however,
that the percentage of assets invested in any one category at any particular
time is subject to change, and no assurance can be given that the composition of
the Company's assets in the future will approximate the percentages listed
above.
At December 31, 1998, the Company's real estate portfolio consisted of 78
properties, 53 of which were held for investment. The remaining 25 properties,
some of which were obtained through foreclosure of collateral securing the
Company's mortgage loans receivable, were held for sale. Eleven of the Company's
properties with an aggregate carrying value of $14.9 million were held free and
clear. The other 67 Company properties are encumbered by mortgages securing
indebtedness of $251.1 million at December 31, 1998.
[This space intentionally left blank.]
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ITEM 2. PROPERTIES (Continued)
The following table shows the number of apartment units and commercial square
footage of the Company's properties, including those owned through partnerships,
by state. Number of apartment units includes 834 units under construction owned
through partnerships and 320 units under construction owned directly.
[MAP OF U.S.A.]
Number of Commercial
Apartment Units Square Footage
--------------- --------------
California 973 288,945
Colorado 880 --
Connecticut 1,950 --
Florida 5,601 324,577
Georgia 360 200,264
Illinois -- 105,363
Kentucky 424 --
Louisiana 320 --
Maryland 459 --
Michigan 163 30,650
Mississippi -- 341,361
North Carolina -- 117,200
Nevada -- 39,600
Ohio 504 --
Oklahoma 793 --
Tennessee 840 --
Texas 2,010 363,408
Wisconsin -- 214,620
Washington DC -- 62,229
------ ---------
Total 15,277 2,088,217
====== =========
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ITEM 2. PROPERTIES (Continued)
Types of Real Estate Investments. The Company's real estate consists of
multifamily and commercial properties, primarily office buildings and shopping
centers, or similar properties having established income-producing capabilities.
In selecting real estate for investment, the Company concentrates on properties
for which intensive management coupled with capital improvements can materially
increase value. The Company favors buying or developing properties in areas in
which it presently operates. The location, age, and type of property, gross
rentals, lease terms, financial and business standing of tenants, operating
expenses, fixed charges, land values, and physical condition are also
considered. The Company may acquire properties subject to, or assume, existing
debt and may mortgage, pledge, or otherwise obtain financing for a portion of
its real estate.
Although the Company has traditionally invested in a wide variety of developed,
income-producing real estate, the Company intends to invest increasing amounts
in major apartment renovations and new construction or development projects
either directly or in partnership with others. To the extent the Company invests
in construction and development projects, it is subject to business risks, such
as cost overruns and delays, associated with higher risk activities. During 1998
and 1997, the Company formed or acquired interests in 12 partnerships set up to
construct or purchase and operate apartment properties. For information on
properties owned through partnerships, see the discussion below under
"Partnership Properties."
The following tables present information about real estate directly owned and
mortgage loans secured by owned real estate at December 31, 1998.
[This space intentionally left blank.]
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TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE --------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- ------ ------- ---- ---- ----
Apartments
Acadian Place .......... 120 143,450 $4.52 $4.04 $3.74
Baton Rouge, LA
Bay West ............... 299 323,774 4.94 5.17 5.22
Bradenton, FL
Bayfront ............... 200 172,720 6.69 5.61 5.56
Houston, TX
Bryan Hill ............. 232 193,500 4.83 4.77 4.59
Bethany, OK
Carlyle Towers ......... 163 247,850 5.86 5.41 5.39
Southfield, MI
Cornell ................ 55 30,150 14.76 13.70 12.70
Los Angeles, CA
Creekwood North ........ 180 166,500 5.99 5.99 5.56
Altamonte Springs, FL
Cross Creek ............ 144 102,258 6.98 7.32 7.14
Lexington, KY
Devonshire ............. 760 521,800 7.54 6.74 5.84
Denver, CO
Diamond Loch ........... 138 139,354 5.64 5.78 5.57
Fort Worth, TX
Fenway Hall ............ 53 27,175 12.19 11.39 11.68
Los Angeles, CA
Forest Oaks ............ 154 132,460 5.52 5.71 5.68
Lexington, KY
Heather Hills .......... 459 401,029 8.50 7.83 7.87
Temple Hills, MD
Kirklevington .......... 126 99,080 6.84 6.77 6.56
Lexington, KY
Lake Point ............. 540 540,160 3.88 4.25 3.92
Memphis, TN
Marina Park ............ 90 86,850 9.31 8.89 7.76
Miami, FL
Mariposa Manor ......... 41 19,710 9.42 7.48 9.25
Los Angeles, CA
Martins Landing ........ 236 207,704 6.78 6.49 6.41
Lakeland, FL
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- -------- ----------- ----------- ------------ ------------ ------------
Apartments
Acadian Place .......... 93.00% 89.20% $5.27 $5.13 $5.81
Baton Rouge, LA
Bay West ............... 84.00% 93.60% 6.52 6.14 6.73
Bradenton, FL
Bayfront ............... 97.00% 93.50% 7.27 6.92 7.79
Houston, TX
Bryan Hill ............. 98.00% 90.50% 5.26 5.23 5.55
Bethany, OK
Carlyle Towers ......... 94.00% 93.90% 6.25 6.24 6.54
Southfield, MI
Cornell ................ 98.20% 96.40% 15.16 14.41 16.56
Los Angeles, CA
Creekwood North ........ 92.00% 93.90% 6.97 6.72 7.07
Altamonte Springs, FL
Cross Creek ............ 89.00% 81.90% 8.96 8.57 9.27
Lexington, KY
Devonshire ............. 91.00% 95.00% 8.28 7.72 9.57
Denver, CO
Diamond Loch ........... 93.00% 92.80% 6.70 6.42 7.26
Fort Worth, TX
Fenway Hall ............ 100.00% 98.10% 12.83 12.39 13.45
Los Angeles, CA
Forest Oaks ............ 86.00% 85.70% 6.92 6.58 7.40
Lexington, KY
Heather Hills .......... 94.00% 93.00% 9.78 9.90 10.24
Temple Hills, MD
Kirklevington .......... 92.00% 85.70% 7.86 7.64 8.14
Lexington, KY
Lake Point ............. 90.00% 90.00% 5.33 5.12 5.66
Memphis, TN
Marina Park ............ 96.00% 91.10% 10.38 9.93 10.80
Miami, FL
Mariposa Manor ......... 87.80% 100.00% 10.23 10.36 10.67
Los Angeles, CA
Martins Landing ........ 94.00% 95.30% 7.25 7.06 7.86
Lakeland, FL
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TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE ------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- ------ ------- ---- ---- ----
Apartments (Continued)
Meadowbrook ............ 200 126,736 $7.57 $7.14 $6.80
Baton Rouge, LA
Mustang Creek .......... 120 167,880 5.68 5.19 5.11
Arlington, TX
Palm Court ............. 144 125,280 7.80 7.61 7.47
Miami, FL
Park Dale Gardens ...... 224 206,640 5.93 5.36 5.26
Dallas, TX
Park Norton ............ 55 21,744 11.17 9.77 8.67
Los Angeles, CA
Park Place ............. 39 15,640 10.52 8.42 8.15
Los Angeles, CA
Pinecrest .............. 324 226,065 13.63 12.86 12.06
Ft. Lauderdale, FL
Prado Bay .............. 123 109,756 10.03 9.64 8.72
