-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MjqgYz42+4hNOHK6VOgpIWxgrlPiU8ZjdTcHHFDeUTVZiMayNNWevvLaMMdsIspk NF42GJSty4a3Gpq5cdCnHw== 0000950134-97-004049.txt : 19970520 0000950134-97-004049.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950134-97-004049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL INCOME REALTY TRUST CENTRAL INDEX KEY: 0000277577 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 942537061 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09211 FILM NUMBER: 97608917 BUSINESS ADDRESS: STREET 1: 3100 MONTICELLO STREET 2: SUITE 200 CITY: DALLAS STATE: TX ZIP: 75205 BUSINESS PHONE: 2146924700 MAIL ADDRESS: STREET 1: 3100 MONTICELLO STREET 2: STE 200 CITY: DALLAS STATE: TX ZIP: 75205 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED CAPITAL INCOME TRUST DATE OF NAME CHANGE: 19890726 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1997 1 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, 1997 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 0-9211 NATIONAL INCOME REALTY TRUST (Exact name of registrant as specified in its charter) California 94-2537061 --------------------------------------------- ------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 280 Park Avenue, East Building, 20th Floor, New York, NY 10017 --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 949-5000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Shares of Beneficial Interest, No par value 3,503,845 ------------------------------------------- ---------------------------- (Class) (Outstanding at May 5, 1997) 1 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements for the period ended March 31, 1997, have not been audited by independent certified public accountants, but, in the opinion of the management of National Income Realty Trust (the "Trust"), 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. NATIONAL INCOME REALTY TRUST CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
March 31, December 31, ----------- ------------ 1997 1996 ----------- ------------ (unaudited) (audited) Assets ------ Real estate held for sale (net of accumulated depreciation of $347 in 1997 and $397 in 1996) ....................... $ 4,431 $ 12,198 Less - allowance for estimated losses .................... (1,195) (1,529) --------- --------- 3,236 10,669 Real estate held for investment (net of accumulated depreciation of $43,354 in 1997 and $41,854 in 1996) .... 192,851 183,053 Investments in partnerships .............................. 7,329 4,739 Cash and cash equivalents................................. 4,692 3,862 Restricted cash .......................................... 4,108 2,850 Other assets, net ........................................ 7,310 6,168 --------- --------- $ 219,526 $ 211,341 ========= ========= Liabilities and Shareholders' Equity ------------------------------------ Liabilities Notes, debentures, and interest payable .................. $ 144,742 $ 134,270 Other liabilities ........................................ 6,124 8,008 --------- --------- 150,866 142,278 Commitments and contingencies............................. Shareholders' equity Shares of beneficial interest, no par value; authorized shares, unlimited; shares outstanding, 3,523,268 in 1997 and 3,523,729 in 1996 (after deducting 769,494 shares in 1997 and 767,294 shares in 1996 held in treasury) ... 10,578 10,579 Paid-in capital ......................................... 277,796 277,795 Accumulated distributions in excess of accumulated earnings ................................... (219,714) (219,311) --------- --------- 68,660 69,063 --------- --------- $ 219,526 $ 211,341 ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 3 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited)
For the Three Months Ended March 31, -------------------- 1997 1996 --------- --------- Income Rentals ..................................................... $ 11,955 $ 11,698 Interest .................................................... 67 142 Equity in income of partnerships ............................ 158 180 --------- --------- 12,180 12,020 Expenses Property operations ......................................... 6,674 6,859 Interest .................................................... 2,747 3,183 Depreciation ................................................ 1,500 1,298 Advisory fees ............................................... 376 247 General and administrative .................................. 542 461 --------- --------- 11,839 12,048 --------- --------- Income (loss) before gain on sale of real estate and insurance settlement .................................................. 341 (28) Gain on sale of real estate .................................. - 224 Gain on insurance settlement ................................. - 451 --------- --------- Net income ................................................... $ 341 $ 647 ========= ========= Earnings per share Net income ................................................... $ .10 $ .17 ========= ========= Weighted average shares of beneficial interest used in computing earnings per share ................................ 3,523,610 3,742,476 ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 4 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in thousands) Accumulated Shares of Distributions Beneficial Interest in Excess of ---------------------- Paid-in Accumulated Shareholders' Shares Amount Capital Earnings Equity ---------- ---------- -------- ------------ ------------- Balance, December 31, 1996 .. 3,523,729 $ 10,579 $277,795 $ (219,311) $ 69,063 Repurchase of shares of beneficial interest ..... (2,200) (7) (20) - (27) Cash distributions ($0.20 per share) .......... - - - (717) (717) Share distributions ......... 1,739 6 21 (27) - Net income .................. - - - 341 341 ---------- ---------- -------- ---------- ---------- Balance, March 31, 1997 (unaudited) ................ 3,523,268 $ 10,578 $277,796 $ (219,714) $ 68,660 ========== ========== ======== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 5 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
