SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1994
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Commission File Number 0-9211
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NATIONAL INCOME REALTY TRUST
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(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.)
3878 Oak Lawn, Suite 300, Dallas, TX 75219
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(Address of Principal Executive Offices) (Zip Code)
(214) 522-9910
--------------------------------
(Registrant's Telephone Number,
Including Area Code)
10670 North Central Expressway, Suite 300, Dallas, TX 75231
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(Former Address)
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 3,007,116
- - ------------------------------ -----------------------------
(Class) (Outstanding at May 11, 1994)
Page 1 of 15
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 the 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
March 31, December 31,
1994 1993
-------- ------------
Assets (dollars in thousands)
--------
Notes and interest receivable
Performing........................................... $ 15,837 $ 15,990
Nonperforming, nonaccruing........................... 3,476 3,404
--------- ---------
19,313 19,394
Real estate held for sale, net of accumulated
depreciation ($2,390 in 1994 and $2,293 in 1993)..... 18,411 18,496
Less - allowance for estimated losses.................. (11,106) (11,106)
--------- ---------
26,618 26,784
Real estate held for investment, net of accumulated
depreciation ($34,597 in 1994 and $33,535 in 1993)... 158,755 154,748
Investments in partnerships............................ 11,774 11,804
Cash and cash equivalents.............................. 919 1,060
Investment in marketable equity securities of
affiliate............................................ 763 702
Other assets........................................... 5,633 4,388
--------- ---------
$ 204,462 $ 199,486
========= =========
Liabilities and Shareholders' Equity
- - ----------------------------------------
Liabilities
Notes, debentures and interest payable................. $ 122,010 $ 114,351
Other liabilities...................................... 5,563 6,961
--------- ---------
127,573 121,312
Commitments and contingencies
Shareholders' equity
Shares of Beneficial Interest, no par value; authorized
shares, unlimited; issued and outstanding, 3,072,916
shares in 1994 and 3,126,116 shares in 1993.......... 9,227 9,387
Paid-in capital........................................ 274,003 274,515
Accumulated distributions in excess of accumulated
earnings............................................. (206,854) (206,180)
Unrealized gains on marketable equity securities....... 513 452
--------- ---------
76,889 78,174
--------- ---------
$ 204,462 $ 199,486
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 2 of 15
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended March 31,
---------------------
1994 1993
------- -------
(dollars in thousands,
except per share)
Revenue
Rentals.............................................. $ 9,143 $ 8,142
Interest............................................. 359 416
Equity in income (loss) of partnerships.............. 85 (28)
--------- ---------
9,587 8,530
Expenses
Property operations.................................. 5,291 4,954
Interest............................................. 2,529 2,756
Depreciation......................................... 1,181 1,093
Advisory fee to affiliate............................ 469 391
General and administrative........................... 351 253
--------- ---------
9,821 9,447
--------- ---------
Net (loss)............................................. $ (234) $ (917)
========= =========
Earnings per share
Net (loss)........................................... $ (.08) $ (.27)
========= =========
Weighted average shares of beneficial interest used in
computing earnings per share........................... 3,093,952 3,350,347
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 3 of 15
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated Unrealized
Shares of Beneficial Distributions Gains on
Interest in Excess of Marketable
-------------------- Paid-in Accumulated Equity Shareholders'
Shares Amount Capital Earnings Securities Equity
--------- ------ -------- ------------ ---------- ------------
(dollars in thousands)
Balance, January 1, 1994....... 3,126,116 $9,387 $274,515 $(206,180) $452 $78,174
Repurchase of shares
of beneficial
interest.................... (53,200) (160) (512) - - (672)
Cash Distributions
($.15 per share)............. - - - (440) - (440)
Unrealized gains on
marketable equity
securities................... - - - - 61 61
Net (loss)..................... - - - (234) - (234)
--------- ------ -------- --------- ---- -------
Balance, March 31, 1994........ 3,072,916 $9,227 $274,003 $(206,854) $513 $76,889
========= ======= ======== ========= ===== =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 4 of 15
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
----------------------
1994 1993
-------- --------
(dollars in thousands)
Cash Flows from Operating Activities
Rentals collected........................................... $ 8,995 $ 8,119
Interest collected.......................................... 325 384
Interest paid............................................... (2,306) (1,803)
Payments for property operations............................ (6,973) (5,593)
General and administrative expenses paid.................... (356) (379)
Advisory fee paid to affiliate.............................. (569) (367)