North Bay Village, FL
The Regent ............. 304 288,320 4.64 3.74 1.74
Jacksonville, FL
River City Landing ..... 352 356,800 4.79 2.99 1.45
Jacksonville, FL
Summit on the Lake ..... 198 138,262 7.46 7.53 7.51
Ft. Worth, TX
Woodbrier .............. 128 115,550 4.61 4.61 3.23
Oklahoma City, OK
Woodcreek .............. 120 99,622 8.86 8.64 8.36
Denver, CO
Woodcreek .............. 260 198,623 7.62 7.30 6.82
------- --------- ----- ----- -----
Jacksonville, FL
SUBTOTAL (e) ........... 6,581 5,752,442 6.61 6.19 5.70
------- --------- ----- ----- -----
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- -------- ----------- ----------- ------------ ------------ ------------
Apartments (Continued)
Meadowbrook ............ 97.00% 93.50% $8.29 $7.89 $8.79
Baton Rouge, LA
Mustang Creek .......... 88.00% 90.00% 6.92 6.46 7.31
Arlington, TX
Palm Court ............. 91.00% 88.90% 8.90 8.57 9.17
Miami, FL
Park Dale Gardens ...... 96.00% 94.60% 6.49 6.17 7.02
Dallas, TX
Park Norton ............ 92.70% 87.30% 11.96 11.59 12.74
Los Angeles, CA
Park Place ............. 87.20% 89.70% 11.16 10.88 11.81
Los Angeles, CA
Pinecrest .............. 96.00% 97.20% 15.14 14.07 15.46
Ft. Lauderdale, FL
Prado Bay .............. 99.00% 96.70% 10.51 10.18 10.87
North Bay Village, FL
The Regent ............. 88.00% 87.80% 6.00 5.97 6.09
Jacksonville, FL
River City Landing ..... 87.00% 75.60% 6.65 6.07 6.81
Jacksonville, FL
Summit on the Lake ..... 87.00% 89.40% 8.63 8.19 9.13
Ft. Worth, TX
Woodbrier .............. 95.00% 89.10% 5.10 4.94 5.67
Oklahoma City, OK
Woodcreek .............. 97.50% 99.20% 9.30 9.14 9.74
Denver, CO
Woodcreek .............. 94.00% 94.60% 7.93 7.65 8.19
----- ----- ----- ----- -----
Jacksonville, FL
SUBTOTAL (e) ........... 91.88% 91.21% 7.65 7.34 8.10
----- ----- ----- ----- -----
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TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE ----------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- ------ ------- ---- ---- ----
Office Buildings
Emerson Center .......... - 126,979 $10.50 $10.13 $ 7.51
Atlanta, GA
Northwest O'Hare ........ - 105,363 12.41 12.30 11.38
Des Plaines, IL
Rancho Sorrento ......... - 147,973 8.12 7.14 6.83
---- ------- ------ ------ ------
San Diego, CA
SUBTOTAL (e) ............ - 380,315 10.10 9.57 8.32
---- ------- ------ ------ ------
Shopping Centers
Emerson Center .......... - 17,733 14.05 12.86 13.61
Atlanta, GA
Jackson Square .......... - 341,361 1.20 1.23 1.32
Jackson, MS
K-Mart Plaza (f) ....... - 117,200 0.73 0.47 0.39
Charlotte, NC
K-Mart Plaza ............ - 63,887 3.65 3.65 3.65
Temple Terrace, FL
K-Mart Plaza (g) ........ - 55,552 2.96 2.96 2.96
Thomasville, GA
Lakeview Mall ........... - 214,620 1.03 0.74 1.43
Manitowoc, WI
Midland Plaza ........... - 30,650 3.38 3.38 3.38
Midland, MI
Midway Mills ............ - 72,065 9.55 9.74 9.70
Carrollton, TX
Northside Center (h) .... - 139,337 4.03 3.84 3.93
Gainesville, FL
Stewart Square .......... - 39,600 10.18 9.43 8.96
Las Vegas, NV
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- -------- ----------- ----------- ------------ ------------ ------------
Office Buildings
Emerson Center .......... 92.90% 90.42% $13.58 $12.40 $13.27
Atlanta, GA
Northwest O'Hare ........ 80.00% 86.76% 14.80 14.36 14.28
Des Plaines, IL
Rancho Sorrento ......... 85.64% 83.06% 9.80 8.87 11.53
------ ------ ------ ------ ------
San Diego, CA
SUBTOTAL (e) ............ 86.50% 86.54% 12.45 11.57 12.87
------ ------ ------ ------ ------
Shopping Centers
Emerson Center .......... 100.00% 77.31% 14.70 14.12 14.95
Atlanta, GA
Jackson Square .......... 36.80% 39.52% 3.49 3.46 3.48
Jackson, MS
K-Mart Plaza (f) ....... 3.10% 3.10% 2.19 2.00 0.79
Charlotte, NC
K-Mart Plaza ............ 100.00% 100.00% 3.65 3.65 3.65
Temple Terrace, FL
K-Mart Plaza (g) ........ 100.00% 100.00% 2.96 2.96 2.96
Thomasville, GA
Lakeview Mall ........... 37.83% 37.83% 3.17 3.23 2.43
Manitowoc, WI
Midland Plaza ........... 100.00% 100.00% 3.38 3.38 3.38
Midland, MI
Midway Mills ............ 95.00% 93.87% 11.28 10.59 11.53
Carrollton, TX
Northside Center (h) .... 98.92% 97.56% 4.10 4.10 4.10
Gainesville, FL
Stewart Square .......... 93.94% 93.94% 10.96 10.33 8.64
Las Vegas, NV
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TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE ---------------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- --------- --------- --------- --------- ---------
Shopping Centers (Continued)
Times Square ...................... -- 19,550 $ 5.33 $ 5.07 $ 4.72
Lubbock, TX
University Center ................. -- 80,725 2.71 2.48 2.47
--------- --------- --------- --------- ---------
Waco, TX
SUBTOTAL (e) ...................... -- 1,192,280 2.89 2.74 2.88
--------- --------- --------- --------- ---------
SAME STORE TOTAL .................. -- 7,325,037 6.19 5.80 5.38
--------- --------- --------- --------- ---------
(WEIGHTED AVG) (e)
1997 Acquisitions
Courtyard at the Park ............. 127 106,266 4.48 5.47 --
Miami, FL
English Village ................... 300 364,680 4.78 4.70 --
Memphis, TN
Fountainhead ...................... 184 187,080 6.75 7.18 --
Kissimmee, FL
Landmark .......................... 128 113,720 4.56 3.71 --
Tallahassee, FL
Mariner Plaza ..................... -- 52,288 5.63 5.34 --
Panama City, FL
Morningside ....................... 112 89,200 6.28 5.90 --
Jacksonville, FL
Newport ........................... 152 139,364 8.19 7.71 --
Plantation, FL
Vistas at Lake Worth (i) .......... 265 188,120 3.28 0.04
--------- --------- --------- --------- ---------
Ft. Worth, TX
SUBTOTAL (e) ...................... 1,268 1,240,718 5.33 4.79 --
--------- --------- --------- --------- ---------
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- -------- ------------ ------------ ------------ ------------ ------------
Shopping Centers (Continued)
Times Square ............... 84.00% 79.80% $ 6.52 $ 6.12 $ 6.54
Lubbock, TX
University Center .......... 42.96% 42.55% 6.37 5.17 5.64
------------ ------------ ------------ ------------ ------------
Waco, TX
SUBTOTAL (e) ............... 56.43% 56.55% 4.49 4.31 4.11
------------ ------------ ------------ ------------ ------------
SAME STORE TOTAL ........... 85.83% 85.33% 7.38 7.07 7.69
------------ ------------ ------------ ------------ ------------
(WEIGHTED AVG) (e)
1997 Acquisitions
Courtyard at the Park ...... 80.00% 48.80% 9.50 8.21 9.56
Miami, FL
English Village ............ 86.00% 93.00% 5.39 5.18 5.82
Memphis, TN
Fountainhead ............... 92.00% 96.20% 8.00 7.69 8.46
Kissimmee, FL
Landmark ................... 93.00% 72.70% 6.58 5.72 6.79
Tallahassee, FL
Mariner Plaza .............. 100.00% 87.67% 6.19 5.93 6.25
Panama City, FL
Morningside ................ 88.00% 94.60% 7.03 6.53 7.47
Jacksonville, FL
Newport .................... 96.00% 84.90% 9.54 9.29 9.96
Plantation, FL
Vistas at Lake Worth (i) ... 55.00% 1.50% 13.02 13.00 13.03
------------ ------------ ------------ ------------ ------------
Ft. Worth, TX
SUBTOTAL (e) ............... 84.19% 72.94% 8.02 7.64 8.32
------------ ------------ ------------ ------------ ------------
