-----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, F/tF7/hlgdEXUdrGBdcc6hj4WZpCvSFPZ6ILXQZ4FkynbiAd+/58Xx7+9jRJvCPC nYWEqLyAzhojkBDrn3MZPg== 0000950134-96-006241.txt : 19961118 0000950134-96-006241.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950134-96-006241 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NONE 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: 96665283 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 SEPTEMBER 30, 1996 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 SEPTEMBER 30, 1996 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 (I.R.S. Employer incorporation 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 3,653,495 - ------------------------------------------- --------------------------------- (Class) (Outstanding at November 4, 1996) 1 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants, but, in the opinion of management of National Income Realty Trust (the "Trust"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated results of operations, consolidated financial position, 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)
September 30, December 31, ------------------- ------------------ 1996 1995 ------------------- ------------------ (unaudited) (audited) Assets ------ Notes and interest receivable Performing . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,653 $ 11,685 Nonperforming, nonaccruing . . . . . . . . . . . . . . . . . . . 977 977 ---------- ---------- 3,630 12,662 Real estate held for sale (net of accumulated depreciation of $397 in 1996 and $895 in 1995) . . . . . . . . . . . . . . . 12,192 6,589 Less - allowance for estimated losses . . . . . . . . . . . . . . (3,274) (6,274) ---------- ---------- 12,548 12,977 Real estate held for investment (net of accumulated depreciation of $40,469 in 1996 and $38,532 in 1995) . . . . . 178,979 189,086 Investments in partnerships . . . . . . . . . . . . . . . . . . . 4,398 10,780 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 7,864 1,674 Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . 3,878 2,329 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 5,598 5,192 ---------- ---------- $ 213,265 $ 222,038 ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 3 NATIONAL INCOME REALTY TRUST CONSOLIDATED BALANCE SHEETS (Continued) (Dollars in thousands)
September 30, December 31, ------------------- ---------------- 1996 1995 ------------------- ---------------- (unaudited) (audited) Liabilities and Shareholders' Equity ------------------------------------ Liabilities Notes, debentures, and interest payable . . . . . . . . . . . . . $ 132,737 $ 144,497 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 9,059 7,914 ------------- ------------- 141,796 152,411 Commitments and contingencies . . . . . . . . . . . . . . . . . . Shareholders' equity Shares of beneficial interest, no par value; authorized shares, unlimited; shares outstanding, 3,690,921 in 1996 and 3,390,727 in 1995 (after deducting 624,202 shares in 1996 and 450,857 shares in 1995 held in treasury) . . . . . 11,081 10,181 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 279,222 276,716 Accumulated distributions in excess of accumulated earnings . . . . . . . . . . . . . . . . . . . . . (218,834) (217,270) ------------- ------------- 71,469 69,627 ------------- ------------- $ 213,265 $ 222,038 ============= =============
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 4 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, -------------------------------- ------------------------------ 1996 1995 1996 1995 -------------------------------- ------------------------------ Revenue Rentals . . . . . . . . . . . . . . . $ 12,297 $ 10,802 $ 36,010 $ 32,034 Interest . . . . . . . . . . . . . . 150 254 510 870 Equity in income of partnerships . . 119 162 1,299 509 ----------- ----------- ----------- ----------- 12,566 11,218 37,819 33,413 Expenses Property operations . . . . . . . . . 7,642 6,785 21,455 19,038 Interest . . . . . . . . . . . . . . 3,067 2,897 9,389 9,147 Depreciation . . . . . . . . . . . . 1,346 1,628 3,989 4,623 Advisory fees to affiliate . . . . . 231 199 767 723 General and administrative . . . . . 451 380 1,517 1,300 Provision for losses . . . . . . . . 300 - 300 (425) ----------- ----------- ----------- ----------- 13,037 11,889 37,417 34,406 ----------- ----------- ----------- ----------- (Loss) income before gains on sales of investments and real estate, gain on insurance settlement, and extraordinary gain . . . . . . . . . (471) (671) 402 (993) Gain on sale of investments . . . . . . . - - - 412 Gain on sale of real estate . . . . . . . 3,681 - 3,692 110 Gain on insurance settlement . . . . . . - - 451 - ----------- ----------- ----------- ----------- Income (loss) from continuing operations . . . . . . . . . . . . . 