Other....................................................... - 259
------- -------
Net cash provided by (used in) operating activities....... (884) 620
Cash Flows from Investing Activities
Acquisition of real estate.................................. (975) -
Real estate improvements.................................... (305) (1,185)
Fundings of notes receivable................................ (207) -
Collections on notes receivable............................. 210 1,647
Contributions to partnerships............................... 115 (298)
------- -------
Net cash provided by (used in) investing
activities............................................. (1,162) 164
Cash Flows from Financing Activities
Borrowings from financial institutions...................... 12,600 112
Payments of mortgage notes payable.......................... (8,833) (1,960)
Repurchase of shares of beneficial interest................. (672) (1,095)
Distributions to shareholders............................... (440) -
Cash collateral deposited................................... (750) -
Advances from affiliate..................................... - 1,043
------- -------
Net cash provided by (used in) financing
activities.............................................. 1,905 (1,900)
------- -------
Net (decrease) in cash and cash equivalents................... (141) (1,116)
Cash and cash equivalents, beginning of period................ 1,060 1,750
------- -------
Cash and cash equivalents, end of period...................... $ 919 $ 634
======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 5 of 15
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Three Months
Ended March 31,
---------------------
1994 1993
--------- ---------
(dollars in thousands)
Reconciliation of net (loss) to net cash
provided by operating activities
Net (loss).................................................... $ (234) $ (917)
Adjustments to reconcile net (loss) to net
cash provided by operating activities
Depreciation and amortization............................... 1,306 1,084
(Increase) in interest receivable........................... (17) (23)
(Increase) decrease in other assets......................... (352) 331
(Decrease) in other liabilities............................. (1,676) (751)
Equity in (income) losses of partnerships................... (85) 28
Increase in interest payable................................ 174 868
------- -------
Net cash provided by (used in) operating
activities............................................. $ (884) $ 620
======= =======
Noncash investing and financing activities
Carrying value of real estate acquired through
foreclosure (in satisfaction of notes receivable
with a carrying value of $5,465).......................... $ - $10,082
Note payable from acquisition of real estate................ 3,711 6,651
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 6 of 15
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1994
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1994. Dollar amounts in tables are in thousands. 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, 1993 ("1993 Form 10-K").
NOTE 2. NOTES AND INTEREST RECEIVABLE
- - ---------------------------------------
On February 25, 1994, the Trust obtained a $2.4 million judgment against the
three individual guarantors of a previously nonperforming first mortgage loan,
secured by the Casa Bonita Apartments located in Paris, Texas. Interest at the
rate of 18% per annum accrues on the judgment until paid in full. The Trust
continues to negotiate with the borrower on payment terms of the note. The
Trust does not anticipate incurring a loss in excess of previously established
reserves on this note.
During March 1994, a first mortgage loan with a carrying value of $227,000
became nonperforming. The collateral property securing the note receivable, a
residence in Kauai, Hawaii, was sold during the quarter and the Trust
anticipates collection of the sales proceeds during May 1994. The Trust expects
that such settlement will not result in any loss in excess of previously
established reserves.
On March 4, 1994, the United States Bankruptcy Court confirmed the borrowers'
plan of reorganization affecting the Alder Creek mortgage note receivable with a
carrying value of $702,000 and a legal balance of $1.2 million at March 31,
1994. The note receivable is secured by 32 acres of developed land located near
Sacramento, California. The approved plan calls for principal payments on the
note balance as the collateral parcels are sold and requires monthly interest
payments at 9% per annum increasing to 24% per annum until maturity on June 1,
1999. On January 26, 1994, approximately 6 acres of the collateral property was
sold for $45,000 cash and a $207,000 promissory note, which also requires
monthly interest payments at 9% per annum, increasing to 24% per annum until
maturity in February 1999. In accordance with the terms of the restructured
note, the mortgage note received for the sale of the released parcel was applied
to reduce the principal balance of the Alder Creek note receivable.
At March 31, 1994, four of the Trust's junior mortgages were classified as
nonperforming, as more fully described below.
A nonperforming junior mortgage note with a principal balance of $256,000 at
March 31, 1994 is secured by a retirement center in Tuscon, Arizona. The
borrower on this note, Eldercare Housing Foundation ("Eldercare"), is currently
in bankruptcy. The Trust does not anticipate incurring losses on this note in
excess of previously established reserves. Ted P. Stokely, a Trustee of the
Trust, was employed as a real estate consultant for Eldercare from April 1992 to
December 1993.