12
13
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE ---------------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- --------- --------- --------- --------- ---------
1998 Acquisitions
1505 Highway 6 .................... -- 62,934 $ 9.75 $ -- $ --
Houston, TX
Desert Winds ...................... 152 121,056 10.61 -- --
Jacksonville, FL
Palm Grove ........................ 142 99,684 8.62 -- --
Orlando, FL
Silver Creek ...................... 152 144,240 8.41 -- --
--------- --------- --------- --------- ---------
Jacksonville, FL
SUBTOTAL (e) ...................... 446 427,914 9.28 -- --
--------- --------- --------- --------- ---------
Acquired through Merger (j)
Aspentree ......................... 296 212,864 7.78 7.50 8.03
Dallas, TX
Briarwest ......................... -- 25,323 10.68 10.77 11.59
Houston, TX
The Brooks ........................ 104 94,176 6.61 6.84 --
Addison, TX
Collegewood ....................... 162 83,700 7.32 8.04 8.28
Tallahassee, FL
French Villa ...................... 101 104,720 6.30 6.09 6.76
Tulsa, OK
Holly House ....................... 57 45,417 8.70 7.84 7.67
North Miami, FL
Mission Trace ..................... 96 104,400 4.32 4.59 5.35
Tallahassee, FL
One Turtle Creek .................. -- 102,811 9.02 8.93 11.13
Dallas, TX
Park 20 West ...................... -- 69,065 13.46 14.82 --
Tallahassee, FL
Phoenix ........................... 254 208,726 5.06 4.91 5.01
Tulsa, OK
Riverside ......................... 145 110,868 9.00 8.49 9.46
Austin, TX
Southern Elms ..................... 78 65,159 6.75 6.66 7.18
Tulsa, OK
Tarzana Towne Plaza ............... -- 37,208 15.92 16.54 14.30
--------- --------- --------- --------- ---------
Tarzana, CA
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- --------- ------------ ------------ ------------ ------------ ------------
1998 Acquisitions
1505 Highway 6 ............. 100.00% -- $ 9.75 $ -- $ 2.38
Houston, TX
Desert Winds ............... 95.00% -- 10.99 -- 9.39
Jacksonville, FL
Palm Grove ................. 99.00% -- 8.91 -- 8.91
Orlando, FL
Silver Creek ............... 99.00% -- 8.60 -- 7.21
------------ ------------ ------------ ------------ ------------
Jacksonville, FL
SUBTOTAL (e) ............... 98.02% -- 9.52 -- 8.81
------------ ------------ ------------ ------------ ------------
Acquired through Merger (j)
Aspentree .................. 95.00% 95.00% 8.54 8.19 9.04
Dallas, TX
Briarwest .................. 82.00% 82.00% 13.62 13.24 13.83
Houston, TX
The Brooks ................. 94.00% 89.00% 7.65 7.85 7.98
Addison, TX
Collegewood ................ 90.00% 92.00% 9.91 9.07 10.51
Tallahassee, FL
French Villa ............... 75.00% 91.00% 6.77 6.68 7.08
Tulsa, OK
Holly House ................ 98.00% 88.00% 9.98 9.03 10.21
North Miami, FL
Mission Trace .............. 88.00% 90.00% 6.61 6.66 6.82
Tallahassee, FL
One Turtle Creek ........... 74.05% 69.00% 14.27 13.32 14.26
Dallas, TX
Park 20 West ............... 97.29% 97.00% 14.17 15.50 14.53
Tallahassee, FL
Phoenix .................... 93.00% 90.00% 5.77 5.60 5.93
Tulsa, OK
Riverside .................. 97.00% 96.00% 9.82 9.51 10.15
Austin, TX
Southern Elms .............. 95.00% 90.00% 7.39 7.36 7.92
Tulsa, OK
Tarzana Towne Plaza ........ 77.70% 80.00% 19.97 20.05 19.74
------------ ------------ ------------ ------------ ------------
Tarzana, CA
13
14
TARRAGON REALTY INVESTORS, INC.
REAL ESTATE SUMMARY
DECEMBER 31, 1998
AVERAGE RENT PSF (a)
NUMBER YEAR ENDED DECEMBER 31
OF SQUARE ------------------------------------
PROPERTY UNITS FOOTAGE 1998 1997 1996
- -------- ---------- ---------- ---------- ---------- ----------
Acquired through merger (Continued) (j)
SUBTOTAL (e) 1,293 1,264,437 $ 7.60 $ 7.61 $ 6.76
---------- ---------- ---------- ---------- ----------
ACQUISITION TOTAL 3,007 2,933,069 6.89 6.45 6.76
---------- ---------- ---------- ---------- ----------
(WEIGHTED AVG.) (e)
GRAND TOTAL 9,588 10,258,106 $ 6.39 $ 5.91 $ 5.58
========== ========== ========== ========== ==========
(WEIGHTED AVG.) (e)
GROSS POTENTIAL GROSS POTENTIAL 12/31/98
PHYSICAL PHYSICAL RENT PSF RENT PSF CURRENT
OCCUPANCY OCCUPANCY YEAR ENDED YEAR ENDED MARKET
PROPERTY 12/31/98(c) 12/31/97(d) 12/31/98 12/31/97 RENT PSF (b)
- -------- ------------ ------------ ------------ ------------ ------------
Acquired through merger (Continued) (j)
SUBTOTAL (e) 89.97% 89.66% $ 9.12 $ 8.91 $ 8.03
------------ ------------ ------------ ------------ ------------
ACQUISITION TOTAL 88.70% 81.58% 8.71 8.32 8.87
------------ ------------ ------------ ------------ ------------
(WEIGHTED AVG.) (e)
GRAND TOTAL 86.65% 84.32% $ 7.76 $ 7.38 $ 8.03
============ ============ ============ ============ ============
(WEIGHTED AVG.) (e)
(a) Amounts represent rental revenue per square foot on an annual basis. Rental
revenue is equal to gross potential rent after giving effect to all rental
losses including bad debt, vacancies, and discounts and concessions. Gross
potential rent equals actual lease rates on leased units/space and market
rates on vacant units/space.
(b) Represents annualized market rate per square foot at December 31, 1998,
based upon scheduled rents at such time.
(c) Represents actual physical occupancy as of the end of the last week of the
fiscal year ended December 31, 1998.
(d) Represents actual physical occupancy as of the end of the last week of the
fiscal year ended December 31, 1997.
(e) The weighted average rent per square foot and occupancy are based on the
square footage in each property.
(f) K-Mart's lease expired January 1994. At December 31, 1998, space had not
been re-leased.
(g) Lease expires September 2004. During the first quarter of 1995, K-Mart
moved out and sublet the space to two tenants.
(h) K-Mart's lease expires September 2002. K-Mart moved out in 1993 and
continues to pay the scheduled rent on the portion of the space it has not
sublet.
(i) For purposes of this schedule, this property is included with 1997
acquisitions because operations began during 1997 although the property was
purchased in 1994.
(j) Average rent per square foot for the years ended December 31, 1996 and
1997, and for the period from January 1, 1998, through November 23, 1998,
gross potential rent per square foot for the year ended December 31, 1997,
and for the period from January 1, 1998, through November 23, 1998, and
physical occupancy at December 31, 1997, relate to these properties prior
to the merger and therefore are not reflected in the Consolidated Financial
Statements included elsewhere in this Form 10-K. The Brooks Apartments and
Park 20 West Office Park were acquired by the Company in 1997. Therefore,
average rent per square foot for the year ended December 31, 1996, is not
presented for these two properties.
Management believes that its properties are adequately covered by liability and
casualty insurance, consistent with industry standards.
The Company also owns directly five parcels of land (one on which construction
of a 320 unit apartment community is underway and one on which construction of
an apartment community is planned) and a house held for rental which are not
reflected on this schedule.