3,210 (671) 4,545 (471) Extraordinary gain . . . . . . . . . . . - 67 - 67 ----------- ----------- ----------- ----------- Net income (loss) . . . . . . . . . . . . $ 3,210 $ (604) $ 4,545 $ (404) =========== =========== =========== =========== Earnings per share Income (loss) from continuing operations . . . . . . . . . . . . . $ .86 $ (.18) $ 1.21 $ (.13) Extraordinary gain . . . . . . . . . . . - .02 - .02 ----------- ----------- ----------- ----------- Net income (loss) . . . . . . . . . . . . $ .86 $ (.16) $ 1.21 $ (.11) =========== =========== =========== =========== Weighted average shares of beneficial interest used in computing earnings per share . . . . 3,749,173 3,738,997 3,758,154 3,776,927 =========== =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 5 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, 1995 (audited) . . . . . . . . . . . . . 3,390,727 $ 10,181 $ 276,716 $ (217,270) $ 69,627 Conversion of convertible subordinated debenture . . . . . . 93,076 279 721 - 1,000 Repurchase of shares of beneficial interest . . . . . . (117,000) (351) (1,254) - (1,605) Cash distributions ($0.55 per share) . . . . . . . . . - - - (2,098) (2,098) Share distributions . . . . . . . . . . 324,118 972 3,039 (4,011) - Net income . . . . . . . . . . . . . . - - - 4,545 4,545 --------- -------- ---------- ----------- -------- Balance, September 30, 1996 (unaudited) . . . . . . . . . . . . 3,690,921 $ 11,081 $ 279,222 $ (218,834) $ 71,469 ========= ======== ========== =========== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 6 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
For the Nine Months Ended September 30, ----------------------------- 1996 1995 -------------- ------------ Cash Flows from Operating Activities Rentals collected . . . . . . . . . . . . . . $ 36,579 $ 32,090 Interest collected . . . . . . . . . . . . . 415 850 Interest paid . . . . . . . . . . . . . . . . (8,772) (9,286) Payments for property operations . . . . . . (20,569) (19,043) General and administrative expenses paid . . (1,732) (1,470) Advisory fees paid to affiliate . . . . . . . (908) (773) Deferred borrowing costs paid . . . . . . . . (1,370) (570) ---------- --------- Net cash provided by operating activities . 3,643 1,798 Cash Flows from Investing Activities Acquisition of real estate . . . . . . . . . (3,199) (3,838) Real estate improvements . . . . . . . . . (8,155) (5,347) Proceeds from sale of real estate . . . . . . 6,156 1,185 Note receivable collections . . . . . . . . . 530 3,591 Cash collateral received . . . . . . . . . . 202 - Acquisition of economic interest in office building - (462) Distribution from partnership's investing activities 6,809 - Distribution of partnership's insurance settlement proceeds . . . . . . . . . . . . . . . . . 759 - Net distributions from partnerships . . . . . 578 934 Proceeds from sale of investments . . . . . . - 593 ---------- --------- Net cash provided by (used in) investing activities 3,680 (3,344) Cash Flows from Financing Activities Borrowings from financial institutions . . . 33,238 8,800 Payments of mortgage notes payable . . . . . (29,169) (9,231) Deposits paid on discounted payoff agreements - (539) Margin account (deposits) borrowings, net. . . (719) 220 Repayment of advances from affiliates, net . (319) - Replacement escrow (deposits) receipts, net . (535) 961 Repurchase of shares of beneficial interest . (1,605) (1,266) Distributions to shareholders . . . . . . . . (2,024) (1,800) Distribution from partnership's financing activities - 2,391 ---------- --------- Net cash (used in) financing activities . . . (1,133) (464) ---------- --------- Net increase (decrease) in cash and cash equivalents 6,190 (2,010) Cash and cash equivalents, beginning of period . 1,674 3,484 ---------- --------- Cash and cash equivalents, end of period . . . . $ 7,864 $ 1,474 ========== =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 7 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands) (Unaudited)
For the Nine Months Ended September 30, -------------------------------------- 1996 1995 --------------- --------------- Reconciliation of net income (loss) to net cash provided by operating activities: Net income (loss) . . . . . . . . . . . . . . . . . $ 4,545 $ (404) Gain on insurance settlement . . . . . . . . . . . (451) - Gain on sale of real estate . . . . . . . . . . . . (3,692) (110) Gain on sale of investments . . . . . . . . . . . . - (412) Extraordinary gain . . . . . . . . . . . . . . . . - (67) Provision for losses . . . . . . . . . . . . . . . 300 (425) Depreciation and amortization . . . . . . . . . . . 4,776 5,023 Equity in (income) of partnerships . . . . . . . . (1,299) (509) Changes in other assets and liabilities, net of effects of noncash investing and financing activities (Increase) in interest receivable . . . . . . . (88) (3) (Increase) in other assets . . . . . . . . . . . (2,811) (1,626) Increase in other liabilities . . . . . . . . . 2,277 696 Increase (decrease) in interest payable . . . . 86 (365) ---------- --------- Net cash provided by operating activities . . . . . . . $ 3,643 $ 1,798 ========== ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Assets acquired and liabilities assumed in connection with the purchase or foreclosure of real estate Real estate . . . . . . . . . . . . . . . . . . . . $ 14,954 $ 9,488 Notes and interest receivable . . . . . . . . . . . (8,568) - Allowance for estimated losses . . . . . . . . . . . 