For the Three Months Ended March 31, -------------------- 1997 1996 ------- ------- Cash Flows from Operating Activities Rentals collected ....................................... $11,768 $11,995 Interest collected ...................................... 70 137 Interest paid ........................................... (2,405) (2,964) Payments for property operations ........................ (8,334) (7,487) General and administrative expenses paid ................ (731) (514) Advisory fees paid to affiliate ......................... (556) (407) Deferred borrowing costs paid ........................... (415) (357) ------- ------- Net cash provided by (used in) operating activities ... (603) 403 Cash Flows from Investing Activities Acquisition of real estate .............................. (414) - Real estate improvements ................................ (3,373) (2,393) Notes receivable collections ............................ 8 26 Additional note receivable collateral ................... - 100 Earnest money deposit paid .............................. (116) - Loan and advances to partnership ........................ (2,251) - Distribution from partnership's investing activities .... - 6,105 Net distributions from partnerships .. (182) 304 ------- ------- Net cash provided by (used in) investing activities ... (6,328) 4,142 Cash Flows from Financing Activities Borrowings from financial institutions .................. 19,350 - Payments of mortgage notes payable ...................... (8,998) (1,820) Margin account repayments, net .......................... (1,527) (859) Repayment of advances from affiliates, net .............. - (519) Replacement escrow (deposits) receipts, net ............. (332) 635 Repurchase of shares of beneficial interest ............. (27) (110) Distributions to shareholders ........................... (705) (679) ------- ------- Net cash provided by (used in) financing activities ... 7,761 (3,352) ------- ------- Net increase in cash and cash equivalents ................ 830 1,193 Cash and cash equivalents, beginning of period ........... 3,862 1,674 ------- ------- Cash and cash equivalents, end of period ................. $ 4,692 $ 2,867 ======= =======
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 6 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands) (Unaudited)
For the Three Months Ended March 31, 1997 1996 -------- --------- Reconciliation of net income to net cash provided by (used in) operating activities: Net income ............................................... $ 341 $ 647 Gain on insurance settlement ............................. - (451) Gain on sale of real estate .............................. - (224) Depreciation and amortization ............................ 1,677 1,577 Equity in of partnerships ....................... (158) (180) Changes in other assets and liabilities, net of effects of noncash investing and financing activities Decrease in interest receivable ...................... 3 - in other assets ........................... (1,871) (569) in other liabilities ...................... (804) (423) Increase in interest payable ......................... 209 26 ------- ------- Net cash provided by (used in) operating activities .... $ (603) $ 403 ======= ======= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Changes in assets and liabilities in connection with the purchase or foreclosure of real estate: Real estate ............................................ $ 2,098 $ 5,568 Notes and interest receivable .......................... - (8,568) Allowance for estimated losses ......................... - 3,000 Other assets ........................................... (22) - Notes and interest payable ............................. (1,641) - Other liabilities ...................................... (21) - ------- ------- Cash paid .......................................... $ 414 $ - ======= ======= Real estate written off pursuant to condemnation .......... $ 2,209 $ - Note and accrued interest receivable written off .......... $ 977 $ - Note payable written off pursuant to the condemnation of the collateral property .................................. $ 1,725 $ - Allowances for estimated losses charged off in connection with the write-off of real estate and note receivable .... $ 1,462 $ - Conversion of convertible subordinated debenture .......... $ - $ 1,000
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 7 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. Operating results for the three month period ended March 31, 1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Trust's Annual Report on Form 10-K for the year ended December 31, 1996. Dollar amounts in tables are in thousands. Certain 1996 balances have been reclassified to conform to the 1997 presentation. Earnings per share have been computed based on the weighted average number of shares of beneficial interest outstanding for the three month periods ended March 31, 1997 and 1996. 1996 share and per share data have been restated to give effect to the 10% share distribution paid to shareholders in September 1996. Effective January 1, 1997, the Trust implemented prospectively a change in accounting estimate whereby capital expenditures for carpet; appliance; and heating, ventilation, and air conditioning (HVAC) replacements are capitalized rather than expensed. The Trust believes that capitalizing these expenditures and depreciating them over lives ranging from three to five years more appropriately reflects the timing of the economic benefits to be received from these expenditures. Additionally, the Trust believes this treatment is consistent with policies currently being used by other real estate investment trusts. For the quarter ended March 31, 1997, the effect of this change in accounting estimate was to decrease property operating expenses by $223,000. Had the Trust implemented this