14
15
TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 1998
(Dollars in thousands)
(Unaudited)
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1998 Rate Date Maturity
- ---------------- ------------ ------------ ------------ ------------ ------------
Apartments
Acadian Place ..................... $ 3,250 $ 3,250 6.56% Jan -09 $ 2,759
Aspentree ......................... 3,966 3,835 8.33% Nov -05 3,390
Bay West .......................... 5,100 4,759 8.89% Jan -19 --
Bayfront .......................... 4,300 4,296 5.99% Nov -08 3,605
The Brooks ........................ 1,375 1,279 9.63% Sep -04 1,074
Bryan Hill ........................ 3,500 3,467 6.93% Jan -08 2,998
Carlyle Towers .................... 5,500 5,464 6.96% Mar -08 4,715
Collegewood (A) ................... 2,050 2,018 8.25% Aug -99 2,002
Cornell ........................... 2,400 2,398 6.16% Nov -08 2,021
Courtyard at the Park (A) ......... 3,230 2,903 7.38% Dec -00 2,791
Creekwood North ................... 3,050 2,980 8.05% May -06 2,678
Cross Creek ....................... 2,720 2,691 7.54% Oct -07 2,367
Desert Winds ...................... 1,834 1,355 8.50% Jul -10 341
Devonshire (A) .................... 15,900 15,900 7.44% Jun -00 15,900
Diamond Loch ...................... 3,512 3,484 6.80% Mar -08 3,005
English Village ................... 6,200 5,918 7.56% Dec -05 4,965
Fenway Hall (A) ................... 1,375 1,286 8.50% Oct -08 720
Forest Oaks ....................... 3,075 2,971 8.16% Jun -06 2,501
Fountainhead (A) .................. 5,650 5,650 7.44% Jun -00 5,650
French Villa ...................... 1,925 1,925 6.82% Jan -09 1,648
Heather Hills ..................... 16,790 17,254 7.88% Jan -31 117
Holly House ....................... 1,760 1,758 6.57% Nov -08 1,498
Kirklevington ..................... 2,470 2,388 9.00% Nov -99 2,364
Lake Point (A) .................... 9,000 9,000 7.46% Jun -00 9,000
Landmark (A) ...................... 1,500 1,500 7.44% Jun -00 1,500
Marina Park ....................... 3,750 3,731 6.89% June -08 3,215
Mariposa Manor (A) ................ 784 747 8.00% Apr -02 708
Martins Landing ................... 5,000 4,776 7.65% Dec -05 4,014
Meadowbrook ....................... 3,700 3,700 6.56% Jan -09 3,148
Mission Trace (A) ................. 2,220 1,807 7.85% May -06 --
Mission Trace (A) ................. 290 236 7.60% May -06 --
Morningside ....................... 1,658 1,599 8.35% Apr -03 1,474
Mustang Creek (A) ................. 4,600 4,600 6.94% Jun -01 4,600
Newport ........................... 5,100 4,983 8.18% Apr -06 4,498
Palm Court ........................ 3,000 2,861 9.67% Dec -04 2,525
Palm Grove ........................ 1,879 1,307 8.50% Feb -12 --
Park Dale Gardens ................. 3,000 2,858 8.30% Jul -05 2,448
15
16
TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES
DECEMBER 31, 1998
(Dollars in thousands)
(Unaudited)
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1998 Rate Date Maturity
- ----------------- ------------ ------------ ------------ ------------ ------------
Apartments (Continued)
Park Norton (A) ........................ $ 564 $ 536 4.98% Jun-05 $ 437
Pinecrest .............................. 14,500 14,291 7.96% Apr-17 8,799
Prado Bay .............................. 4,800 4,756 7.05% Jan-08 4,124
The Regent (A) ......................... 4,900 4,900 6.94% Jun-01 4,900
River City Landing (A) ................. 7,743 7,743 7.44% Jun-00 7,743
Riverside .............................. 4,200 4,159 7.16% Dec-07 3,627
Silver Creek ........................... 1,926 1,283 8.50% May-12 --
Southern Elms .......................... 1,370 1,310 9.68% Feb-02 1,242
Summit on the Lake ..................... 4,800 4,726 6.35% Aug-27 --
Vistas at Lake Worth (A) ............... 10,000 9,500 7.19% May-00 9,500
Vintage at Legacy Lakes (A) ............ 3,000 1,600 8.00% Jun-99 1,600
Vintage at Legacy Lakes (A), (C) ....... 1,921 1,921 6.79% Dec-00 1,921
Woodbrier .............................. 2,200 2,198 6.11% Nov-08 1,850
Woodcreek (CO) ......................... 4,750 4,708 6.71% Feb-08 4,056
Woodcreek (FL) ......................... 7,080 7,062 6.79% Sep-08 6,057
------------ ------------ ------------ -----------
220,167 213,627 7.48%(B) 162,095
------------ ------------ ------------ -----------
[This space intentionally left blank.]
16
17
TARRAGON REALTY INVESTORS, INC.
MORTGAGE LOANS SECURED BY OWNED PROPERTIES (Continued)
DECEMBER 31, 1998
(Dollars in thousands)
(Unaudited)
Stated Balance
Original Balance Interest Maturity Due at
Name of Property Amount Dec 31, 1998 Rate Date Maturity
- ---------------- ---------- ---------- ---------- ---------- ----------
Office Buildings
1505 Highway 6 (A) ............ $ 2,000 $ 2,000 7.79% Nov -01 $ 2,000
Emerson Center (D) ............ 7,000 7,000 7.38% Nov -99 6,916
Northwest O'Hare (A) .......... 2,450 1,850 6.94% Jun -01 1,850
One Turtle Creek .............. 2,000 1,817 9.00% Feb -05 1,504
Park 20 West .................. 2,000 1,880 8.68% Mar -06 1,415
Rancho Sorrento ............... 3,750 2,643 9.00% Aug -00 2,400
Rancho Sorrento ............... 2,650 2,545 8.13% Mar -09 1,575
Tarzana Towne Plaza ........... 2,973 2,922 9.81% Nov -06 2,613
---------- ---------- ---------- ----------
24,823 22,657 8.20%(B) 20,273
---------- ---------- ---------- ----------
Shopping Centers
Briarwest (A) ................. 1,700 1,677 7.71% Nov -04 1,510
K-Mart - Charlotte (A) ........ 1,360 1,236 9.25% Oct -01 1,188
K-Mart - Temple Terrace ....... 1,750 858 8.50% May -05 70
K-Mart - Temple Terrace (A) ... 347 321 9.75% Oct -99 315
K-Mart - Thomasville .......... 1,300 676 9.63% Sep -05 --
K-Mart - Thomasville (A) ...... 290 268 9.75% Oct -99 264
Mariner Plaza ................. 1,725 1,725 7.15% Jan -09 1,467
Midland Plaza (A) ............. 305 278 10.00% Oct -99 272
Midway Mills .................. 4,200 4,043 8.64% Dec -05 3,465
Northside Center .............. 3,100 1,554 9.00% Nov -05 --
Stewart Square (A) ............ 2,250 2,221 7.44% Dec -04 2,054
---------- ---------- ---------- ----------
18,327 14,857 8.38%(B) 10,605
---------- ---------- ---------- ----------
Total ............................. $ 263,317 $ 251,141 7.60%(B) $ 192,973
========== ========== ========== ==========
(A) For loans with variable interest rates, the rate in effect for the month of
March 1999 is presented.
(B) Represents weighted average interest rate for the month of March 1999.
(C) Construction loan.
(D) Both retail and office portions of Emerson Center secure a mortgage with a
December 31, 1998, balance of $7 million.
17
18
ITEM 2. PROPERTIES (Continued)
Partnership Properties
The Company holds noncontrolling interests in 14 partnerships accounted for
using the equity method. Following is a discussion of these partnerships and the
properties they own.
Partnerships with affiliates of Robert C. Rohdie.
The Company has formed seven partnerships with affiliates of Robert C. Rohdie.
These partnerships were formed for the purpose of constructing luxury apartment
communities. In forming these partnerships, the Company has capitalized on the
experience of a seasoned developer. Mr. Rohdie has been actively involved in
development of residential and commercial properties in Florida and New York for
over 25 years and has been a principal in the development of over 10,000
apartments units. The Company has provided substantially all of the equity for
these construction projects as interest-bearing priority loans to the
partnerships. The Company's partners hold interests in the partnerships that are
subordinate to the Company's priority loans. Affiliates of Mr. Rohdie have
personally guaranteed each of the construction loans, which are non-recourse to
the Company. The following list of the Company's partnerships with Mr. Rohdie
provides information about the properties constructed by each.