3,000 - Other assets . . . . . . . . . . . . . . . . . . . . 44 240 Notes and interest payable . . . . . . . . . . . . (6,157) (5,743) Other liabilities . . . . . . . . . . . . . . . . . (74) (147) ---------- ---------- Cash paid . . . . . . . . . . . . . . . . . . . $ 3,199 $ 3,838 ========== ========== Assets disposed of and liabilities released in connection with the sale of real estate Real estate . . . . . . . . . . . . . . . . . . . . $ 23,221 $ 2,426 Allowance for estimated losses . . . . . . . . . . - (275) Other assets . . . . . . . . . . . . . . . . . . . 596 - Notes and interest payable . . . . . . . . . . . . (21,127) (1,076) Other liabilities . . . . . . . . . . . . . . . . . (212) - Gain on sale . . . . . . . . . . . . . . . . . . . 3,678 110 ---------- ---------- Cash received . . . . . . . . . . . . . . . . . . $ 6,156 $ 1,185 ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 7 8 NATIONAL INCOME REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands) (Unaudited)
For the Nine Months Ended September 30, ------------------------- 1996 1995 --------- ---------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES (Continued): Conversion of convertible subordinated debenture . . . $ 1,000 $ - Note payable related to acquisition of economic interest in office building . . . . . . . . . . . . $ - $ 2,500 Note payable released in connection with litigation settlement . . . . . . . . . . . . . . . . . . . . $ - $ 1,020
The accompanying notes are an integral part of these Consolidated Financial Statements. 8 9 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 nine month period ended September 30, 1996, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 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, 1995. Certain 1995 balances have been reclassified to conform to the 1996 presentation. Dollar amounts in tables are in thousands. Earnings per share have been computed based on the weighted average number of shares of beneficial interest outstanding for the three and nine month periods ended September 30, 1996 and 1995. Share and per share data have been restated to give effect to the 10% share distribution paid to shareholders in September 1996. NOTE 2. REAL ESTATE Pursuant to the Trust's adoption of Statement of Financial Accounting Standards No. 121- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" effective January 1, 1996, the Trust ceased depreciation of its properties held for sale, including Century Centre II Office Building, a property with a $23.1 million carrying value at the time the Trust reclassified it from real estate held for investment to real estate held for sale in January 1996. In September 1996, the Trust sold Century Centre II to a third party for a cash sale price of $28.2 million. After closing costs, prorations, and the payoff of the $21.0 million first mortgage loan secured by the property, the Trust received net cash proceeds of $6.2 million. In connection with this transaction, the Trust recognized a gain of $3.7 million. In November 1995, the City of Indianapolis (the "City") initiated condemnation proceedings against the Trust's K-Mart Shopping Center, acquired in December 1994 through a deed in lieu of foreclosure. The shopping center was vacant at the time the Trust acquired it, although it was 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 February 1996, the City offered preliminary condemnation proceeds of $1.6 million which the Trust rejected in light of appraisals prepared for the City which exceed $2.0 million. In March 1996, the Trust ceased payments on the $1.7 million mortgage note payable secured by the shopping center. The Trust has provided an allowance for estimated losses of $300,000 which represents the excess of the property's carrying value over the estimated condemnation settlement. In April 1996, the Trust purchased Woodbrier Apartments, a 128-unit complex located in Oklahoma City, Oklahoma, at a total cost of $2.5 million, the cash portion of which totaled $1.3 million. The remainder of the purchase price was financed through the assumption of a $1.2 million first mortgage loan that bears interest at 7.925% per annum, is payable in monthly installments of principal and interest of $10,951, and matures in November 2003. In connection with the acquisition, the Trust paid Tarragon Realty Advisors, Inc. ("Tarragon"), the Trust's advisor, an acquisition fee of $24,900. 