change on January 1, 1996, property operating expenses for the quarter ended March 31, 1996, would have been reduced by $188,000. The decrease in property operating expenses correlates to an increase in funds from operations, on which the advisory fee is based. Accordingly, this change will result in higher advisory fees to Tarragon Realty Advisors, Inc. ("Tarragon"), the Trust's advisor. NOTE 2. NOTES AND INTEREST RECEIVABLE In March 1997, the Trust wrote off a note receivable with a balance of $977,000, including accrued interest, secured by an apartment complex in Paris, Texas, which had matured in 1988. The Trust had fully-reserved the loan in previous years. Consequently, no loss was recognized in connection with the write-off. NOTE 3. REAL ESTATE AND DEPRECIATION In January 1997, after an evaluation of its real estate portfolio, the Trust reclassified Jackson Square Shopping Center from real estate held for sale to real estate held for investment. As the estimated fair value of the property exceeded its carrying value, no loss was recognized upon the reclassification. In November 1995, the City of Indianapolis (the "City") initiated condemnation proceedings against the Trust's K-Mart Shopping Center, acquired through a deed in lieu of foreclosure in December 1994. The shopping center was vacant at the time the Trust acquired it, although leased to K-Mart under a net lease expiring in 1999. The lease was assigned by K-Mart to the City in September 1995. In March 1996, the Trust ceased payments on the $1.7 million non-recourse mortgage note secured by the shopping center. In January 1997, the Trust wrote off the property and related debt, as the mortgage is now secured by the condemnation award. No loss was recognized in excess of amounts previously provided. 7 8 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE 3. REAL ESTATE AND DEPRECIATION (Continued) In February 1997, the Trust purchased Morningside Apartments, a 112-unit property located in Jacksonville, Florida. The purchase price was $2.1 million, $1.6 million of which was financed through the assumption of an existing mortgage loan secured by the property. In connection with the transaction, the Trust paid Tarragon an acquisition fee of $20,550. NOTE 4. INVESTMENTS IN PARTNERSHIPS Investments in partnerships, accounted for under the equity method, consisted of the following at March 31, 1997: Income Special Associates ("ISA") .. $1,495 801 Pennsylvania Avenue ............ 2,917 RI Windsor, Ltd. ................... 2,438 Sacramento Nine ("SAC 9") .......... 479 English Village .................... - ------ $7,329 ======
In January 1997, in exchange for a capital contribution of $200,000, which was matched by the other partners, the Trust received a 1% general partner interest and a 49% limited partner interest in RI Windsor, Ltd., a limited partnership formed to construct a 324-unit luxury apartment complex to be known as The Mayfaire at Windsor Parke in Jacksonville, Florida, at an estimated cost of $19.0 million. The property is expected to be completed in the fourth quarter of 1997. The partnership has obtained an $18.0 million construction loan to finance the construction. The Trust also loaned the partnership $2.0 million which is to be repaid from construction loan proceeds following completion. Until lease-up of the property, the construction loan is guaranteed by the other general partner. As the Trust holds a non-controlling interest, it accounts for its investment in the partnership using the equity method. The proceeds for the Trust's loan and capital contribution to the partnership were obtained from a $2.2 million loan secured by 352,000 of the Trust's shares of beneficial interest. The lender has no voting rights with these shares, and all distributions paid on the shares are used to reduce the loan balance. Therefore, these shares are not included with outstanding shares in the accompanying March 31, 1997, Consolidated Balance Sheet and the Consolidated Statement of Shareholders' Equity for the three months ended March 31, 1997. The loan matures in January 2000; however, the Trust intends to repay the loan prior to December 1997 with proceeds received from the partnership's construction loan. The following information summarizes the results of operations of these partnerships for the three months ended March 31, 1997: Rentals ............................ $1,007 Property operations ................ (454) Interest ........................... (135) Depreciation ....................... (138) ------ Net income ......................... $ 280 ======
8 9 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE 5. NOTES, DEBENTURES, AND INTEREST PAYABLE Pursuant to a Master Repurchase Agreement (the "Agreement") with an investment bank entered into in April 1996, the Trust purchased the $3.1 million Fannie Mae mortgage backed security ("Fannie Mae Certificate") issued by the lender in connection with the financing of Forest Oaks at a 1/2% discount in June 1996 and the $16.8 million Government National Mortgage Association mortgage backed security ("GNMA Certificate") issued by the lender in connection with the financing of Heather Hills at a 2.7% discount in July 1996. The investment bank purchased the Fannie Mae Certificate and the GNMA Certificate from the Trust for 92% of the aggregate value, or $17.9 million, and the Trust agreed to repurchase the Certificates from the investment bank one month later at the same price plus interest at the London Interbank Offered Rate ("LIBOR") plus 1/2% per annum. As provided for in the Agreement, the Trust and the investment bank extended the repurchase date monthly. The December 1996 purchase price and, consequently, the January 1997 repurchase price were increased to 95% of the aggregate value of the Certificates, or $19.3 million, and the interest rate associated with the repurchase agreement was reduced to LIBOR plus 1/4% per annum. In January 1997, the Trust entered into a similar repurchase