-----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, SnflpmiQaWHCebnYc6SV+T+Hn1RUZT9apdXsXozF2Cts/wnpe2v78ho0P93MWeuL 9CbR7Pkxj+Q0IVx/xl1lug== 0000950134-98-004121.txt : 19980514 0000950134-98-004121.hdr.sgml : 19980514 ACCESSION NUMBER: 0000950134-98-004121 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 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: SEC FILE NUMBER: 000-09211 FILM NUMBER: 98617299 BUSINESS ADDRESS: STREET 1: 280 PARK AVE E BLDG 20TH FL STREET 2: SUITE 200 CITY: NEW YORK STATE: NY ZIP: 10017 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, 1998 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, 1998 -------------- 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 3,812,630 - ------------------------------------------- ---------------------------- (Class) (Outstanding at May 7, 1998) 1 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements for the period ended March 31, 1998, 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 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) (Unaudited)
March 31, December 31, 1998 1997 --------- ------------ Assets Real estate held for sale (net of accumulated depreciation of $593 in 1998 and 1997) .......................................... $ 5,129 $ 5,123 Less - allowance for estimated losses ................................ (1,194) (1,194) --------- --------- 3,935 3,929 Real estate held for investment (net of accumulated depreciation of $47,541 in 1998 and $45,440 in 1997) ............... 230,528 230,007 Investments in partnerships .......................................... 19,941 13,839 Cash and cash equivalents ............................................ 1,421 4,262 Restricted cash ...................................................... 4,958 4,300 Other assets, net .................................................... 9,240 9,303 --------- --------- $ 270,023 $ 265,640 ========= ========= Liabilities and Shareholders' Equity Liabilities Notes and interest payable ........................................... $ 189,938 $ 184,126 Other liabilities .................................................... 10,175 10,423 --------- --------- 200,113 194,549 Commitments and contingencies......................................... Shareholders' equity Shares of beneficial interest, no par value; authorized shares, unlimited; shares outstanding, 3,814,670 in 1998 and 3,812,404 in 1997 (after deducting 904,006 shares in 1998 and 896,962 shares in 1997 held in treasury) ............... 11,453 11,446 Paid-in capital ...................................................... 281,670 281,638 Accumulated distributions in excess of accumulated earnings ............................................... (223,196) (222,126) Accumulated other comprehensive income ............................... (17) 133 --------- --------- 69,910 71,091 --------- --------- $ 270,023 $ 265,640 ========= =========
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, -------------------------- 1998 1997 ----------- ---------- Revenue Rentals ................................................. $ 13,861 $ 11,955 Interest ................................................ 215 67 Equity in income of partnerships ........................ 180 158 ----------- ---------- 14,256 12,180 Expenses Property operations ..................................... 7,406 6,674 Interest ................................................ 3,732 2,747 Depreciation ............................................ 2,100 1,500 Advisory fee to affiliate ............................... 432 376 General and administrative .............................. 572 542 ----------- ---------- 14,242 11,839 ----------- ---------- Income before gain on sale of investments and extraordinary loss ...................................... 14 341 Gain on sale of investments ................................ 117 -- ----------- ---------- Income from continuing operations .......................... 131 341 Extraordinary loss ......................................... (262) -- ----------- ---------- Net income (loss) .......................................... $ (131) $ 341 =========== ========== Other comprehensive income: Unrealized losses on marketable equity securities ....... (33) -- Realized gains on marketable equity securities .......... (117) -- ----------- ---------- Net loss recognized in other comprehensive income .......... (150) -- ----------- ---------- Comprehensive income (loss) ................................ $ (281) $ 341 =========== ========== Earnings per share - basic and diluted Income from continuing operations .......................... $ .03 $ .09 Extraordinary loss ......................................... (.06) -- ----------- ---------- Net income (loss) .......................................... $ (.03) $ .09 =========== ========== Weighted average shares of beneficial interest used in computing earnings per share .................... 3,820,556 3,868,328 =========== ========== Weighted average shares of beneficial interest used in computing earnings per share - assuming dilution ........ 3,876,723 3,906,728 =========== ==========
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) (Unaudited)
Accumulated Shares of Distributions Accumulated Beneficial Interest in Excess of Other ---------------------- Paid-in Accumulated Comprehensive Shareholders' Shares Amount Capital Earnings Income Equity --------- -------- --------- --------- ------ -------- Balance, December 31, 1997 ............. 3,812,404 $ 11,446 $ 281,638 $(222,126) $ 133 $ 71,091 Repurchase of shares of beneficial interest ............... (7,044) (21) (104) -- -- (125) Cash distributions ($0.20 per share) .................... -- -- -- (775) -- (775) Share distributions .................... 9,310 28 136 (164) -- -- Net loss recognized in other comprehensive income ................. -- -- -- -- (150) (150) Net loss ............................... -- -- -- (131) -- (131) --------- -------- --------- --------- ----- -------- Balance, March 31, 1998 ............... 3,814,670 $ 11,453 $ 281,670 $(223,196) $ (17) $ 69,910 ========= ======== ========= ========= ===== ========