9 10 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE 2. REAL ESTATE (Continued) In June 1996, the Trust purchased Heron Cove Apartments, a 352-unit community located in Jacksonville, Florida. A portion of the $6.8 million purchase price was financed via the assumption of a $5.1 million mortgage loan secured by a first lien on the property. Simultaneously with the closing, the Trust paid $329,000 of the balance of the mortgage loan, reducing the outstanding balance to $4.8 million. The mortgage loan bears interest at a variable rate, is payable in monthly installments of principal and interest, and matures in December 1999. The remainder of the purchase price, along with closing costs and prorations, was paid in cash from the Trust's general working capital. The Trust paid Tarragon an acquisition fee of $66,005 for services provided in connection with the transaction. Also in connection with this transaction, the seller paid Mr. Bruce A. Schnitz, Chief Operating Officer of the Trust, a commission of $82,563 pursuant to a brokerage agreement entered into prior to his having any affiliation with Tarragon or the Trust. In September 1996, the Trust determined a permanent impairment in value existed on Mariposa Manor Apartments, a 41-unit complex located in Los Angeles, California. A provision for loss of $300,000 was recorded to reduce the carrying value of the property to its then estimated fair value. The property collateralizes a first mortgage loan in the amount of $769,000, which is not currently in default. NOTE 3. NOTES AND INTEREST RECEIVABLE In October 1995, the Trust and the borrower on an $8.6 million first mortgage receivable, which matured in December 1995, negotiated a settlement of the outstanding balance whereby the borrower agreed to relinquish the collateral property, a 342,000 square foot shopping center in Jackson, Mississippi, through a deed in lieu of foreclosure. The Trust took possession of the property in January 1996. As the estimated fair value of the property exceeded the Trust's net carrying value of the mortgage loan, the Trust recognized no loss in excess of amounts previously provided. NOTE 4. INVESTMENTS IN PARTNERSHIPS Investments in partnerships, accounted for under the equity method, consisted of the following at September 30, 1996: Income Special Associates ("ISA") . . . . . . . $ 1,485 801 Pennsylvania Avenue . . . . . . . . . . . . 2,765 Sacramento Nine . . . . . . . . . . . . . . . . 145 English Village . . . . . . . . . . . . . . . . 3 ------- $ 4,398 ======= The Trust and Continental Mortgage and Equity Trust are partners in ISA, a general partnership in which the Trust has a 40% interest in earnings, losses, and distributions. ISA in turn owns an effective 100% interest in Indcon, L.P. ("Indcon"), which owned five unencumbered industrial warehouses at September 30, 1996. During the first half of 1996, Indcon sold 27 warehouses for $41.2 million, receiving net cash proceeds of 10 11 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE 4. INVESTMENTS IN PARTNERSHIPS (Continued) $16.8 million after the payoff of the existing $23.5 million mortgage loan and closing costs. The Trust received $6.7 million for its proportionate share of the sale proceeds and an additional $130,000 representing an allowance for brokerage commissions which the Trust retained and which offset the Trust's share of Indcon's loss on the sale, resulting in a net gain on the sale of $14,000. In September 1995, one of Indcon's warehouses was destroyed in a fire. An insurance settlement totaling $2.2 million was reached by the partnership in March 1996 resulting in a $1.1 million gain, of which the Trust's proportionate share was $451,000. The Trust received cash proceeds of $759,000 representing its proportionate share of the insurance settlement proceeds. Indcon does not anticipate rebuilding the property. The following information summarizes the results of operations of these partnerships for the nine months ended September 30, 1996: Rentals . . . . . . . . . . . . . . . . . . . . $ 4,055 Property operations . . . . . . . . . . . . . . (1,696) Interest . . . . . . . . . . . . . . . . . . . . (1,204) Depreciation . . . . . . . . . . . . . . . . . . (380) ------- Income before loss on sale of real estate and gain on insurance settlement . . . . . . . 775 Loss on sale of real estate . . . . . . . . . . (290) Gain on insurance settlement . . . . . . . . . . 1,126 ------- Net income . . . . . . . . . . . . . . . . $ 1,611 ======= NOTE 5. NOTES, DEBENTURES, AND INTEREST PAYABLE In April 1996, the Trust completed the refinancing of the mortgage debt secured by Creekwood North Apartments, located in Altamonte Springs, Florida. The $3.1 million new first mortgage loan bears interest at 8.05% per annum, is payable in monthly installments of principal and interest of $22,486, and matures in May 2006. The Trust received cash proceeds from the refinancing of $645,000 after the payoff of the $2.1 million prior first mortgage loan, which included $427,000 to the Trust for its participation in the prior loan. The remainder of the refinancing proceeds was used to fund closing costs and escrows for property taxes and insurance and repairs. In connection with this transaction, the Trust paid Tarragon a refinancing fee of $30,500. The Trust acquired this property in November 1992 for a purchase price of $2.7 million. In May 1996, the Trust obtained first mortgage financing secured by Forest Oaks Apartments, located in Lexington, Kentucky, in the amount of $3.1 million. The loan bears interest at 8.16% per annum, calls for monthly principal and interest payments calculated on a 25-year amortization, and matures in June 2006. The Trust received net cash proceeds of $514,000 after the payoff of the $2.0 million interim mortgage loan obtained in 1995 and paying closing costs and funding required escrows for property taxes and insurance, repairs, and replacements. The Trust paid Tarragon a refinancing fee of $30,750 for services provided in connection with this financing. This property was acquired by the Trust in November 1994 for a purchase price of $3.4 million. 