transaction with a government sponsored enterprise which purchased the Certificates for 97% of their aggregate value, or $19.3 million, and the Trust agreed to repurchase them in February 1997 for the same price plus interest at 5.4% per annum. The repurchase date has been extended to May 1997, and the current repurchase price is $19.7 million. The repurchase transaction has resulted in effective interest rates as of March 31, 1997, on the Forest Oaks and Heather Hills financings of 6.9% and 6.5%, respectively. The Trust is exposed to a demand for additional collateral or, in the alternative, credit loss in the event the interest rate associated with the repurchase transaction fluctuates in a manner that is unfavorable to the Trust's interest in the Certificates. However, the Trust intends to either pay off the mortgage or modify the mortgage to increase the interest rate prior to any significant credit loss. In February 1997, the Trust closed separate mortgage loans, secured by Pinecrest Apartments and Rancho Sorrento Office Building, totaling $17.2 million. After the payoff of the $8.2 million existing mortgage secured by Pinecrest, establishing escrows for taxes, insurance, and repairs, and closing costs, the Trust received net cash proceeds of $7.7 million. In connection with these transactions, the Trust paid Tarragon mortgage brokerage commissions totaling $172,000. NOTE 6. INCOME TAXES No provision has been made for federal income taxes because the Trust's management believes the Trust has qualified as a Real Estate Investment Trust, as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and expects that it will continue to do so. NOTE 7. COMMITMENTS AND CONTINGENCIES The Trust is a party to various claims and routine litigation arising in the ordinary course of business. Management of the Trust 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 or financial position. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction National Income Realty Trust (the "Trust") invests in real estate through acquisitions, leases, and partnerships and, to a lesser extent, in mortgages secured by real estate. The Trust was organized on October 31, 1978, and commenced operations on March 27, 1979. At March 31, 1997, the Trust's real estate portfolio included 58 properties, seven of which were held for sale, located throughout the United States, with concentrations in the Southeast and Southwest. These properties consisted of 38 apartment complexes, 13 shopping centers, three office buildings, three parcels of land, and one single-family residence. All of the Trust's real estate, except for 16 properties, is pledged to secure first mortgage notes payable. The Trust's current policy is to make mortgage loans only in connection with, and to facilitate, the sale or acquisition of real estate. Accordingly, as existing mortgage loans are paid off, the Trust's portfolio of mortgage notes receivable is expected to decline. The Trust's objective is to maximize the long term value of its real estate portfolio with an emphasis on increasing operating income and future cash distributions to shareholders. Management focuses on both the appreciation of the existing real estate portfolio, through intensive management and capital improvements, and enlarging the portfolio with highly selective and opportunistic acquisitions concentrated on older, undermanaged, and underperforming multifamily projects in geographic locations where the Trust presently owns properties. In addition to raising capital through operating income, the Trust intends to generate capital through mortgage refinancings and selective disposition of certain assets. Liquidity and Capital Resources Cash and cash equivalents aggregated $4.7 million at March 31, 1997, compared with $3.9 million at December 31, 1996. The Trust's principal sources of cash have been property operations, collections of mortgage notes receivable, and external sources, such as property sales and refinancings, as more fully discussed in the paragraphs below. The Trust expects these sources will continue to be sufficient to meet projected cash requirements, including debt service obligations, property maintenance and improvements, and continuation of regular distributions. During the first quarter of 1997, the Trust acquired a 112-unit apartment property for $2.1 million and a 50% interest in a partnership which is constructing a 324-unit apartment property for $200,000. The Trust also advanced the partnership $2.2 million which was obtained through a loan which matures in January 2000. The Trust made real estate improvements totaling $3.4 million to its properties during the first quarter of 1997, including $1.2 million on the construction of The Vistas at Lake Worth, which is in redevelopment and should be completed in the fourth quarter of 1997. Projected construction costs for The Vistas are $7.8 million for the remainder of 1997. The Trust anticipates expenditures for capital improvements on its other properties during the remainder of 1997 to total approximately $5.8 million. During the first quarter of 1997, the Trust obtained first mortgage financing totaling $17.2 million and received net cash proceeds of $7.7 million after the payoff of existing debt of $8.2 million, funding escrows, and paying associated closing costs. The Trust made other principal payments totaling $796,000 during the three months ended March 31, 1997. Principal payments of $10.8 million, including balloon payments of $9.2 million, are due during the remainder of 1997. The Trust intends to either pay off the maturing mortgages or extend the due 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) dates while seeking to obtain long term refinancing. While management is confident of its ability to acquire financing as needed, there is no assurance that the Trust will continue to be successful in its efforts in this regard. During the three months ended March 31, 1997, the Trust repurchased 2,200 of its shares