Company's
Partnership Name Date Formed Interest Property Name Location
- ---------------- ----------- -------- -------------- --------
RI Windsor, Ltd. Jan 97 50% Mayfaire at Windsor Parke Jacksonville, FL
RI Panama City, Ltd. Jun 97 50% Harbour Green Panama City, FL
Danforth National Apartments,
Ltd. Sep 97 80% Club at Danforth Jacksonville, FL
Tarragon Savannah, L.P. Dec 97 50% Links at Georgetown Savannah, GA
Links Phase II Savannah, GA
Orange National Partners, L.P. Mar 98 50% Vineyard at Eagle Harbor Orange Park, FL
Tarragon Stoneybrook Apartments,
L.L.C. Jun 98 50% Stoneybrook Apartments Orlando, FL
Tarragon Huntsville Apartments,
L.L.C. Nov 98 50% (1) Huntsville, AL
Number Total Cost of Construction
Partnership Name Of Units Development(3) Loan
- ---------------- ------ -------------- --------------
RI Windsor, Ltd. 324 $18.7 million $16 million
RI Panama City, Ltd. 200 $10.1 million $8.8 million
Danforth National Apartments,
Ltd. 288 $16 million $13.7 million
Tarragon Savannah, L.P. 250 $14.5 million $12 million
110 $7.4 million (6)
Orange National Partners, L.P. 328 $20 million $15.8 million
Tarragon Stoneybrook Apartments,
L.L.C. 396 $27.6 million $22 million
Tarragon Huntsville Apartments,
L.L.C. 178 $10.4 million (2)
Date of Initial Date of (3)
Partnership Name Property Name Operations Completion
- ---------------- ------------- ---------- ----------
RI Windsor, Ltd. Mayfaire at Windsor Parke Aug 97 Mar 98
RI Panama City, Ltd. Harbour Green Jan 98 May 98
Danforth National Apartments,
Ltd. Club at Danforth Mar 98 Sep 98
Tarragon Savannah, L.P. Links at Georgetown Aug 98 Mar 99
Links Phase II (4) Second Quarter 2000
Orange National Partners, L.P. Vineyard at Eagle Harbor Dec 98 Third Quarter 1999
Tarragon Stoneybrook Apartments,
L.L.C. Stoneybrook Apartments (4) Second Quarter 2000
Tarragon Huntsville Apartments,
L.L.C. (1) (4) (5)
- ----------------
(1) This partnership is expected to build a property (not yet named) on land
acquired in November 1998.
(2) The partnership plans to obtain an $8.8 million construction loan.
(3) Total cost of development and dates of completion for projects not yet
complete are estimated.
(4) Property has not begun operating.
(5) Construction of this property is expected to begin in the second quarter of
1999.
(6) The partnership plans to obtain a construction loan.
18
19
ITEM 2. PROPERTIES (Continued)
Partnership Properties (Continued)
Ansonia Apartments, L.P. In December 1997, the Company formed Ansonia
Apartments, L.P. ("Ansonia") with two unrelated entities to acquire and
reposition or renovate older suburban apartment properties in central and
eastern Connecticut. The Company formed this partnership to take advantage of
the acquisition and management skills of the principals of the outside partners,
Richard Frary, Joel Mael, Robert Rothenberg, and Saul Spitz, who have been
involved in the management and renovation of apartment and commercial properties
in the northeastern United States for over ten years. The Company has a 70%
interest in this partnership. The outside partners have a 30% interest in the
partnership, subject to their obligation to pay the Company 30% of the amounts
contributed to the partnership by the Company plus interest. Between December
1997 and August 1998, Ansonia purchased ten properties in separate transactions.
The cash portion of the purchase price of each acquisition was contributed to
Ansonia by the Company. Funds contributed by the Company constitute priority
loans to the partnership.
The following table sets forth information about the properties owned by Ansonia
as of December 31, 1998.
Date Number
Property Name Acquired Location Of Units Purchase Price Mortgage
- --------------------------- -------- ---------- -------- -------------- -------------
Meriden East Dec 97 Meriden, CT 66 $1.8 million $1.4 million
Autumn Ridge Dec 97 East Haven, CT 116 $2.0 million $1.5 million
Lakeview Apr 98 Waterbury, CT 88 $3.0 million $2.4 million
Parkview Jul 98 Naugatuck, CT 160 $5.5 million $4.6 million
Sagamore Hills Jul 98 Middletown, CT 212 $6.6 million $4.4 million
Prescott Glen Jul 98 East Hartford, CT 562 $16.7 million $13.6 million
Groton Towers Aug 98 Groton, CT 114 $4.4 million $4.2 million
Whalers' Point/Nutmeg Woods Aug 98 New London, CT 382 $14.6 million $13.8 million
Fox Run Aug 98 Ledyard, CT 172 $7.3 million $5.9 million
Foxon Woods Aug 98 East Haven, CT 78 $2.7 million $2.0 million
Sacramento Nine. The Company owns two fully leased office buildings in the
vicinity of Sacramento, California, as a 70% tenant-in-common with Continental
Mortgage and Equity Trust.
801 Pennsylvania Avenue. In June 1995, the Company acquired a 50% economic
interest in an office building located at 801 Pennsylvania Avenue, Washington,
D.C., through purchase of a first lien mortgage note with a face value of $8.5
million for $3 million. In accordance with terms of the note, the Company's $3
million investment, as well as any additional advances made to the property, was
to be repaid from property cash flow after operating expenses with interest at
11% per annum. The $5.5 million remaining balance of the note plus accrued
interest entitled the Company to 50% of all funds available after property
operating expenses plus 50% of the proceeds from any sale and any refinancing.
In June 1998, new first mortgage financing of $4.2 million was obtained. The
Company received $3.8 million of the proceeds, $2.9 million of which represented
the balance of its original investment, $606,000 of which was accrued interest,
and $267,000 representing the Company's 50% participation in excess financing
proceeds.
19
20
ITEM 2. PROPERTIES (Continued)
Partnership Properties (Continued)
National Omni Associates, Ltd. In December 1997, the Company acquired 55% of
National Omni Associates, Ltd., which purchased 5600 Collins, a 289-unit high
rise waterfront apartment building in Miami Beach, Florida, in February 1998.
The purchase price of $32 million was partially funded through $26 million of
first and second lien mortgages. The remainder of the purchase price was paid
with funds contributed by the Company. In connection with the merger of the
Company with NIRT, the Company's interest in this partnership increased to 70%.
Larchmont Associates, L.P. The Company holds a 57% interest in Larchmont
Associates, L.P., which owns Larchmont West Apartments, a 504-unit operating
property presently under repositioning and located in Toledo, Ohio. The
Larchmont interest was initially acquired by Vinland in December 1995 for a cash
investment of $418,000. The Company's investment plus additional advances to the
partnership are subject to repayment with simple interest at 18% prior to any
distributions to the partners.
Antelope Pines Estates, L.P., and Woodcreek Garden Apartments, L.P. In December
1998, the Company purchased general partner interests in Antelope Pines Estates,
L.P., which owns Antelope Pines, a 314-unit operating apartment property in
Lancaster, California, and in Woodcreek Garden Apartments, L.P., which owns
Woodcreek Garden Apartments, a 416-unit operating apartment property, also in
Lancaster, California. The Company has made investments in and advances to the
partnerships of $1 million in connection with the purchase of its interests.
The following table sets forth information about operating properties owned by
Company partnerships as of December 31, 1998. The properties owned by Antelope
Pines Estates, L.P., and Woodcreek Garden Apartments, L.P., are stabilized and
fully operational, but they are excluded from the table because operations after
their purchase in December 1998 were not significant.
Average Rent Physical
Per Square Foot(a) Occupancy(b)
Property Number Square ---------------------- -----------------
Partnership Location of Units Footage 1998 1997 1998 1997
--------------------- -------------- -------- ----------- ---------- --------- ------ -------
Sacramento Nine Rancho Cordova, CA - 103,764 $13.91 $13.15 100% 90%
801 Pennsylvania Washington, D.C. - 62,229 12.71 11.63 88% 65%
RI Windsor, Ltd. Jacksonville, FL 324 339,886 3.52 .60 71% 27%
RI Panama City, Ltd. (c) Panama City, FL 200 201,480 3.80 - 62% -
Danforth National Apartments, Ltd. (c) Jacksonville, FL 288 295,620 1.25 - 57% -
Tarragon Savannah, L.P. (c) Savannah, GA 250 260,294 .90 - 52% -
National Omni Associates, L.P. (c) Miami Beach, FL 289 333,552 11.50 - 88% -
Ansonia Apartments, L.P. (d) Connecticut 1,950 1,391,048 3.78 - 80% -
Orange National Partners, L.P. (c) Orange Park, FL 328 354,136 .01 - 1% -
Larchmont Associates, L.P. (e) Toledo, OH 504 339,654 5.56 4.94 91% 86%
- ---------------------
(a) Amounts represent rental revenue per square foot on an annual basis. Rental
revenue is equal to gross potential rent after giving effect to all rental
losses including bad debts, vacancies, and discounts and concessions. Gross
potential rent equals actual lease rates on leased units/space and market
rates on vacant units/space.