11 12 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE 5. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued) On June 28, 1996, pursuant to a Master Repurchase Agreement (the "Agreement") with Bear, Stearns & Co. Inc. ("Bear Stearns") entered into in April 1996, the Trust purchased at a 1/2% discount the $3.1 million Federal National Mortgage Association mortgage backed security ("FNMA Certificate") issued by the lender in connection with the financing of Forest Oaks Apartments described above. Simultaneously, Bear Stearns purchased the FNMA Certificate from the Trust for $2.8 million, and the Trust agreed to repurchase the FNMA Certificate from Bear Stearns on July 29, 1996, at the same price plus interest at the London Interbank Offered Rate ("LIBOR") plus 1/2% per annum. Under the terms of the Agreement, the Trust and Bear Stearns may agree to extend the repurchase date monthly, which they have done. This transaction has resulted in an effective interest rate of approximately 7.5% per annum on the Forest Oaks financing. In June 1996, the Trust refinanced the mortgage debt secured by Heather Hills Apartments, located in Temple Hills, Maryland. The new $16.8 million first mortgage loan bears interest at 7.875% per annum, is payable in monthly installments of principal and interest of $118,055, and matures in January 2031. At the closing of the transaction, the Trust paid $499,000, which, along with the new loan proceeds, funded the payoff of the $15.9 million prior mortgage loan, closing costs, and escrows for repairs, replacements, and mortgage insurance. Pursuant to the Agreement with Bear Stearns, in July 1996, the Trust purchased at a 2.7% discount 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 Apartments described above. Simultaneously, Bear Stearns purchased the GNMA Certificate from the Trust for $15.1 million, and the Trust agreed to repurchase the GNMA Certificate from Bear Stearns one month later at the same price plus interest at LIBOR plus 1/2% per annum. Under the terms of the Agreement, the Trust and Bear Stearns may agree to extend the repurchase date monthly, which they have done. The current repurchase agreement has a $15.4 million price and matures on November 30, 1996. This transaction has resulted in an effective interest rate of approximately 7% per annum on the Heather Hills financing. Also in June 1996, the Trust closed a $1.8 million mortgage loan secured by a first lien on Plaza Hills Apartments, located in Kansas City, Missouri, and received net cash proceeds of $1.7 million. The mortgage loan bears interest at 8.35% per annum, is payable in monthly installments of principal and interest of $14,098, and matures in July 2006. The remainder of the loan proceeds was used to establish escrows for property taxes and insurance, repairs, and replacements and to pay the associated closing costs. The $1.1 million prior loan secured by this property was paid in full in February 1996 with funds from the Trust's general working capital. In connection with this transaction, the Trust paid Tarragon a refinancing fee of $17,730. In July 1996, the Trust obtained financing in the amount of $1.1 million secured by a first lien mortgage on Mountain View Shopping Center located in Las Vegas, Nevada. The mortgage loan bears interest at a variable rate which may range between 11.68% and 16.68% per annum, is payable in monthly installments of principal and interest, and matures in July 2006. The Trust received net cash proceeds of $975,000 after closing costs. 12 13 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE 5. NOTES, DEBENTURES, AND INTEREST PAYABLE (Continued) In August 1996, the Trust obtained a $9.0 million line of credit secured by mortgages on four of its properties, Diamond Loch Apartments, Meadowbrook Apartments, Mustang Creek Apartments, and The Regent Apartments. All of these properties except The Regent previously collateralized other mortgage loans. The prior loans totaling $3.9 million secured by Diamond Loch and Mustang Creek were paid off at closing. Additionally, a principal payment of $500,000 was made at closing on the $3.5 million interim mortgage loan which had been obtained in 1995 and was secured by both Meadowbrook and Bryan Hill Apartments in exchange for the release of Meadowbrook. At closing, $6.5 million was advanced under the line of credit, and, after prior loan payoffs and closing costs, the Trust received net cash proceeds of $1.9 million. In September 1996, the Trust received an additional advance of $1.0 million under the line of credit. The Trust plans to obtain the remaining $1.5 million during the fourth quarter of 1996. The Trust paid Tarragon financing fees totaling $75,000 for services rendered in connection with this transaction. In December 1993, the