of beneficial interest at a total cost of $27,000. During 1996, the Board authorized the Trust to repurchase up to an additional 281,592 shares of beneficial interest, of which 170,091 had been purchased as of March 31, 1997. Cash distributions to shareholders totaling $717,000, or $0.20 per share, were declared by the Board in the first quarter of 1997. The Trust has paid regular quarterly cash distributions since September 1993. Results of Operations The Trust reported net income of $341,000 for the three months ended March 31, 1997, compared to $647,000 for the three months ended March 31, 1996. The components of the change in results from operations are discussed in the following paragraphs. Multifamily Properties The Trust's multifamily portfolio, which accounted for 76% of the Trust's real estate and included 7,190 operating units at March 31, 1997, reported an increase in net rental income (rental revenue less property operating expenses) of $750,000, or 21%, for the three months ended March 31, 1997, compared to the corresponding period in 1996. $200,000 of this increase resulted from properties acquired in 1996 and 1997. The remainder of the increase comes from higher rents for multifamily properties held in both years. Overall, both physical and economic occupancy levels have remained relatively stable for multifamily properties held in both years. Commercial Properties The Trust's commercial portfolio included 1.6 million square feet at March 31, 1997. The sale of Century Centre II Office Building in September 1996 resulted in a decrease in net rental income of $418,000 for the quarter. Commercial properties held in both years reported an overall increase in net rental income of $102,000 principally due to lower economic vacancies. Overall, both rental rates and physical occupancy for properties held in both years were higher than reported in 1996. Interest revenue decreased from $142,000 for the three months ended March 31, 1996, to $67,000 for the corresponding period in 1997. This decrease resulted primarily from the payoff of the Sherwood Trust mortgage note receivable in November 1996. The Trust does not anticipate making new mortgage loans in the future except in connection with the sale of real estate. Therefore, as existing loans are paid off, interest revenue is expected to continue to decline. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) Interest expense decreased from $3.2 million for the three months ended March 31, 1996, to $2.7 million for the three months ended March 31, 1997, due to the sale of Century Centre II and the lower rates produced by the repurchase transaction discussed in NOTE 5. "NOTES, DEBENTURES, AND INTEREST PAYABLE" in the Notes to Consolidated Financial Statements. Advisory fees to Tarragon Realty Advisors, Inc. ("Tarragon"), increased from $247,000 for the three months ended March 31, 1996, to $376,000 for the three months ended March 31, 1997. The Tarragon advisory agreement calls for a monthly incentive fee equal to 16% per annum of adjusted funds from operations, as defined in the advisory agreement approved by the Board. The Trust's funds from operations increased 47% for the first quarter of 1997 compared to the corresponding period in 1996. See "Funds from Operations" below. During the first quarter of 1996, the Trust reported a $224,000 gain on the sale of real estate related to the sale of the Indcon warehouses and a $451,000 gain due to Indcon's insurance settlement received as a result of the warehouse fire in September 1995. Funds from Operations Funds from operations ("FFO") for the three month periods ended March 31, 1997 and 1996, are as follows (unaudited) (dollars in thousands, except per share amounts):
For the Three Months Ended March 31, -------------------- 1997 1996 ------ ------ Net income ........................................... $ 341 $ 647 Gain on insurance settlement ......................... - (451) Gain on sale of real estate .......................... - (224) Depreciation and amortization of real estate assets .. 1,546 1,298 Depreciation and amortization of real estate assets of partnerships ....................................... 86 70 ------ ------ Funds from operations ................................ $1,973 $1,340 ====== ====== Funds from operations per share ...................... $ .56 $ .36 ====== ======
Industry analysts generally consider FFO an appropriate measure of the performance of an equity real estate investment trust. FFO, as defined by the National Association of Real Estate Investment Trusts, is net income as determined in accordance with generally accepted accounting principles, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization of real estate assets uniquely significant to the real estate industry, and after adjustments for unconsolidated partnerships and joint ventures. The Trust believes that in order to facilitate a clear understanding of its operating results, FFO should be examined in conjunction with net income as presented herein. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Funds from Operations (Continued) indicative of cash available to fund cash needs and cash distributions. FFO should not be considered as an alternative to net income as an indication of the Trust's performance or as an alternative to cash flow as a measure of liquidity. Effective January 1, 1997, the Trust modified its calculation of FFO to include the add back of amortization of leasing commissions associated with its commercial properties. The Trust believes that this calculation of FFO is consistent with other real estate investment trusts. If the Trust had calculated FFO in the same manner for the three months ended March 31, 1996, FFO would have been $78,000 higher for that period. Implementation of Change in Accounting Estimate Effective January 1, 1997, the Trust implemented prospectively a change in accounting estimate whereby capital expenditures for carpet; appliance; and heating, ventilation, and air