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, --------------------- 1998 1997 -------- -------- Cash Flows from Operating Activities Rentals collected ........................................ $ 14,096 $ 11,768 Interest collected ....................................... 57 70 Interest paid ............................................ (3,505) (2,405) Payments for property operations ......................... (8,163) (8,334) General and administrative expenses paid ................. (655) (731) Advisory fee paid to affiliate ........................... (447) (556) Deferred borrowing costs paid ............................ (469) (415) -------- -------- Net cash provided by (used in) operating activities ... 914 (603) Cash Flows from Investing Activities Acquisition of real estate ............................... -- (414) Real estate improvements ................................. (2,671) (3,373) Note receivable collections .............................. 57 8 Earnest money deposits received (paid), net .............. 135 (116) Net contributions and advances to partnerships ........... (6,393) (2,433) Proceeds from sale of marketable equity securities ....... 417 -- -------- -------- Net cash (used in) investing activities ............... (8,455) (6,328) Cash Flows from Financing Activities Proceeds from borrowings ................................. 15,142 19,350 Payments of mortgage notes payable ....................... (9,501) (8,998) Margin account repayments, net ........................... (6) (1,527) Replacement escrow deposits, net ......................... (62) (332) Repurchase of shares of beneficial interest .............. (125) (27) Distributions to shareholders ............................ (748) (705) -------- -------- Net cash provided by financing activities ............. 4,700 7,761 -------- -------- Net increase (decrease) in cash and cash equivalents ....... (2,841) 830 Cash and cash equivalents, beginning of period ............. 4,262 3,862 -------- -------- Cash and cash equivalents, end of period ................... $ 1,421 $ 4,692 ======== ========
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, ------------------- 1998 1997 ------- ------- Reconciliation of net income (loss) to net cash provided by (used in) operating activities: Net income (loss) ............................................................ $ (131) $ 341 Extraordinary loss ........................................................... 262 -- Gain on sale of marketable equity securities ................................. (117) -- Depreciation and amortization ................................................ 2,379 1,677 Equity in income of partnerships ............................................. (180) (158) Interest on advances to partnerships ......................................... (158) -- Changes in other assets and liabilities, net of effects of noncash investing and financing activities Decrease in interest receivable ......................................... -- 3 (Increase) in other assets .............................................. (1,560) (1,871) Increase (decrease) in other liabilities ................................ 407 (804) Increase in interest payable ............................................ 12 209 ------- ------- Net cash provided by (used in) operating activities ....................... $ 914 $ (603) ======= ======= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Changes in assets and liabilities in connection with the purchase of real estate: Real estate ............................................................... $ -- $ 2,098 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
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, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. Dollar amounts in tables are in thousands. Certain 1997 balances have been reclassified to conform to the 1998 presentation. On January 1, 1998, the Trust adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires the reporting of comprehensive income in addition to net from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Accumulated other comprehensive income presented in the accompanying March 31, 1998, Consolidated Balance Sheet and Consolidated Statement of Shareholders' Equity represents unrealized holding losses on marketable equity securities. NOTE 2. INVESTMENTS IN PARTNERSHIPS Investments in partnerships, accounted for using the equity method, consisted of the following at March 31, 1998: Sacramento Nine ............................................ $ 549 Ansonia Apartments, L.P. ................................... 1,148 Danforth National Apartments, Ltd. ("Danforth") ............ 3,711 801 Pennsylvania Avenue .................................... 3,172 National Omni Associates, L.P. ("Omni") .................... 4,865 RI Windsor, Ltd. ("Windsor") ............................... 2,586 RI Panama City, Ltd. ("Panama City") ....................... 1,715 Tarragon Savannah, L.P. ("Savannah") ....................... 2,195 ------- $19,941 =======
In December 1997, the Trust contributed $721,000 to Omni in exchange for a 55% general partner interest in this partnership. In 1998, the Trust contributed an additional $4.1 million to Omni, which purchased 5600 Collins Avenue, a 289-unit, high rise apartment building in Miami Beach, Florida, for $32 million in February 1998. $26 million of the purchase price was financed through first and second lien mortgages. In connection with this transaction, Omni paid Tarragon Realty Advisors, Inc., ("Tarragon") a $150,000 acquisition fee. In accordance with the partnership agreement, the Trust is to receive a preferred return of 10% compounded monthly on its contributions. The Trust will receive 78% of the partnerships' cash distributions until the preferred return is paid and the Trust's contributions have been repaid. The Trust will receive 55% of subsequent cash distributions from the partnership. 7 8 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE 2. INVESTMENTS IN PARTNERSHIPS (Continued) The following information summarizes the results of operations for these partnerships for the three months ended March 31, 1998 (unaudited): Rental revenue .................................................. $ 1,801 Property operating expenses ..................................... (734) Interest expense ................................................ (901) Depreciation expense ............................................ (267) ------- Net loss ....................................................... $ (101) =======