(b) Represents actual physical occupancy as of the end of the last week of the
years ended December 31, 1998 and 1997.
(c) Property was constructed or purchased and began operating during 1998.
Therefore, there is no 1997 information.
(d) Partnership owned two properties that operated for less than one month in
1997.
(e) Average rent per square foot for the year ended December 31, 1997, and for
the period from January 1, 1998, through November 23, 1998, and physical
occupancy as of December 31, 1997, relate to this partnership prior to the
merger and therefore are not reflected in the Consolidated Financial
Statements included elsewhere in this Form 10-K.
20
21
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various claims and routine litigation arising in the
ordinary course of business. Management of the Company does not believe that the
results of these claims and litigation, individually or in the aggregate, will
have a material adverse effect on its business, financial position, or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 10, 1998, the Company's Registration Statement on Form S-4 No.
333-60527 was declared effective by the Securities and Exchange Commission. This
Registration Statement covered the issuance of up to 7,586,000 shares of Company
common stock in connection with the Merger Agreement between the Company and
NIRT and the Stock Purchase Agreement between the Company, TRA, William S.
Friedman, and Lucy N. Friedman.
A Joint Proxy Statement/Prospectus was included in the Registration Statement
and was mailed to the respective shareholders of the Company and NIRT in
connection with separate Special Meetings of the shareholders of the Company and
NIRT held on October 20, 1998.
At the Special Meetings, the shareholders of the Company and NIRT voted to
approve and adopt the Merger Agreement and the transactions contemplated by the
Merger Agreement, including the issuance of shares of Company common stock and
the conversion of the shares of beneficial interest of NIRT into the right to
receive 1.97 shares of Company common stock.
As of September 4, 1998, the record date for the Special Meeting, there were
1,272,180 shares of Company common stock outstanding and entitled to vote. At
the Company's Special Meeting on October 20, 1998, a total of 714,508 votes were
cast FOR (93.4% of the total of 765,050 shares voted or 56.16% of those entitled
to vote), 11,084 shares were voted AGAINST such proposal, and 39,458 shares
ABSTAINED from voting. As of September 4, 1998, there were 3,737,171 shares of
beneficial interest of NIRT issued and outstanding and entitled to vote. At the
NIRT Special Meeting on October 20, 1998, a total of 2,245,673 votes were cast
FOR (94.01% of the total of 2,388,803 shares voted or 60.09% of those entitled
to vote), 64,210 shares were voted AGAINST such proposal, and 78,920 shares
ABSTAINED from voting.
[This space intentionally left blank.]
21
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value, is listed on the NASDAQ SmallCap
Market and is traded in the NASDAQ over-the-counter market under the symbol
"TARR." The following table sets forth the high and low bid quotations of the
common stock as reported by the NASDAQ System for the periods indicated. The
following information gives retroactive effect to the exchange of each share of
beneficial interest of NIRT for 1.97 shares of the Company's common stock in
connection with the merger of the Company and NIRT in November 1998 and a 10%
stock dividend paid by NIRT in September 1997. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commissions, and may not necessarily represent actual transactions.
1998 1997
------------------------- -------------------------
High Low High Low
---------- ---------- ---------- ----------
First quarter $ 9.14 $ 7.99 $ 7.04 $ 5.65
Second quarter 10.85 8.88 7.38 7.04
Third quarter 14.02 10.66 7.93 7.15
Fourth quarter 12.31 10.00 8.63 7.74
According to the transfer agent's records, at April 5, 1999, the Company's
common stock was held by approximately 12,400 holders, including beneficial
holders.
Cash dividends per share paid to shareholders in 1998 and 1997 were as follows
(restated to give effect to the November 1998 merger and the September 1997 10%
stock dividend):
1998 1997
---------- ----------
First quarter $ .102 $ .092
Second quarter .102 .092
Third quarter .102 .092
Fourth quarter .105 .102
[This space intentionally left blank.]
22
23
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with all of the
financial statements and notes thereto and with the discussion set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. Dollar amounts are in
thousands, except per share amounts.
On November 24, 1998, the Company and NIRT merged, with the Company as the
survivor, on the basis of 1.97 shares of the Company's common stock for each
share of beneficial interest of NIRT. The merger has been accounted for as a
reverse acquisition of the Company by NIRT using purchase method accounting.
Therefore, historical balances and operating information presented below for
periods prior to the merger are those of NIRT.
For the Years Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
OPERATING DATA
Revenue ............................... $ 58,700 $ 52,017 $ 49,962 $ 45,240 $ 40,135
Expenses .............................. (61,095) (51,749) (49,176) (46,214) (40,915)
------------ ------------ ------------ ------------ ------------
Income (loss) before net gain on sale
of real estate, gain on sale of
investments, gain on insurance
settlement, and extraordinary items .. (2,395) 268 786 (974) (780)
Net gain on sale of real estate ....... 2,108 4,350 3,700 533 385
Gain on sale of investments ........... 123 913 -- 412 141
Gain on insurance settlement .......... -- -- 451 -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations .......................... (164) 5,531 4,937 (29) (254)
Extraordinary items ................... (1,231) 61 -- 737 --
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................... $ (1,395) $ 5,592 $ 4,937 $ 708 $ (254)
============ ============ ============ ============ ============
PER SHARE DATA (1)
EARNINGS PER SHARE
Income (loss) from continuing
operations .......................... $ (.02) $ .72 $ .60 $ -- $ (.03)
Extraordinary items ................... (.16) .01 -- .09 --
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................... $ (.18) $ .73 $ .60 $ .09 $ (.03)
============ ============ ============ ============ ============
Weighted average shares (2) .............. 7,619,604 7,693,031 8,161,197 8,222,799 8,539,220
- ---------------------------------------------
(1) Share and per share data have been restated to give effect to the merger of
the Company with NIRT on the basis of 1.97 shares of the Company's common
stock for each share of beneficial interest of NIRT and 10% stock dividends
paid by NIRT in September of each of 1995 through 1997.
(2) Represents the weighted average shares of common stock used in the
computation of earnings per share.
23
24
ITEM 6. SELECTED FINANCIAL DATA (Continued)
For the Years Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
PER SHARE DATA (CONTINUED)(1)
EARNINGS PER SHARE - ASSUMING DILUTION
Income (loss) from continuing
operations .......................... $ (.02) $ .71 $ .60 $ -- $ (.03)
Extraordinary items ................... (.16) .01 -- .09 --
------------ ------------ ------------ ------------ ------------
Net income (loss) ..................... $ (.18) $ .72 $ .60 $ .09 $ (.03)
============ ============ ============ ============ ============
Weighted average shares -
assuming dilution (2) ............... 7,619,604 7,769,296 8,197,049 8,223,800 8,539,220
Dividends (3) ............................ $ .41 $ .38 $ .34 $ .31 $ .24
December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA
Real estate ........................... $ 293,975 $ 233,936 $ 193,722 $ 195,675 $ 184,658
Notes and interest receivable (4) ..... -- -- -- 6,388 9,997
Investments in and advances to
partnerships ....................... 37,356 13,839 4,739 10,780 11,026
Total assets .......................... 357,060 265,640 211,341 222,038 217,040
Notes, debentures, and
interest payable ................... 263,361 184,126 134,270 144,497 138,316
Shareholders' equity .................. 76,685 71,091 69,063 69,627 73,360
Book value per share .................. $ 9.06 $ 9.47 $ 9.95 $ 10.42 $ 11.58
For the Years Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
OTHER DATA
Cash flows provided by (used in):
Operating activities ................ $ 2,533 $ 3,261 $ 3,795 $ 2,030 $ 1,852
Investing activities ................ (43,828) (43,813) (436) (5,436) (1,409)
Financing activities ................ 39,475 40,952 (1,171) 1,596 1,981
- ---------------------------------------------
(1) Share and per share data have been restated to give effect to the merger of
the Company with NIRT on the basis of 1.97 shares of the Company's common
stock for each share of beneficial interest of NIRT and 10% stock dividends
paid by NIRT in September of each of 1995 through 1997.
(2) Represents the weighted average shares of common stock used in the
computation of earnings per share - assuming dilution.