Trust issued a $1.0 million convertible subordinated debenture to Mr. John A. Doyle, Chief Financial Officer of the Trust until June 1996, in exchange for his participation interest in the profits of the Consolidated Capital Properties II ("CCP II") assets, which the Trust acquired in November 1992. Mr. Doyle was granted this participation as consideration for his services in connection with the CCP II acquisition. In February 1996, Mr. Doyle converted the debenture into 93,076 shares of beneficial interest ("Shares") of the Trust. In September 1996, the Trust repurchased 50,000 of these shares from Mr. Doyle for $700,000. NOTE 6. MANAGEMENT FEES TO AFFILIATE Beginning April 1, 1996, Tarragon Management, Inc. ("TMI"), a wholly-owned subsidiary of Tarragon, assumed the property-level management of certain of the Trust's multifamily properties. The Trust pays TMI a property management fee equal to 4.5% of gross monthly rentals collected for the properties it manages. NOTE 7. SHARE OPTIONS In January 1996, pursuant to its Independent Trustee Share Option Plan, the Trust issued options to each Independent Trustee to purchase up to 1,000 Shares at an exercise price equal to the market price on the date of grant. The options expire on the earlier of the first anniversary of the date on which a Trustee ceases to be a Trustee of the Trust or ten years from the date of grant ("Termination Date") and are exercisable at any time between the date of grant and the Termination Date. Also during 1996, pursuant to its Share Option and Incentive Plan (the "Incentive Plan"), the Trust issued options covering 47,000 Shares to Trust officers and key employees of Tarragon. All options were issued with an exercise price equal to the market price on the grant date, are exercisable beginning one year after the date of grant, and expire on December 31, 2000. All options awarded pursuant to the Incentive Plan are determined by the Option Committee, which is presently comprised of two Trustees, Messrs. William S. Friedman and Carl B. Weisbrod (Chairman of the Board). 13 14 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE 8. 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 9. 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. [This space intentionally left blank.] 14 15 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 September 30, 1996, the Trust's real estate portfolio included 59 properties, 9 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, 14 shopping centers, 3 office buildings, three parcels of land, and one single-family residence. All of the Trust's real estate, except for 13 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 $7.9 million at September 30, 1996, compared with $1.7 million at December 31, 1995. 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. The Trust's cash flow from property operations (rentals collected less payments for property operating expenses) increased $3.7 million for the nine months ended September 30, 1996, compared to the nine months ended September 30, 1995, primarily due to the operations of the properties acquired during 1995 and 1996. The Trust purchased two properties during the nine months ended September 30, 1996, for an aggregate purchase price of $9.4 million, a portion of which was financed through the assumption of first mortgage loans totaling $6.0 million. The Trust paid cash totaling $3.2 million at closing of these purchases. The Trust paid for real estate improvements totaling $8.2 million to its properties during the first half of 1996, including $3.5 million on the construction of The Regent Apartments and The Vistas at Lake Worth, properties in redevelopment which should be completed in the fourth quarter of 1996 and the fourth quarter of 1997, respectively. Projected construction costs for these properties aggregate $2.5 million for the remainder of 1996 and $3.0 million for 1997. The Trust anticipates expenditures for capital improvement on its other properties during the remainder of 1996 to total approximately $1.0 million. 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources (Continued) The Trust sold Century Centre II Office Building in September 1996, receiving net cash proceeds of $6.2 million and recognizing a gain of $3.7 million. The Trust and Continental Mortgage and Equity Trust ("CMET") are partners in Income Special Associates ("ISA"), a general partnership in which the Trust has a 40% interest in earnings, losses, and distributions. ISA in turn owns an effective 100% interest in Indcon, L.P. ("Indcon"), which owned five unencumbered industrial warehouses at September 30, 1996. During the first half of 1996, Indcon sold 27 warehouses for $41.2 million, receiving net cash proceeds of $16.8 million, after the payoff of the existing $23.5 million existing mortgage loan and related closing costs. Indcon distributed $6.8 million to the Trust as its proportionate share of the sales proceeds plus an allowance for brokerage commissions. During the nine months ended September 30, 1996, the Trust obtained first mortgage financing totaling $33.2 million involving nine properties and