The above summarized financial information includes no operations for Danforth and Savannah, each of which owns an apartment property under construction with an aggregate 538 units. Operations for Windsor and Panama City are reflected in the above summarized results of operations. Construction of Windsor's sole property, The Mayfaire at Windsor Parke, a 324-unit property in Jacksonville, Florida, was substantially complete at March 31, 1998, and the property was in lease-up. Panama City's sole property, Harbour Green, a 200-unit property in Panama City, Florida, was also in lease-up during the first quarter of 1998, and construction was substantially completed in April 1998. NOTE 3. INVESTMENTS IN MARKETABLE EQUITY SECURITIES In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," investments in marketable equity securities are carried at fair value. These investments are included in "Other assets" in the accompanying Consolidated Balance Sheets. These investments are considered available for sale, and unrealized holding gains and losses are included in other comprehensive income. During the first quarter of 1998, unrealized losses of $33,000 were incurred, and investments with a cost basis of $300,000 (determined by the average cost method) were sold for $417,000, resulting in realized gains of $117,000. NOTE 4. NOTES 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 MBS") 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 MBS") 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 MBS and the GNMA MBS from the Trust for 92% of the aggregate value, or $17.9 million, and the Trust agreed to repurchase the MBSs 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. In January 1997, the Trust entered into a similar repurchase transaction with a government sponsored enterprise which purchased the MBSs 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 Trust and the government sponsored enterprise have since extended the repurchase date monthly. In November 1997, the Trust purchased the $2.7 million Fannie Mae MBS issued by the lender in connection with the financing of Cross Creek Apartments ("Cross Creek") at face value. The government sponsored enterprise purchased the Cross Creek Fannie Mae MBS 8 9 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE 4. NOTES AND INTEREST PAYABLE (Continued) along with the other MBSs in November 1997 pursuant to the same reverse repurchase agreement. The repurchase date has been extended to May 1998, and the current repurchase price is $22.3 million. The repurchase transaction has resulted in effective interest rates as of March 31, 1998, on the Forest Oaks, Heather Hills, and Cross Creek financings of 6.82%, 6.07%, and 7.21%, 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 MBSs. However, the Trust intends to either pay off the mortgages or modify the mortgages to increase the interest rates prior to any significant credit loss. In May 1997, the Trust accepted a commitment from GMAC Commercial Mortgage Corporation for a $50 million revolving credit facility. Advances under the facility are available to finance properties currently owned by the Trust as well as new acquisitions. The outstanding balance is limited to the lesser of 75% of the value of the collateral properties or an amount supported by a debt service coverage ratio of 1.25. The borrowing base may be increased by adding new or existing properties to the collateral pool. Advances are limited to the lesser of 75% of the appraised value of the property as stabilized or 80% of total acquisition costs which include the purchase price of a newly acquired property and the cost of improvements incurred between the date of acquisition and the date that any mortgage secured by that property is recorded. A newly acquired property is defined as a property owned by the Trust for less than one year. The outstanding balance under the facility bears interest at the 30 day LIBOR plus a variable spread of between 2% and 2.5% which is determined based on the loan-to-value and debt service coverage maintained. Payment terms include interest only monthly with the outstanding balance due at maturity, which is 36 months from the date of the first advance. The Trust may extend the maturity by two six-month terms, but no new fundings may occur under the facility during any extension period. The Trust has obtained fundings under this revolving credit facility totaling $43.2 million, $42 million of which were obtained in 1997, secured by first mortgages against nine Trust properties. The Trust received net cash proceeds of $27.4 million ($26.3 million in 1997) from these fundings after the payoff of existing mortgages of $13.5 million, establishing escrows for taxes, insurance, and repairs, and paying the associated closing costs. In connection with these fundings, the Trust paid Tarragon financing fees totaling $432,000 ($420,000 in 1997). During the first quarter of 1998, the Trust closed separate mortgage loans secured by three properties totaling $13.8 million. After the payoff of $9 million in existing debt, establishing escrows for taxes, insurance, and repairs, and closing costs, the Trust received net cash proceeds of $3.6 million. In connection with these financings, the Trust paid Tarragon financing fees totaling $138,000. 9 10 NATIONAL INCOME REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE 5. EARNINGS PER SHARE 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, 1998 and 1997. 1997 share and per share data have been restated to give effect to the 10% share distribution paid to shareholders in September 1997. Following is a reconciliation of the weighted average shares of beneficial interest outstanding used in the computation of earnings per share and earnings per share - assuming dilution.