(3) Dividends in 1995 through 1998 represented return of capital. Dividends in
1994 were taxable to shareholders as ordinary income.
(4) Notes and interest receivable at December 31, 1998, 1997, and 1996, are
classified with other assets.
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25
ITEM 6. SELECTED FINANCIAL DATA (Continued)
For the Years Ended December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
OTHER DATA (CONTINUED)
Calculation of funds from operations:
Net income (loss) ........................ $ (1,395) $ 5,592 $ 4,937 $ 708 $ (254)
Extraordinary items ...................... 1,231 (61) -- (737) --
Gain on insurance settlement (1) ......... -- -- (451) -- --
Net gain on sale of real estate .......... (2,108) (4,350) (3,700) (533) (385)
Gain on sale of investments .............. -- (215) -- -- --
Depreciation and amortization
of real estate assets .................. 7,602 7,225 5,374 5,959 4,992
Depreciation and amortization
of real estate assets of partnerships .. 1,892 356 305 882 1,086
Distributions from partnerships
in excess of the Company's
investments in the partnerships ........ (338) (41) (899) -- --
---------- ---------- ---------- ---------- ----------
Funds from operations (2) ..................... $ 6,884 $ 8,506 $ 5,566 $ 6,279 $ 5,439
========== ========== ========== ========== ==========
- ----------------------
(1) The gain on insurance settlement represents the Company's share of gain
realized by a partnership in which the Company held a 40% interest. The
insurance proceeds from the destruction of a partnership property which was
not rebuilt exceeded the basis of the property.
(2) The Company generally considers funds from operations ("FFO") to be an
appropriate measure of the performance of an equity real estate investment
trust ("REIT"). FFO, as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), equals net income (loss), computed in
accordance with generally accepted accounting principles ("GAAP"),
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments
for unconsolidated partnerships and joint ventures are calculated to
reflect FFO on the same basis. The amortization of deferred financing costs
is not added back to net income (loss) in the Company's calculation. This
treatment is consistent with the Company's historical calculation of FFO.
The Company believes that FFO is useful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, investing activities, and financing activities, it provides
investors an understanding of the ability of the Company to incur and
service debt and to make capital expenditures. The Company believes that in
order to facilitate a clear understanding of its operating results, FFO
should be examined in conjunction with net income (loss) as presented in
the financial statements included elsewhere in this report. FFO does not
represent cash generated from operating activities in accordance with GAAP
and therefore should not be considered an alternative to net income as an
indication of the Company's operating performance or to cash flow as a
measure of liquidity and is not necessarily indicative of cash available to
fund cash needs and dividends. The Company's calculation of FFO may differ
from the methodology for calculating FFO utilized by other REITs and,
accordingly, may not be comparable to such other REITs.
Effective January 1, 1997, the Company modified its calculation of FFO to
include the add back of amortization of leasing commissions associated with
its commercial properties. The Company believes that this treatment is
consistent with a majority of other REITs. If the Company had calculated
FFO in the same manner for each of the years ended December 31, 1996, 1995,
and 1994, FFO would have been higher by $262,000, $272,000, and $235,000,
respectively.
Included in FFO for the years ended December 31, 1998, 1997, 1995, and
1994, are gains totaling $123,000, $698,000, $412,000, and $141,000,
respectively, resulting from the Company's sale of investments in
marketable equity securities.
Included in FFO for the year ended December 31, 1996, is a provision for
loss of $300,000. Included in FFO for the year ended December 31, 1995, is
a provision for loss credit of $425,000. See NOTE 3. "ALLOWANCE FOR
ESTIMATED LOSSES AND PROVISIONS FOR LOSSES" in the Notes to Consolidated
Financial Statements for a description of the 1996 provision for loss. The
1995 provision for loss credit was comprised of the reversal of a $700,000
allowance provided in 1993 against Pepperkorn Office Building and a
provision of $275,000 to reduce the carrying value of K-Mart Shopping
Center in Kansas City, Missouri, to the net sale proceeds received in July
1995.
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26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes thereto.
Introduction
Tarragon Realty Investors, Inc. (the "Company"), a Nevada corporation
incorporated on April 2, 1997, is the successor in interest to National Income
Realty Trust ("NIRT") and Vinland Property Trust ("Vinland"). NIRT was a
California business trust organized on October 31, 1978. It commenced operations
as a real estate investment trust ("REIT") on March 27, 1979. NIRT invested in
income-producing real estate through acquisitions, leases, and partnerships.
Vinland was established on July 18, 1973, and commenced operations on April 2,
1974, as a REIT. Vinland was formed as a California business trust to invest in
commercial and multifamily real estate. In July 1997, Vinland merged with the
Company, its wholly-owned subsidiary.
Effective November 23, 1998, NIRT incorporated as a California corporation and
on November 24, 1998, merged with and into the Company, with the Company as the
survivor. Pursuant to the terms of the Agreement and Plan of Merger entered into
by the Company and NIRT, each share of beneficial interest of NIRT was converted
into 1.97 shares of common stock of the Company. As a result, the shareholders
of NIRT became the owners of 85% of the Company's common stock.
FOR ACCOUNTING PURPOSES THE MERGER IS TREATED AS A REVERSE ACQUISITION OF THE
COMPANY BY NIRT USING THE PURCHASE METHOD OF ACCOUNTING, AND HISTORICAL BALANCES
AND OPERATIONS OF THE COMPANY FOUND IN THIS FORM 10-K ARE THOSE OF NIRT. SHARE
AND PER SHARE INFORMATION HAS BEEN RESTATED RETROACTIVELY TO GIVE EFFECT TO THE
1.97 TO 1 EXCHANGE RATIO IN THE MERGER. REFERENCES TO THE COMPANY IN RELATION TO
DATES PRIOR TO NOVEMBER 24, 1998, ARE INTENDED TO INCLUDE BOTH OF THE COMPANY'S
PREDECESSORS, NIRT AND VINLAND.
Immediately following the merger, the Company acquired Tarragon Realty Advisors,
Inc. ("TRA"), the Company's advisor since March 1, 1994, and NIRT's advisor
since April 1, 1994, from William S. Friedman and his wife, Lucy N. Friedman,
for 100,000 shares of the Company's common stock and options to acquire 350,000
additional shares of the Company's common stock at prices ranging between $13
and $16 per share.
At December 31, 1998, the Company's directly-owned real estate portfolio was
comprised of 78 properties (25 held for sale) located throughout the United
States, with concentrations in the Southeast and Southwest. These properties
include 51 apartment complexes, 14 shopping centers, four office buildings, one
office park, one combination office building and shopping center, one
combination office/retail/medical facility, five parcels of land, and one
single-family residence.
In 1997, the Company began a program of acquiring and developing income
producing real estate, primarily apartment communities, through joint ventures.
At the end of 1997, these joint ventures had purchased two operating apartment
properties and had four apartment properties under construction. During 1998,
construction was completed on three of the four started in 1997 and begun on one
more. Eleven operating apartment properties were purchased in 1998. As a result
of the merger of the Company with NIRT, the Company now holds an additional
operating apartment property owned through a partnership, and the Company's
ownership interest in a second partnership was increased. Construction began on
another apartment community during first quarter 1999. As part of the Company's
normal operating procedures, other properties are under review for purchase or
development including three for which land has been acquired. At December 31,
1998, the Company held interests in 14 joint ventures or partnerships accounted
for using the equity method.
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27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Introduction (Continued)
Through its investments in these entities, the Company has ownership interests
in 21 apartment communities, three of which are under construction and one on
which construction is expected to begin in mid-1999, and three office buildings.
All of the Company's directly-owned real estate, except for 11 properties, and
all properties held in joint ventures, are encumbered by mortgages. In the past,
the Company held mortgage loans, but such loans are now made only in connection
with, and to facilitate, the sale or acquisition of real estate. As a result of
the payoff of existing mortgages, the portfolio of loans has declined so that it
is no longer a significant part of the Company's operations.
The Company's long term objective is to increase the value of its real estate
portfolio through increased operating income, resulting in higher equity values
for and increased dividends to shareholders. Intensive management of and
consistent capital improvements to the existing portfolio are aimed at achieving
increased operating income.