conditioning (HVAC) replacements are capitalized rather than expensed. The Trust believes that capitalizing these expenditures and depreciating them over lives ranging from three to five years more appropriately reflects the timing of the economic benefits to be received from these expenditures. Additionally, the Trust believes this treatment is consistent with policies currently being used by other real estate investment trusts. For the quarter ended March 31, 1997, the effect of this change in accounting estimate was to decrease property operating expenses by $223,000. Had the Trust implemented this change on January 1, 1996, property operating expenses for the quarter ended March 31, 1996, would have been reduced by $188,000. The decrease in property operating expenses correlates to an increase in funds from operations, on which the advisory fee is based. Accordingly, this change will result in higher advisory fees to Tarragon, the Trust's advisor. Allowance for Estimated Losses and Provisions for Losses The Trust's management, on a quarterly basis, reviews the carrying values of the Trust's mortgage loans and properties held for sale. Generally accepted accounting principles require that the carrying value of a mortgage loan or a property held for sale cannot exceed its the lower of its cost or its estimated fair value less costs to sell. In those instances in which estimates of fair value less costs to sell of the collateral securing the Trust's mortgage loans or properties held for sale are less than the carrying values thereof at the time of evaluation, an allowance for loss is provided by a charge against operations. The evaluation of the carrying values of the mortgage loans is based on management's review and evaluation of the collateral properties securing the mortgage loans. The review of collateral properties and properties held for sale generally includes selective site inspections, a review of the property's current rents compared to market rents, a review of the property's expenses, a review of maintenance requirements, discussions with the property manager, and a review of the surrounding area. Future quarterly reviews could cause the Trust's management to adjust current estimates of fair value. The Trust's management also evaluates the Trust's properties held for investment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. This evaluation generally consists of a review of the property's cash flow and current and projected market conditions, as well as any changes in general and local economic conditions. If an impairment loss exists based on the results of this review, a loss is recognized by a charge against current earnings and a corresponding reduction in the respective asset's carrying value. The amount of this impairment loss is equal to the amount by which the carrying value of the property exceeds its estimated fair value. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Environmental Matters Under various federal, state, and local environmental laws, ordinances, and regulations, the Trust may be potentially liable for removal or remediation costs, as well as certain other potential costs (including governmental fines and injuries to persons and property) relating to hazardous or toxic substances where property-level managers have arranged for the removal, disposal, or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from the Trust for personal injury associated with such materials. The Trust's management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on the Trust's business, assets, or results of operations. Income Tax Aspects As more fully discussed in the Trust's 1996 Form 10-K, the Trust has elected and, in the opinion of the Trust's management, qualified to be taxed as a Real Estate Investment Trust ("REIT"), as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and, as such, will not be taxed for federal income tax purposes on that portion of its taxable income which is distributed to shareholders, provided that at least 95% of its REIT taxable income is distributed. [This space intentionally left blank.] 14 15 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On March 17, 1997, at the annual meeting of shareholders, the shareholders of the Trust (i) elected eight Trustees of the Trust, (ii) approved the Trust's Advisory Agreement with Tarragon Realty Advisors, Inc. ("Tarragon"), (iii) approved an amendment to subpart (1) of Section 3.2 of the Declaration of Trust to clarify authorization for the Trust to own securities of other entities and have wholly-owned subsidiaries, (iv) approved an amendment to the Trust's Declaration of Trust to specifically authorize the acquisition of the Trust's own securities, (v) approved a proposal to repeal and delete subpart (d) of Section 5.3 of the Trust's Declaration of Trust which restricted the Trust's issuance of certain securities, (vi) approved a proposal to repeal and delete subpart (e) of Section 5.3 of the Trust's Declaration of Trust which limited the Trust's ability to invest in certain unimproved, non-income producing property, (vii) approved a proposal to repeal and delete subpart (g) of Section 5.3 of the Trust's Declaration of Trust which limited the period of time the Trust may hold its investments in equity securities, and (viii) approved a proposal to repeal and delete subpart (o) of Section 5.3 of the Trust's Declaration of Trust which prohibited the Trust from investing any of the assets of the Trust in single-family homes. Proxies for such annual meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "1934 Act"), and there was no solicitation in opposition to the nominees for Trustee. Following is a brief description of each matter considered at the annual meeting of shareholders and the number of votes cast for, against, or withheld, as well as the number of abstentions and broker non-votes as to each such matter, including a separate tabulation with respect to each nominee for election as a Trustee.