For the Three Months ended March 31, ------------------------------------ 1998 1997 --------- --------- Weighted average shares of beneficial interest outstanding ............... 3,820,556 3,868,328 Share options .................................... 56,167 38,400 --------- --------- Weighted average shares of beneficial interest outstanding - assuming dilution ............................. 3,876,723 3,906,728 ========= =========
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 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, financial position, or results of operations. NOTE 8. SUBSEQUENT EVENT Upon the substantial completion of construction of The Vistas at Lake Worth, the Trust obtained $8.7 million of interim financing secured by this previously unencumbered property in April 1998. The Trust received net cash proceeds of $8.4 million and paid Tarragon a financing fee of $86,800 in connection with this transaction. [This space intentionally left blank.] 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes thereto. Introduction National Income Realty Trust (the "Trust") invests in income-producing real estate through acquisitions, leases, and partnerships. The Trust was organized on October 31, 1978, and commenced operations on March 27, 1979. At March 31, 1998, the Trust's real estate portfolio included 61 properties, eight of which were held for sale, located throughout the United States, with concentrations in the Southeast and Southwest. These properties consisted of 40 apartment complexes, 14 shopping centers, three office buildings, three parcels of land, and one single-family residence. All of the Trust's real estate, except for ten properties, is encumbered by mortgages. 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 mortgages receivable have been paid off, the Trust's portfolio of mortgage notes receivable has declined and is expected to continue 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, under-managed, and under-performing multifamily projects in geographical regions where the Trust presently owns properties. The Trust also intends to invest increasing amounts in new construction of apartment properties either directly or through partnerships. In the first quarter of 1998, the Trust completed construction of two apartment properties, one of which is owned through a partnership. The Trust currently has three apartment properties under construction, all of which are owned through partnerships. To the extent it invests in construction projects, the Trust is subject to business risks, such as cost overruns and delays, associated with such higher risk activities. 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 $1.4 million at March 31, 1998, compared to $4.3 million at December 31, 1997. The Trust's principal sources of cash have been property operations and external sources, such as property sales and refinancings. 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 invested $2.7 million in capital improvements to its properties during the first quarter of 1998, including $1.3 million of construction costs for the Vistas at Lake Worth, which was completed in the first quarter of 1998. The Trust anticipates spending an additional $10.6 million for capital improvements to its properties during the remainder of 1998. During the first quarter of 1998, the Trust made net contributions and advances totaling $6.4 million to partnerships accounted for using the equity method. $4.1 million represented contributions to National Omni Associates, L.P., which purchased 5600 Collins Avenue, a 289-unit, high rise apartment building in Miami Beach, Florida, in February 1998. $1.6 million represented advances to Tarragon Savannah, Ltd., in which the 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) Trust holds a 50% interest, and Danforth National Apartments, Ltd., in which the Trust holds an 80% noncontrolling interest. These two partnerships are each constructing a luxury apartment complex and have construction loans in place which are expected to fund all of the remaining construction costs. During the three months ended March 31, 1998, the Trust received proceeds from the sale of marketable equity securities of $417,000 and realized gains on these sales totaling $117,000. During the first quarter of 1998, the Trust obtained first mortgage financing totaling $15.1 million and received net cash proceeds of $4.9 million after the payoff of existing debt of $9 million, funding escrows, and paying associated closing costs. The Trust made other principal payments totaling $500,000 during the three months ended March 31, 1998. Principal payments of $15.7 million, including balloon payments of $11.5 million, are due during the remainder of 1998. The Trust intends to either pay off the maturing mortgages or extend the due 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, 1998, the Trust repurchased 7,044 of its shares of beneficial interest at a total cost of $125,000. During 1996, the Board of Trustees (the "Board") authorized the Trust to repurchase up to an additional 281,592 shares of beneficial interest, of which 223,407 had been purchased as of March 31, 1998. Cash distributions to shareholders totaling $810,000, or $0.20 per share, were declared by the Board in December 1997 and paid in the first quarter of 1998. Cash distributions to shareholders of $775,000, or $0.20 per share, were declared by the Board in March 1998 and paid in April 1998. The Trust