Page 7 of 15
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
- - --------------------------------------
The three remaining nonperforming junior mortgage notes have an aggregate
principal balance of $1.3 million and were acquired in a package of similar
loans in 1991. All three loans are secured by shopping centers net leased to a
major national tenant. The Trust is currently negotiating a settlement of these
loans with the owners. The Trust expects that such settlement will not result
in any loss in excess of previously established reserves.
NOTE 3. REAL ESTATE
- - --------------------
As disclosed in the Trust's 1993 Form 10-K, in January 1993, the Trust was
forced to shut down the Lake Highlands Apartments as a result of a change in
zoning of the property. The Trust does not expect to be able to operate the
property as an apartment complex in the future. Based on the land value under
the current zoning, the Trust does not anticipate incurring a loss in excess of
previously established reserves.
Also as disclosed in the Trust's 1993 Form 10-K, in 1993, the State of Wisconsin
commenced eminent domain proceedings to acquire the Pepperkorn Building, located
in Manitowoc, Wisconsin, for highway development. The State of Wisconsin's
initial offer was $175,000, which is being appealed by the Trust. There is no
assurance that the Trust's appeal will be successful or of the amount, if any,
of additional compensation that it may receive. However, based on the
information presently available, the Trust does not anticipate incurring any
losses in excess of previously established reserves.
On March 28, 1994, the Trust paid $300,000 in cash to exercise its option to
acquire, through a transfer of general partner interests and stock of limited
partners, certain limited partnerships which own three residential properties
comprising 600 apartment units in Lakeland, Florida; Lexington, Kentucky and
Oklahoma City, Oklahoma. The properties are subject to existing first mortgage
liens totaling $11.6 million. The Trust is seeking the approval of the
Department of Housing and Urban Development ("HUD") for the transfer of physical
assets on the three properties with the approval expected in June 1994.
On March 30, 1994, the Trust purchased the Summit on the Lake Apartments located
in Fort Worth, Texas. The Trust paid $675,000 in cash, subject to the existing
first mortgage of $3.7 million. The mortgage accrues interest at 7.5% per annum
and matures September 2007. In connection with the acquisition, the Trust paid
$176,000 of real estate brokerage and acquisition commissions, based upon the
$4.4 million purchase price of the property, to Tarragon Realty Advisors
("Tarragon"), the Trust's advisor. William S. Friedman, the President and a
Trustee of the Trust serves as Director and Chief Executive Officer of Tarragon.
Tarragon is owned by Lucy N. Friedman, Mr. Friedman's wife, and Mr. Doyle, who
serves as Director, President and Chief Operating Officer of Tarragon and
Trustee and Executive Vice President of the Trust. Mr. Friedman's family owns
approximately 30% of the outstanding shares of the Trust.
NOTE 4. NOTES PAYABLE
- - ----------------------
The $1.6 million first mortgage secured by the Palm Court Apartments, located in
Miami, Florida, matured in July 1993. Prior to the maturity, the Trust obtained
the lender's written agreement to extend the note. Thereafter, the lender
refused to execute the extension documents and repeatedly rejected the Trust's
tender of mortgage payments in accordance with the extension ageement. The
matter is presently in litigation. If adversely determined, the Trust intends
to repay the mortgage debt in full.
Page 8 of 15
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. NOTES PAYABLE (Continued)
- - ----------------------
During the first quarter of 1994, the Trust obtained first mortgage financing on
three Trust properties totaling $12.6 million, as more fully discussed below.
The Trust received net cash of $4.5 million after the payoff of $7.8 million in
existing debt ($3.9 million of which matured in 1994). The remainder of the
financing proceeds were used to fund escrows for replacements and repairs and to
pay closing costs associated with the refinancing. The Trust paid mortgage
brokerage and equity refinancing fees of $90,300 to Basic Capital Management
("BCM"), the Trust's advisor, until March 31, 1994, based upon the new mortgage
financing of $12.6 million.
Bay West Apartments in Bradenton, Florida secures a $5.1 million nonrecourse
mortgage which matures January 2019. This mortgage initially bears interest at
8.89% per annum and calls for monthly principal and interest payments of
$42,416. Interest, after the first ten years of the loan, is based on the
United States Treasury Rate and the monthly principal and interest payment will
be calculated in a constant amount to amortize the unpaid balance over the
remaining term of the loan.