Matter Voted Upon Shares Voting --------------------------------- ------------------------------------ (1) Election of Trustees Shares Authority Name Voted for Withheld --------------------------------- ------------- ------------- Irving E. Cohen 2,691,045 52,476 William S. Friedman 2,678,360 65,161 Sally Hernandez-Pinero 2,693,539 49,982 Dan L. Johnston 2,692,529 50,992 Lance Liebman 2,694,309 49,212 L. G. Schafran 2,694,559 48,962 Raymond V. J. Schrag 2,693,010 50,511 Carl B. Weisbrod 2,692,601 50,920
Votes Cast ------------------------------------ For Against Abstention ---------- ---------- ---------- (2) Approval of the Trust's Advisory Agreement with Tarragon 2,070,228 56,274 50,311
15 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Continued)
Votes Cast ------------------------------------ For Against Abstention ---------- ---------- ---------- (3) Approval to amend subpart (1) of Section 3.2 of the Declaration of Trust 2,096,663 66,612 52,081 (4) Approval to amend the Trust's Declaration of Trust to specifically authorize the acquisition of the Trust's own securities 2,073,965 54,847 48,001 (5) Approval to repeal and delete subpart (d) of Section 5.3 of the Trust's Declaration of Trust 2,033,555 86,758 56,500 (6) Approval to repeal and delete subpart (e) of Section 5.3 of the Trust's Declaration of Trust 2,020,678 103,971 52,164 (7) Approval to repeal and delete subpart (g) of Section 5.3 of the Trust's Declaration of Trust 2,058,818 72,838 50,157 (8) Approval to repeal and delete subpart (o) of Section 5.3 of the Trust's Declaration of Trust 2,066,488 95,343 53,525
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 3.0 Amendment No. 4 to the Amended and Restated Declaration of Trust Exhibit 27.0 Financial Data Schedule (b) Reports on Form 8-K as follows: None 16 17 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. NATIONAL INCOME REALTY TRUST Date: May 15, 1997 By:/s/ William S. Friedman --------------- ---------------------------- William S. Friedman President, Chief Executive Officer, and Trustee Date: May 15, 1997 By:/s/ Robert C. Irvine ---------------- ---------------------------- Robert C. Irvine Executive Vice President and Chief Financial Officer Date: May 15, 1997 By:/s/ Erin D. Davis ---------------- ---------------------------- Erin D. Davis Vice President and Chief Accounting Officer 17 18 NATIONAL INCOME REALTY TRUST INDEX TO EXHIBITS EXHIBIT 3.0 Amendment No. 4 to the Amended and Restated Declaration of Trust Page 19 EXHIBIT 27.0 Financial Data Schedule Page 25 18 EX-3.0 2 AMENDMENT NO. 4 TO THE DECLARATION OF TRUST 1 EXHIBIT 3.0 WHEN RECORDED, RETURN TO: 31248-01000:022497:SCM:2 AMENDMENT NO. 4 TO THE AMENDED AND RESTATED DECLARATION OF TRUST OF NATIONAL INCOME REALTY TRUST (formerly CONSOLIDATED CAPITAL INCOME TRUST) -------------------------------- The Amended and Restated Declaration of Trust dated June 15, 1987 for NATIONAL INCOME REALTY TRUST (formerly Consolidated Capital Income Trust), recorded on July 29, 1987 as Instrument No. 87-212433 in the Alameda County, California Records, as amended by Amendment No. 1 effective June 22, 1989, recorded July 13, 1989 as Instrument No. 89-188235 in the Alameda County, California Records, as further amended by Amendment No. 2 effective March 22, 1990, recorded on April 11, 1990, as Instrument No. 90-098391 in the Alameda County, California Records, as further amended by Amendment No. 3 effective June 3, 1992, recorded June 29, 1992 as Instrument No. 92-210806 in the Alameda County, California Records (collectively, the "Declaration of Trust"), is hereby further amended as follows, such amendments having been approved by shareholders holding a majority of the outstanding Shares of Beneficial Interest entitled to vote thereon at a meeting held on March 20, 1997: Subpart (l) of Section 3.2 of the Declaration of Trust is amended to read in its entirety hereafter as follows: "(l) to enter into joint ventures, general or limited partnerships, and any other lawful combinations or associations, create, acquire or invest in any business entity (including a corporation whether or not a wholly-owned subsidiary or REMIC), and to purchase, receive, subscribe for, or otherwise acquire, own, hold, vote, use, employ, mortgage, lend, pledge, sell or otherwise dispose of, and otherwise use and deal in and with, securities, shares or other interests in, or obligations of, domestic or foreign corporations, associations, partnerships, limited liability companies, other real estate investment trusts, or individuals, direct or indirect obligations of the United States or of any other government, state, territory, government district, or municipality, or any instrumentality thereof, and to be an organizer, partner, member, associate, equity owner, equity participant or manager of any partnership, joint venture, limited liability company or other enterprise, and to the extent permitted in any other jurisdiction, to be an incorporator of any other corporation of any type or kind." -1- 2 The following provisions are added to Section 3.2 as additional subparts (w) through (y), with the existing last subpart to be re-numbered (z) as follows: "(w) to purchase or otherwise acquire its own bonds, debentures, certificates, or other evidences of indebtedness or obligations for its own Shares and hold those acquired Shares as Treasury Shares or cancel or otherwise dispose of those acquired Shares and to redeem or purchase Shares made redeemable by the provisions of this Declaration, if any. "(x) to engage in any and all activities that are mandated, authorized or