has paid regular quarterly cash distributions since September 1993. Results of Operations The Trust reported a net loss of $131,000 for the three months ended March 31, 1998, compared to net income of $341,000 for the three months ended March 31, 1997. The components of the change in results from operations are discussed in the following paragraphs. Net rental income (rental revenue less property operating expenses) increased from $5.3 million for the three months ended March 31, 1997, to $6.5 million for the corresponding period in 1998. Multifamily Properties The Trust's multifamily portfolio, which accounted for 66% of the Trust's real estate and included 7,987 operating units at March 31, 1998, reported an increase in net rental income of $1.1 million, or 25%, for the three months ended March 31, 1998, compared to the corresponding period in 1997. $591,000 of this increase resulted from properties acquired in 1997. A decrease of $285,000 resulted from the sale of three multifamily properties during 1997. The remainder of the increase comes from higher rents and decreased vacancy losses for multifamily properties held in both years. Overall, physical occupancy levels have increased for multifamily properties held in both years. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) Commercial Properties The Trust's commercial portfolio included 1.6 million square feet at March 31, 1998. The commercial properties reported an overall increase in net rental income of $191,000 principally due to increased rental rates. Overall, physical occupancy levels for commercial properties held in both years were slightly lower than reported in 1997. Interest revenue increased $148,000 for the three months ended March 31, 1998, compared to the corresponding period in 1997 primarily due to interest earned on advances to certain partnerships in which the Trust holds investments accounted for using the equity method. Interest expense increased $985,000 for the three months ended March 31, 1998, compared to the corresponding period in 1997. An increase of $480,000 resulted from the 1997 property acquisitions. In addition, long term and interim mortgage financing, including advances under line of credit facilities, obtained on properties held in both years increased mortgage loans by $42.1 million and the related interest expense by $645,000 for the same period. A decrease of $223,000 in interest expense resulted from the sale of three properties in 1997 and interest capitalized to the carrying values of unencumbered development properties during 1997 and 1998. Depreciation expense increased from $1.5 million for the three months ended March 31, 1997, to $2.1 million for the corresponding period in 1998. Additional depreciation associated with the 1997 acquisitions and capital improvements to existing properties were the major contributors to this increase. During the first quarter of 1998, the Trust recognized gains totaling $117,000 relating to the sales of investments in marketable equitable securities. Also, during the first quarter of 1998, the Trust recognized $262,000 in extraordinary losses resulting from prepayment penalties and the write-off of deferred financing expenses associated with certain 1998 refinancings. Funds from Operations The following information should be read in conjunction with all of the financial statements and notes thereto included elsewhere in this report and with the discussion set forth above in "Liquidity and Capital Resources" and "Results of Operations." 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Funds from Operations (Continued) Funds from operations ("FFO") for the three month periods ended March 31, 1998 and 1997, are as follows (unaudited) (dollars in thousands):
For the Three Months Ended March 31, --------------------- 1998 1997 --------- -------- Net income (loss) .................................................... $ (131) $ 341 Extraordinary loss ................................................... 262 -- Depreciation and amortization of real estate assets .................. 2,159 1,544 Depreciation and amortization of real estate assets of partnerships ...................................................... 158 86 ------- ------ Funds from operations ................................................ $ 2,448 $1,971 ======= ======
The Trust generally considers FFO to be an appropriate measure of the performance of an equity real estate investment trust ("REIT"). FFO, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), equals net income (loss), computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. The amortization of deferred financing costs is not added back to net income (loss) in the Trust's calculation. This treatment is consistent with the Trust's historical calculation of FFO. The Trust believes that FFO is useful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, investing activities, and financing activities, it provides investors an understanding of the ability of the Trust to incur and service debt and to make capital expenditures. The Trust believes that in order to facilitate a clear understanding of its operating results, FFO should be examined in conjunction with net income (loss) as presented in the financial statements included elsewhere in this report. FFO does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Trust's operating performance or to cash flow as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs and cash distributions. The Trust's calculation of FFO may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs. Included in FFO for the three months ended March 31, 1998, are gains totaling $117,000 resulting from the Trust's sale of investments in marketable equity securities. 