received net cash proceeds of $6.1 million after the payoff of $25.5 million of existing mortgage debt. The balance of the refinancing proceeds was used to fund escrows and pay the associated closing costs. The Trust made additional principal payments of $3.7 million during the first nine months of 1996. The total of $29.2 million principal payments included $10.2 million related to payoffs of mortgage loans scheduled to mature in 1996. It is the Trust's intention to either pay its mortgage loans when due or seek to extend the due dates while attempting to obtain long term refinancing. However, while management is confident of its ability to acquire refinancing as needed, there is no assurance that the Trust will continue to be successful in its efforts in this regard. During the nine months ended September 30, 1996, the Trust repurchased 117,000 of its shares of beneficial interest at a total cost of $1.6 million. In May 1994, the Trust's Board of Trustees (the "Board") authorized the Trust to repurchase up to 300,000 shares of beneficial interest, of which 299,702 had been purchased through September 30, 1996. At its September 1996 meeting, the Board authorized the Trust to repurchase up to an additional 150,000 shares of beneficial interest. Cash distributions to shareholders totaling $2.1 million, or $0.55 per share, have been declared by the Board, and $2.0 million have been paid by the Trust during the nine month period ended September 30, 1996. The Trust also paid a 10% share distribution in September 1996. The third quarter distributions represent the Trust's thirteenth cash distribution and fourth share distribution since the resumption of regular quarterly distributions in September 1993. Results of Operations The Trust reported net income of $3.2 million and $4.5 million, respectively, for the three and nine month periods ended September 30, 1996, as compared to net losses of $604,000 and $404,000, respectively, for the three and nine month periods ended September 30, 1995. The primary reason for the improvement in operating results is the $3.7 million gain on the sale of Century Centre II Office Building in September 1996. The other underlying components of the Trust's results of operations are discussed in the following paragraphs. 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Results of Operations (Continued) Net rental income (rental revenue less property operating expenses) increased from $4.0 million and $13.0 million for the three and nine month periods ended September 30, 1995, to $4.7 million and $14.6 million for the corresponding periods in 1996. Multifamily Properties The Trust's multifamily portfolio, which represented 74% of the Trust's real estate and included 7,078 operating units at September 30, 1996, reported increases in net rental income of $591,000, or 21%, and $1.5 million, or 16%, respectively, for the three and nine month periods ended September 30, 1996, as compared to the corresponding periods in 1995.Of these increases, $356,000 and $798,000 are related to properties acquired in 1995 and 1996. Multifamily properties held in both years reported increases of $235,000 and $661,000 due to increased rental revenue from higher rental rates, which was partially offset by increased operating expenses related to the Trust's continued efforts to improve its properties. Overall, both physical and economic occupancy levels have increased slightly for multifamily properties held in both years. Commercial Properties The Trust's commercial portfolio included 1.7 million square feet at September 30, 1996. Increases in net rental income of $6,000 and $166,000, respectively, resulted from the addition of Jackson Square Shopping Center, acquired through a deed in lieu of foreclosure in January 1996. Decreases of $21,000 and $139,000, respectively, resulted from the sale of K-Mart Shopping Center in Kansas City, Missouri, in July 1995. Commercial properties held in both years reported overall increases in net rental income of $62,000 and $224,000, principally due to lower economic vacancies which were partially offset by increased operating expenses related to continued efforts to increase physical occupancy levels, which were higher than those reported in 1995. Since June 30, 1996, the Trust has consummated leases on 120,000 square feet of space generating monthly rental revenue of approximately $135,000. Interest revenue decreased from $254,000 and $870,000 for the three and nine month periods ended September 30, 1995, to $150,000 and $510,000 for the corresponding periods in 1996. Of these decreases, $129,000 and $476,000 resulted from the payoff of the Greentree mortgage note receivable in September 1995 and the acquisition of Jackson Square Shopping Center through deed in lieu of foreclosure in January 1996. Equity in income of partnerships was $119,000 and $1.3 million, respectively, for the three and nine month periods ended September 30, 1996, compared to $162,000 and $509,000, respectively, for the corresponding periods in 1995. The increase for the nine months ended September 30, 1996, was primarily due to distributions received from Sacramento Nine, a tenancy-in-common in which the Trust holds a 70% undivided interest in earnings, losses, and distributions, and English Village, a partnership in which the Trust holds 1% general partner and 49% limited partner interests, in excess of the Trust's investments in the partnerships. 