Carlyle Towers Apartments in Southfield, Michigan secures a $4.5 million
nonrecourse mortgage loan which bears interest at the London Interbank Offering
Rate ("LIBOR") plus 3.25% and matures March 13, 1999. This mortgage loan calls
for monthly payments equal to the greater of interest due or $33,750, and
requires the principal balance be reduced by no less than $175,000 each year.
Woodcreek Apartments, located in Denver, Colorado, secures a $3.0 million
nonrecourse mortgage note which bears interest at the LIBOR rate plus 3.25% and
matures March 22, 1999. This loan also calls for monthly payments equal to the
greater of interest due or $22,500, and requires the principal balance be
reduced by no less than $50,000 each year.
The Trust extended two first mortgage loans totaling $1.6 million during the
first quarter of 1994. The $590,000 first mortgage loan secured by the Flannery
House Apartments in Baton Rouge, Louisiana, was extended one year to March 31,
1995 and the interest rate was reduced from 11% per annum to 8.75% per annum.
Also, in February 1994, the $1.0 million first mortgage loan secured by the
Mountain View Shopping Center was extended six months to September 1, 1994 and
all other terms remained constant.
On March 23, 1994, the Trust paid in full the first mortgage principal balance
and all accrued interest of $143,000 secured by the Stewart Square Shopping
Center in Las Vegas, Nevada.
In connection with the restructured mortgage note payable, secured by the
Century Centre II Office Building, the Trust deposited $750,000 in cash with the
lender as additional collateral on the first mortgage. The Trust has since
pledged one of its properties held for sale, Stewart Square Shopping Center, as
substitute collateral and anticipates a return of the cash collateral funds in
June 1994.
NOTE 5. COMMITMENTS AND CONTINGENCIES
- - ----------------------------------------
Olive Litigation. In February 1990, the Trust, together with Continental
Mortgage and Equity Trust ("CMET"), Income Opportunity Realty Trust ("IORT") and
Transcontinental Realty Investors, Inc. ("TCI"), three real estate entities
with, at the time, the same officers, directors or trustees and advisor as the
Trust, entered into a settlement of a class and derivative action entitled Olive
et al. v. National Income Realty Trust et al., relating to
Page 9 of 15
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. COMMITMENTS AND CONTINGENCIES (Continued)
- - --------------------------------------
the operation and management of each of the entities. On April 23, 1990, the
court granted final approval of the terms of the settlement. By agreeing to
settle these actions, the defendants, including the Trust, did not and do not
admit any liability whatsoever.
In February and April 1993, evidentiary hearings were held concerning
allegations by the plaintiffs that the terms of the settlement had been breached
by the Trust, CMET, IORT, and TCI. No determination on the matters was made by
the court due to settlement discussions entered into among the parties.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settles the claims
asserted by the plaintiffs and modifies certain provisions of the April 1990
settlement. The Modification is subject to shareholder notice and final court
approval.
The Modification, among other things, provides for the addition of three new
unaffiliated members to the Trust's Board of Trustees and sets forth new, highly
restrictive requirements for the approval of any transactions with affiliates
over the next five years. In addition, Basic Capital Management, Inc., the
Trust's former advisor, Gene E. Phillips and William S. Friedman have agreed to
pay a total of $1.2 million to the Trust, CMET, IORT and TCI. The Trust's share
of this payment will be approximately $201,600.
Under the Modification, the Trust, CMET, IORT, TCI and their shareholders will
release the defendants from any claims relating to the plaintiffs' allegations.
The Trust, CMET, IORT, and TCI have also agreed to waive any demand requirement
for the plaintiffs to pursue claims on behalf of each of them against certain
unaffiliated persons or entities. The Modification also requires that the
shares of the Trust held by Messrs. Phillips, Friedman or their affiliates shall
be (i) voted in favor of the reelection of all current Board members that stand
for reelection during the two calendar years following the effective date of the
Modification and (ii) voted in favor of all new Board members appointed pursuant
to the terms of the Modification that stand for reelection during the three
calendar years following the effective date of the Modification. The
Modification also terminates a number of the provisions of the Stipulation of
Settlement, including the requirement that the Trust, CMET, IORT and TCI
maintain a Related Party Transaction Committee and a Litigation Committee of
their respective Boards.
The court will retain jurisdiction to enforce the Modification.