14 15 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 periodically reviews the carrying values of the Trust's properties held for sale. Generally accepted accounting principles require that the carrying value of a property held for sale cannot exceed 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 Trust's 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 review of 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 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, financial position, or results of operations. Tax Matters As more fully discussed in the Trust's Annual Report on Form 10-K for the year ended December 31, 1997, the Trust has elected and, in the opinion of the Trust's management, qualified to be taxed as a REIT, as defined under Sections 856 through 860 of the Internal Revenue Code of 1986 (the "Code"). The Code requires a REIT to distribute at least 95% of its REIT taxable income, plus 95% of its net income from foreclosure property, as defined in Section 857 of the Code, on an annual basis to shareholders. 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Impact of the Year 2000 Issue The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Trust's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Trust has initiated an assessment to determine the extent to which the Trust is vulnerable to Year 2000 Issues. Management does not anticipate a material impact on the Trust's business, financial position, or results of operations from the Year 2000 Issue. Possible Consolidation with Tarragon Realty Investors, Inc. On February 19, 1998, the Trust and Tarragon Realty Investors, Inc., ("TRI") jointly announced the agreement of their respective boards to form a single consolidated entity with TRI, for convenience, as the survivor. The surviving consolidated entity is intended to operate as a self-administered REIT. The consolidation transaction will be submitted to shareholders of each of the Trust and TRI for approval at special meetings to be held during 1998. Under the proposed agreement, each shareholder of the Trust will receive 1.97 shares of TRI common stock for each share of beneficial interest of the Trust held. TRI, also a REIT, has a similar opportunistic approach to real estate investment and had total consolidated assets of approximately $37 million as of December 31, 1997. Upon the approval and consummation of the consolidation transaction by the respective shareholders of each entity, TRI will acquire Tarragon Realty Advisors, Inc. ("Tarragon"), the Trust's advisor since April 1, 1994, and TRI's advisor since March 1, 1994, for 100,000 shares of common stock of TRI and options to acquire additional shares of common stock of TRI at prices ranging between $13 and $16 per share. The resulting consolidated enterprise with TRI as the survivor will emerge from these transactions as an integrated, self-administered, self-managed REIT controlling approximately 14,000 apartment units and 2.1 million square feet of retail and office space, primarily in California, Florida, and Texas. The consolidation transaction will be accounted for as a reverse acquisition of TRI by the Trust. William S. Friedman, President, Chief Executive Officer, and Trustee of the Trust, also serves as Director and Chief Executive Officer of Tarragon and as Director, President, and Chief Executive Officer of TRI. Tarragon is owned by Mr. Friedman and his wife, Lucy N. Friedman. The Friedman family also owns approximately 30% of the outstanding shares of common stock of TRI and approximately 33% of the outstanding shares of beneficial interest of the Trust. 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Risks Associated with Forward-Looking Statements Included in this Form 10-Q This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created thereby. These statements include the plans and objectives of management for future operations, including plans and objectives relating to capital expenditures on Trust properties. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Trust. Although the Trust believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Trust or any other person that the objectives and plans of the Trust will be achieved. --------------------------------------------------------------------- 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: None. 17 18 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 12, 1998 By: /s/ William S. Friedman ----------------------- ------------------ William S. Friedman President, Chief Executive Officer, and Trustee Date: May 12, 1998 By: /s/ Robert C. Irvine ----------------------- ------------------ Robert C. Irvine Executive Vice President and Chief Financial Officer Date: May 12, 1998 By: /s/ Erin D. Davis ----------------------- ------------------ Erin D. Davis Vice President and Chief Accounting Officer 18 19 NATIONAL INCOME REALTY TRUST INDEX TO EXHIBITS EXHIBIT 27.0 Financial Data Schedule Page 20
EX-27.0 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 MAR-31-1998 1,421 0 0 (1,194) 0 0 283,791 (48,134) 270,023 0 189,938 0 0 0 69,910 270,023 0 14,256 0 7,406 2,532 0 3,732 131 0 131 0 (262) 0 (131) (.03) (.03)
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