Inflation works both for and against the Company's operations. A benefit of
inflation is that revenue from rentals of its real estate properties generally
tracks increases in inflation. The same is true, however, for property operating
expenses. A benefit of the present low rate of inflation is that interest rates
on new borrowings are now lower than previously experienced. This allows for
larger loans and/or lower debt service payments, thus improving the Company's
liquidity.
The Company places additional focus on enhancing the quality of its portfolio
with selective and opportunistic acquisitions, concentrated on older,
under-managed, and under-performing multifamily projects in geographic regions
where the Company presently operates. Properties that the Company's management
believes have peaked in value or do not provide operating efficiencies within
the Company's portfolio have been placed on the market for sale. While the
Company has identified the properties it desires to sell, market conditions will
determine which of them will actually be sold.
The Company intends to continue investing in new construction of apartment
properties, either directly or through joint ventures, relying on the strength
and experience of its partners in regions or property types where the Company
has little or no experience. To the extent it invests in construction projects,
the Company is subject to business risks, such as cost overruns and delays,
associated with development activities.
In addition to raising capital through operating income and the selective
disposition of certain assets, the Company expects to continue generating funds
for investment through new borrowings and refinancings.
Liquidity and Capital Resources
During the last three years, the Company has produced positive cash flow from
operating activities. Cash and cash equivalents were maintained at about $4
million between 1996 and 1997, declining to $2.4 million at December 31, 1998.
The principal source of cash since 1996 has been proceeds from borrowings,
including refinancing of existing debt and new debt incurred as part of property
acquisitions. Borrowings provided more than $193.4 million during the last three
years and resulted in establishing relationships with lenders that are
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28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
expected to continue. Sale of real estate has been an important source of cash,
raising approximately $14.6 million in the same period. Cash flow from operating
activities provided a steady and increasing part of the Company's needs, about
$9.6 million during that time. In 1998, advances from affiliates became a more
important source of cash; those advances amounted to $5.9 million under a
two-year line of credit arrangement.
Borrowings likewise were the primary source of cash for joint ventures in which
the Company holds interests. At the end 1998, partnership debt was $176 million,
of which $142 million was from financing of 1998 or 1997 acquisition or
development. The balance of the joint venture indebtedness was incurred prior to
1997.
Cash from the Company's new borrowings can be linked most closely to the payment
of existing debt ($106.5 million since 1996), to the acquisition of additional
properties ($23.4 million), for improvements to properties ($58.2 million), and,
in the last two years, loans and equity advances to partnerships ($34.2 million)
used in acquisition and development of apartment properties. Affiliate advances
were also used to facilitate property acquisitions by the Company and the joint
ventures.
Net cash provided by or used in the Company's operating activities, investing
activities, and financing activities for the last three years is reported in the
Consolidated Statements of Cash Flows included in Item 8 "FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA." The following discussion will assist in understanding
the information presented therein.
Sources of cash projected in 1999 include net financing proceeds upon the
refinancing of 20 properties of $30 million, $5.6 million of which was received
in the first quarter of 1999 upon the refinancing of three properties. The
Company also expects to receive $13 million comprising repayment of advances and
accrued interest from the refinancing of four partnership properties.
Additionally, the Company plans to obtain $8 million from new line of credit
facilities during 1999. Sources of cash projected in 1999 also include proceeds
from the sale of eight properties, including one partnership property, of $40
million. The Company expects these sources will continue to be sufficient to
meet projected cash requirements, including debt service obligations, property
maintenance and improvements, development costs on construction properties, and
continuation of regular cash dividends. Although the Company expects sources of
cash to be more than sufficient to fund planned uses of cash, there can be no
assurance that the expected sales and refinancings of properties will be
consummated when anticipated.
Operating Activities
The Company's principal operating activity is the active operation of its
directly-owned real estate largely through its wholly-owned subsidiary Tarragon
Management, Inc.
The Company's cash flow from real estate operations before payment of interest
on mortgage debt continues to increase to $27.8 million in 1998 from $20.7
million in 1997 and $19.3 million in 1996. Properties held for all three years
show increases to $23 million in 1998 from $17 million in 1997 and $16 million
in 1996. The remainder of the increases is primarily due to acquisitions made in
1998, 1997, and 1996. Properties acquired in those years contributed $4.2
million in operating cash flow in 1998, $2.5 million in 1997, and $540,000 in
1996. Property sales likewise affected cash flow from property operations.
Mountain View Shopping Center and Spring Pines Apartments, sold in 1998,
contributed cash flow from operations of $251,000 in 1998 prior to
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29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Operating Activities (Continued)
their sale, $375,000 in 1997, and $300,000 in 1996. Plaza Hills Apartments,
Huntington Green Apartments, and Pheasant Pointe Apartments, sold in 1997,
contributed cash flow from operations of $544,000 in 1997 prior to their sale
and $1.1 million in 1996. In 1996, Century Centre II Office Building contributed
$1.5 million of operating cash flow prior to its sale. See NOTE 4. "REAL ESTATE
AND DEPRECIATION" in the Notes to Consolidated Financial Statements for
discussion of the sales.
Interest paid on mortgages and other debt and related costs of obtaining new
mortgages have increased as the Company's debt level has increased. Interest and
deferred borrowing costs paid were $19.6 million in 1998, $14.5 million in 1997,
and $12.8 million in 1996. See "Financing Activities" for a discussion of the
Company's mortgages and other debt.
Prior to November 24, 1998, the Company paid TRA an advisory fee of 16% per
annum of adjusted funds from operations, as defined in the advisory agreement
and, in accordance with the terms of the advisory agreement, reimbursed TRA for
expenses related to certain services provided by TRA, including, but not limited
to, legal, accounting, investor relations, data processing, and the related
departmental overhead. Since the Company's acquisition of TRA, the advisory
agreement is no longer in place, and expenses previously borne by TRA, including
payroll and other general and administrative costs, are now borne directly by
the Company. Therefore, in the future, advisory fees will not be incurred, and
general and administrative expenses will increase.
Investing Activities
Investing activities are primarily associated with the Company's direct real
estate acquisitions and developments and those made through partnerships.
The expansion of the Company's activities over the past two years has required
increased investments, $43.8 million in each of 1998 and 1997 funded through
outside financing sources. In 1996, net cash used was $436,000, as the bulk of
cash required was generated from other investing sources. Discussion of the
components of cash provided by and used in investing activities during the last
three years follows.
Investments in real estate
The Company used $3.3 million in 1998, $13.7 million in 1997, and $3.2 million
in 1996 in the direct purchase of operating real estate. The Company purchased
three apartment communities in 1998 prior to the merger, five in 1997, and two
in 1996, increasing the Company's multifamily portfolio by 1,629 units. The
Company also purchased a 52,288 square foot shopping center in 1997 and a 62,934
square foot office building in 1998 prior to the merger. The aggregate purchase
prices for the 1998, 1997, and 1996 direct purchases of operating real estate
were $8.5 million, $23.4 million, and $9.4 million respectively. Of the
aggregate costs of acquisition, $6 million in 1998, $9.7 in 1997, and $6.2
million in 1996 was financed through mortgages on certain of the properties.
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30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Investing Activities (Continued)
In April 1998, the Company purchased a 43-acre tract of land adjacent to The
Vistas at Lake Worth, in Fort Worth, Texas for $707,000 in cash. The Company
intends to build an apartment property known as The Observatory on a portion of
this land and to sell the balance to one or more home builders. In May 1998, the
Company purchased a 33-acre tract of land in Frisco, Texas, for $4.5 million,
paying $1.6 million in cash and financing the remainder with a short-term
mortgage. Construction is now underway on a 320-unit luxury apartment community
known as The Vintage at Legacy Lakes which occupies a portion of this site. The
balance of this site is slated for future development.
As part of the merger, the Company acquired 13 properties, nine apartment
complexes with 1,293 units and four commercial properties with 234,407 square
feet. Except for two, all properties are held for investment. The properties'
new cost basis of $39 million was determined by allocating the purchase
consideration based on the properties' relative fair values. The properties
secure debt with balances totaling $26.6 million.
In July 1997, the Company added 300 units to its multifamily portfolio through
its acquisition of an additional 40% interest in English Village Partners, L.P.,
increasing its total ownership to 90%, for $1 million. As a result, English
Village is now a consolidated entity.
During 1998, 1997, and 1996, the Company made real estate improvements totaling
$17.3 million,