NOTE 6. SUBSEQUENT EVENT
- - -------------------------
The Trust and CMET are partners in Income Special Associates ("ISA"), a joint
venture partnership in which the Trust has a 40% interest in earnings, losses
and distributions. ISA in turn owns a 100% interest in Adams Properties
Associates ("APA"), which owns 33 industrial warehouses. On May 11, 1994, APA
sold a warehouse located in Dallas, Texas for $4.4 million. APA received $2.1
million in cash, of which the Trust's equity share was $850,000, after the
payoff of an existing first mortgage with a principal balance of $1.8 million.
In connection with the sale, a sales commission of $26,100 was paid to Tarragon.
Page 10 of 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 in mortgages secured by real estate.
The Trust was organized on October 31, 1978 and commenced operations on March
27, 1979.
Liquidity and Capital Resources
- - -------------------------------
Cash and cash equivalents aggregated $919,000 at March 31, 1994, compared with
$1.1 million at December 31, 1993. The principal reasons for this decrease in
cash, other than property improvement expenditures of $305,000, are discussed in
the paragraphs below. The Trust's principal sources of cash have been and will
continue to be property operations, proceeds from property sales, the collection
of mortgage notes receivable and borrowings. The Trust expects that funds from
such sources will be sufficient to meet the Trust's various cash needs,
including, but not limited to debt service obligations, property maintenance and
improvements and shareholder distributions.
On July 1, 1993, the Trust's Board of Trustees approved the resumption of
regular quarterly distributions. A distribution of $440,000, $.15 per share,
was paid on March 17, 1994 to shareholders of record as of February 28, 1994.
The Trust's cash flow from property operations (rentals collected less payments
for property operating expenses) decreased from $2.5 million for the first
quarter of 1993 as compared to $2.0 million for the corresponding period in
1994. While rentals collected increased $876,000, primarily due to the two
apartment properties acquired through foreclosure in March 1993, payments made
for property operations increased $1.4 million. This increase is attributable
to approximately $1.0 million of prior year real estate taxes paid during the
first quarter of 1994.
In March 1994, the Trust paid $300,000 in cash to exercise its option to
acquire, through a transfer of general partner interests and stock of limited
partners, certain limited partnerships which own three residential properties.
The Trust anticipates the transfer of physical assets during June 1994. Also in
March 1994, the Trust purchased the Summit on the Lake Apartments located in
Fort Worth, Texas. The Trust paid $675,000 in cash, subject to the existing
first mortgage of $3.7 million.
During the quarter ended March 31, 1994, the Trust obtained first mortgage
financing on three Trust properties totaling $12.6 million, receiving net cash
proceeds of $4.5 million after the payoff of $7.8 million in existing debt ($3.9
million of which matured in 1994). The remainder of the financing proceeds were
used to fund escrows for replacements and repairs and to pay closing costs
associated with the refinancing. The Trust intends to increase its emphasis on
obtaining financing or refinancing of its properties. However, there is no
assurance that the Trust will continue to be successful in its efforts in this
regard.
In addition, the Trust paid off a $143,000 mortgage note payable, on March 23,
1994, which was secured by the Stewart Square Shopping Center in Las Vegas,
Nevada.
Page 11 of 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- - -------------------------------
In connection with the restructured mortgage note payable, secured by the
Century Centre II Office Building, the Trust deposited $750,000 in cash with the
lender as additional collateral on the first mortgage. The Trust has since
pledged one of its properties held for sale, Stewart Square Shopping Center, as
substitute collateral and anticipates a return of the cash collateral funds in
June 1994.
During the three months ended March 31, 1994, the Trust repurchased 53,200 of
its shares of beneficial interest at a cost to the Trust of $672,410, pursuant
to a repurchase program originally announced by the Trust on December 5, 1989.
In April, the Trust purchased an additional 33,000 shares at a cost to the Trust
of $414,490. The Trust's Board of Trustees authorized the Trust to repurchase a
total of 1,026,667 shares under such repurchase program, of which 980,069 shares
have been purchased as of April 30, 1994.
At March 31, 1994, the Trust owned 54,500 shares of beneficial interest of
Continental Mortgage and Equity Trust ("CMET"), which had a market value at that
date of $763,000. A majority of the Trustees of the Trust are also trustees of
CMET.
Results of Operations
- - ---------------------
For the three months ended March 31, 1994, the Trust had a net loss of $234,000,
compared with a net loss of $917,000 for the three months ended March 31, 1993.
The primary factors contributing to the decrease in the Trust's net loss are
discussed in the following paragraphs.