permitted by sections of the Internal Revenue Code of 1986, as amended, or any successor statute, that relate to or govern real estate investment trusts or the regulations adopted under that law. "(y) whether included in the foregoing or not, to have and exercise all powers necessary or appropriate to effect any or all of the purposes for which this Trust is organized. "(z) (renumbered from [w]) to do all other such acts and things as are incident to the foregoing, and to exercise all powers which are necessary or useful to carry on the business of the Trust; to promote any of the purposes for which the Trust is formed, and to carry out the provisions of this Declaration." Subpart (d) of Section 5.3 is repealed and deleted and replaced with the following language: "(d) deleted;" Subpart (e) of Section 5.3 is repealed and deleted and replaced with the following language: "(e) deleted;" Subpart (g) of Section 5.3 is repealed and deleted and replaced with the following language: "(g) deleted;" Subpart (o) of Section 5.3 is repealed and deleted and replaced with the following language: "(o) deleted;" -2- 3 IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 4 as of March 20, 1997, in one or more counterparts, each of which shall be deemed an original and all of which, together, constitute but one and the same instrument. /s/ IRVING E. COHEN -------------------------------------- Irving E. Cohen, Trustee /s/ WILLIAM S. FRIEDMAN -------------------------------------- William S. Friedman, Trustee /s/ SALLY HERNANDEZ-PINERO -------------------------------------- Sally Hernandez-Pinero, Trustee /s/ DAN L. JOHNSTON -------------------------------------- Dan L. Johnston, Trustee /s/ LANCE LIEBMAN -------------------------------------- Lance Liebman, Trustee /s/ LAWRENCE G. SCHAFRAN -------------------------------------- Lawrence G. Schafran, Trustee /s/ RAYMOND V. J. SCHRAG -------------------------------------- Raymond V. J. Schrag, Trustee /s/ CARL B. WEISBROD -------------------------------------- Carl B. Weisbrod, Trustee THE STATE OF NEW YORK ) COUNTY OF NEW YORK ) The foregoing instrument was acknowledged before me on March 20, 1997, by Irving E. Cohen. /s/ LAWRENCE S. HARTMAN -------------------------------------- Notary Public, State of -------------- My commission expires: -------------------------------------- LAWRENCE S. HARTMAN Notary Public, State of New York No. 02HA5062161 Qualified in Kings County Commission Expires June 24, 1998 -3- 4 THE STATE OF NEW YORK ) ) COUNTY OF NEW YORK ) The foregoing instrument was acknowledged before me on March 20, 1997, by William S. Friedman. /s/ LAWRENCE S. HARTMAN -------------------------------------- Notary Public, State of New York My commission expires: -------------------------------------- THE STATE OF NEW YORK ) LAWRENCE S. HARTMAN ) Notary Public, State of New York COUNTY OF NEW YORK ) No. 02HA5062161 Qualified in Kings County Commission Expires June 24, 1998 The foregoing instrument was acknowledged before me on March 20, 1997, by Sally Hernandez-Pinero. /s/ LAWRENCE S. HARTMAN -------------------------------------- Notary Public, State of -------------- My commission expires: -------------------------------------- THE STATE OF NEW YORK ) LAWRENCE S. HARTMAN ) Notary Public, State of New York COUNTY OF NEW YORK ) No. 02HA5062161 Qualified in Kings County Commission Expires June 24, 1998 The foregoing instrument was acknowledged before me on March 20, 1997, by Dan L. Johnston. /s/ LAWRENCE S. HARTMAN -------------------------------------- Notary Public, State of -------------- My commission expires: -------------------------------------- LAWRENCE S. HARTMAN Notary Public, State of New York No. 02HA5062161 Qualified in Kings County Commission Expires June 24, 1998 -4- 5 THE STATE OF NEW YORK ) ) COUNTY OF NEW YORK ) The foregoing instrument was acknowledged before me on March 20, 1997, by Lance Liebman. /s/ ALYSSA J. ZIMMERMAN BASSETT -------------------------------------- Notary Public, State of New York My commission expires: -------------------------------------- ALYSSA J. ZIMMERMAN BASSETT Notary Public, State of New York No. 4980637 Qualified in New York County Commission Expires April 22, 1997 THE STATE OF MARYLAND ) ) COUNTY OF HARVARD ) The foregoing instrument was acknowledged before me on March 28, 1997, by Lawrence G. Schafran. /s/ LINDA M. MASON -------------------------------------- Notary Public, State of Maryland My commission expires: 3/2/99 -------------------------------------- THE STATE OF NEW YORK ) ) COUNTY OF NEW YORK ) The foregoing instrument was acknowledged before me on March 28, 1997, by Raymond V. J. Schrag. /s/ ROBERTA YATES -------------------------------------- Notary Public, State of --------------- My commission expires: -------------------------------------- ROBERTA YATES NOTARY PUBLIC, STATE OF NEW YORK No. 24-4661458 Qualified in Kings County Term Expires 12/31/97 -5- 6 THE STATE OF NEW YORK ) ) COUNTY OF NEW YORK ) The foregoing instrument was acknowledged before me on March 20, 1997, by Carl B. Weisbrod. /s/ LAWRENCE S. HARTMAN --------------------------------------- Notary Public, State of -------------- -------------------------------------- LAWRENCE S. HARTMAN Notary Public, State of New York No. 02HA5062161 Qualified in Kings County Commission Expires June 24, 1998 -6- EX-27.0 3 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 MAR-31-1997 4,692 0 0 (1,195) 0 0 240,983 (43,701) 219,526 0 144,742 0 0 0 68,660 219,526 0 12,180 0 6,674 1,876 0 2,747 341 0 341 0 0 0 341 .10 .10
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