17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Results of Operations (Continued) Interest expense was $3.1 million and $9.4 million for the three and nine month periods ended September 30, 1996, as compared to $2.9 million and $9.1 million for the three and nine month periods ended September 30, 1995. Increases of $81,000 and $304,000 resulted from interest expense associated with mortgage loans obtained or assumed in connection with 1995 and 1996 property acquisitions. In addition, long term and interim first mortgage financing obtained on existing properties during 1995 and 1996 increased mortgage loans by $11.8 million and the related interest expense by $41,000 and $499,000 for these periods. These increases were partially offset by decreases totaling $150,000 and $477,000 due to the sale of K-Mart Shopping Center in Kansas City, Missouri, in July 1995; ceasing payments on the mortgage loan secured by K-Mart Shopping Center in Indianapolis, Indiana, in March 1996 pursuant to the condemnation action; and interest capitalized to the carrying values of unencumbered development properties during 1996. Depreciation expense decreased from $1.6 million and $4.6 million for the three and nine month periods ended September 30, 1995, to $1.3 million and $4.0 million for the corresponding periods in 1996. Effective January 1, 1996, the Trust's adopted Statement of Financial Accounting Standards No. 121, which required the Trust to cease depreciation of its assets held for sale, resulting in decreases of $233,000 and $719,000. Advisory fees to Tarragon Realty Advisors, Inc. ("Tarragon"), were $231,000 and $767,000 for the three and nine month periods ended September 30, 1996, as compared to $199,000 and $723,000 for the corresponding periods in 1995. The current 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 initial advisory agreement also called for a $100,000 annual base fee, which was eliminated in April 1995. In September 1996, the Trust recorded a $300,000 provision for loss to reduce the carrying value of Mariposa Manor Apartments to its then estimated fair value. During the nine months ended September 30, 1995, the Trust recorded a provision for loss credit of $425,000. This credit was comprised of a provision for loss of $275,000 to reduce the net carrying value of K-Mart Shopping Center in Kansas City, Missouri, to its net sales proceeds and a reversal of a previously provided allowance for estimated loss of $700,000 against Pepperkorn Office Building which was determined to no longer be necessary after litigation involving the property was settled. In addition to the $3.7 million gain on the sale of Century Centre II Office Building discussed previously, during the first nine months of 1996, the Trust reported a gain of $14,000 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. During the first nine months of 1995, the Trust reported a gain of $412,000 on the sale of shares of beneficial interest of CMET and a $110,000 gain on the sale of a portion of Lake Highlands land. 18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 the lower of its cost or its estimated fair value. In those instances in which estimates of fair value 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. 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 Annual Report on Form 10-K for the year ended December 31, 1995, 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. 19 20 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 27.0 - Financial Data Schedule (b) Reports on Form 8-K as follows: The following current report on Form 8-K was filed during the period covered by this report or with respect to events which occurred during the period covered by this report: Date of Event Date Filed Items Reported ------------- ---------- -------------- September 27, 1996 October 15, 1996 2. Acquisition or Disposition of Assets 5. Other Events 7. Financial Statements and Exhibits [This space intentionally left blank.] 20 21 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: November 14, 1996 By: /s/ William S. Friedman ------------------- ------------------------- William S. Friedman President, Chief Executive Officer, and Trustee Date: November 14, 1996 By: /s/ Robert C. Irvine ------------------ ---------------------- Robert C. Irvine Chief Financial Officer Date: November 14, 1996 By: /s/ Erin D. Davis -------------------- ------------------- Erin D. Davis Vice President and Chief Accounting Officer 21 22 NATIONAL INCOME REALTY TRUST INDEX TO EXHIBITS EXHIBIT 27.0 Financial Data Schedule Page 23 22 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 7,864 0 3,630 (3,274) 0 0 232,037 (40,866) 213,265 0 132,737 0 0 0 71,469 213,265 0 37,819 0 21,455 4,756 300 9,389 4,545 0 4,545 0 0 0 4,545 1.21 1.21
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