Net rental income (rental income less property operating expenses) increased
from $3.2 million for the three months ended March 31, 1993 to $3.9 million for
the three months ended March 31, 1994. This increase is due to the addition of
the Lake Point Apartments in Memphis, Tennessee and the Huntington Green
Apartments in West Town, Pennsylvania, obtained through foreclosure in March
1993.
Equity in income (loss) of partnerships was income of $85,000 for the first
quarter of 1994 as compared to a loss of $28,000 for the first quarter of 1993.
This increase is primarily due to the equity income of $46,000 for the first
quarter of 1994 recorded for the Trust's investment in English Village Partners,
L.P. ("English Village") which increased to a 50% interest in July 1993. The
Trust recorded no equity income for English Village in the first quarter of
1992.
Interest expense decreased from $2.8 million for the three months ended March
31, 1993 to $2.5 million for the three months ended March 31, 1994. Of this
decrease, $295,000 is attributable to the reduction in the interest rate on the
first mortgage secured by the Century Centre II Office Building and the purchase
of the second mortgage at a significant discount in 1993. In addition, $86,000
of the decrease is due to a reduction in the variable interest rate on the note
payable secured by Pinecrest Apartments.
Depreciation expense increased from $1.1 million for the three months ended
March 31, 1993 to $1.2 million for the three months ended March 31, 1994. This
increase is primarily due to the two apartment complexes obtained through
foreclosure in March 1993.
Page 12 of 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations ( Continued)
- - ---------------------
The Trust's management, on a quarterly basis, reviews the carrying value of the
Trust's mortgage loans, properties held for investment and properties held for
sale. Generally accepted accounting principles require that the carrying value
of an investment cannot exceed its cost or its estimated net realizable value.
In those instances in which estimates of net realizable value of the Trust's
properties are less than the carrying value thereof at the time of evaluation, a
provision for loss is recorded by a charge against operations. The estimate of
net realizable value of the mortgage loans is based on management's review and
evaluation of the collateral properties securing the mortgage loans. The review
generally includes selective property 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 manager of the property
and a review of the surrounding area. Future quarterly reviews could cause the
Trust's management to adjust current estimates of net realizable value.
Income Tax Aspects
- - ------------------
As more fully discussed in the Trust's 1992 Form 10-K, the Trust has elected
and, in the opinion of the Trust's management, qualified to be taxed as a Real
Estate Investment Trust ("REIT") as defined under Sections 856 through 860 of
the Internal Revenue Code of 1986, 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.
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 relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
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.
Recent Accounting Pronouncements
- - --------------------------------
The Financial Accounting Standards Board ("FASB") has recently issued Statement
of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors
for Impairment of a Loan", which amends SFAS No. 5 - "Accounting for
Contingencies" and SFAS No. 15 - "Accounting by Debtors and Creditors for
Troubled Debt Restructurings." The statement requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate. SFAS No. 114 is effective for fiscal years
beginning after December 15, 1994. The Trust's management has not fully
evaluated the effects of implementing this statement, but expects that they will
not be material as the statement is applicable to debt restructurings after the
earlier of the effective date of the statement or the Trust's adoption of the
statement.
Page 13 of 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Recent Accounting Pronouncements (Continued)
- - --------------------------------
The FASB has also recently issued SFAS No. 115 - "Accounting for Certain
Investments in Debt and Equity Securities", which supersedes SFAS No. 12 -
"Accounting for Certain Marketable Securities", and requires that certain
marketable debt and equity securities be reported at fair value, with unrealized
gains and losses either included in earnings or reported as a separate component
of shareholder's equity. The Trust adopted SFAS No. 115 effective December 31,
1993, and the impact of the adoption was a $61,000 unrealized gain included in
shareholders equity for the three months ended March 31, 1994.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- - --------------------------
See NOTE 5. "COMMITMENTS AND CONTINGENCIES" of Notes to the Consolidated
Financial Statements in Part I for information relating to legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K as follows:
None.
Page 14 of 15
SIGNATURE PAGE
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 20, 1994 By:/s/ William S. Friedman
------------------- ------------------------------
William S. Friedman
President, Chief Executive
Officer and Trustee
Date: May 20, 1994 By:/s/ Ivan Roth
------------------- ------------------------------
Ivan Roth
Treasurer and
Chief Financial Officer
Date: May 20, 1994 By:/s/ Katie Jackson
------------------- ------------------------------
Katie Jackson
Vice President and
Chief Accounting Officer
Page 15 of 15