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 SEPTEMBER 30, 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
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(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
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(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 3,251,367
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(Class) (Outstanding at November 8, 1994)
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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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
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
September 30, December 31,
1994 1993
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Assets (dollars in thousands)
------
Notes and interest receivable
Performing.............................................. $ 15,440 $ 15,990
Nonperforming, nonaccruing.............................. 2,552 3,404
--------- ---------
17,992 19,394
Real estate held for sale, net of accumulated
depreciation ($2,612 in 1994 and $2,293 in 1993)........ 19,452 18,496
Less - allowance for estimated losses.................... (11,106) (11,106)
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26,338 26,784
Real estate held for investment, net of accumulated
depreciation ($36,934 in 1994 and $33,535 in 1993)...... 157,383 154,748
Investments in partnerships.............................. 11,135 11,804
Cash and cash equivalents................................ 2,594 1,060
Investment in marketable equity securities of
affiliate............................................... 553 702
Other assets............................................. 5,979 4,388
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$ 203,982 $ 199,486
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes, debentures and interest payable................... $ 122,516 $ 114,351
Other liabilities........................................ 7,000 6,961
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129,516 121,312
Commitments and contingencies............................
Shareholders' equity
Shares of Beneficial Interest, no par value; authorized
shares, unlimited; issued and outstanding, 3,263,267
shares in 1994 and 3,126,116 shares in 1993............. 9,799 9,387
Paid-in capital.......................................... 275,586 274,515
Accumulated distributions in excess of accumulated
earnings................................................ (211,291) (206,180)
Unrealized gains on marketable equity securities......... 372 452
--------- ---------
74,466 78,174
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$ 203,982 $ 199,486
========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements.
2
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------------------- ------------------------------------
1994 1993 1994 1993
------------------ ------------------- ------------------ ----------------
(dollars in thousands, except per share)
Revenue
Rentals........................ $ 9,484 $ 8,848 $ 28,223 $ 25,639
Interest....................... 578 331 1,277 1,068
Equity in income of
partnerships.................. 169 107 161 107
---------- ---------- ---------- ----------
10,231 9,286 29,661 26,814
Expenses
Property operations............ 5,768 5,225 16,493 14,935
Interest....................... 2,486 2,493 7,704 7,843
Depreciation................... 1,280 1,173 3,749 3,453
Advisory fee to affiliate...... 270 - 588 -
Advisory fee to prior advisor.. - 384 468 1,159
General and administrative..... 609 443 1,529 1,271
---------- ---------- ---------- ----------
10,413 9,718 30,531 28,661
---------- ---------- ---------- ----------
(Loss) from operations.......... (182) (432) (870) (1,847)
Gain on sale of real estate..... - - 385 945
Gain on sale of investments..... - - 141 -
---------- ---------- ---------- ----------
Net (loss)...................... $ (182) $ (432) $ (344) $ (902)
========== ========== ========== ==========
Earnings per share
(Loss) from operations......... $ (.06) $ (.12) $ (.26) $ (.52)
Gain on sale of real
estate........................ - - .12 .27
Gain on sale of
investments................... - - .04 -
---------- ---------- ---------- ----------
Net (loss)...................... $ (.06) $ (.12) $ (.10) $ (.25)
========== ========== ========== ==========
Weighted average shares of
beneficial interest used
in computing earnings per
share.......................... 3,277,642 3,486,562 3,320,888 3,544,266
========== ========== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements.
3
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..................... (145,000) (434) (1,363) - - (1,797)
Cash distributions............ - - - (1,487) - (1,487)
Share distributions........... 282,151 846 2,434 (3,280) - -
Unrealized gains on
marketable equity
securities................... - - - - 61 61
Realized gains on sale
of marketable equity
securities................... - - - - (141) (141)
Net (loss).................... - - - (344) - (344)
--------- ------- -------- --------- ------ -------
Balance, September 30, 1994... 3,263,267 $ 9,799 $275,586 $(211,291) $ 372 $74,466
========= ======= ======== ========= ===== =======
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
-------------------
1994 1993
-------- ---------
(dollars in thousands)
Cash Flows from Operating Activities
Rentals collected..................................... $ 27,631 $ 25,627
Interest collected.................................... 1,215 1,004
Interest paid......................................... (7,184) (6,601)
Payments for property operations...................... (17,203) (15,527)
General and administrative expenses paid.............. (1,301) (1,200)
Advisory fee paid to affiliate........................ (579) -
Advisory fee paid to prior advisor.................... (468) (1,170)
Payments for deferred borrowing costs................. (768) (111)
-------- --------
Net cash provided by operating activities............ 1,343 2,022
Cash Flows from Investing Activities
Acquisition of real estate............................ (975) -
Real estate improvements.............................. (1,723) (2,531)
Proceeds from sale of real estate..................... - 360
Fundings of notes receivable.......................... - (329)
Collections on notes receivable....................... 1,124 1,652
Distribution from partnerships' investing activities.. 871 1,746
Distributions from (contributions to) partnerships.... 675 (477)
Proceeds from sale of marketable equity securities.... 210 -
-------- -------
Net cash provided by investing activities............ 182 421
Cash Flows from Financing Activities
Borrowings from financial institutions................ 19,766 1,960
Payments of mortgage notes payable.................... (16,473) (3,114)
Repurchase of shares of beneficial interest........... (1,797) (2,064)
Distributions to shareholders......................... (1,487) (276)
-------- --------
Net cash provided by (used in) financing
activities.......................................... 9 (3,494)
-------- --------
Net increase (decrease) in cash and cash equivalents... 1,534 (1,051)
Cash and cash equivalents, beginning of period......... 1,060 1,750
-------- --------
Cash and cash equivalents, end of period............... $ 2,594 $ 699
======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements.
5
NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months
Ended September 30,
-------------------------
1994 1993
------- --------
(dollars in thousands)
Reconciliation of net (loss) to net cash
provided by operating activities
Net (loss)............................................. $ (344) $(902)
Adjustments to reconcile net (loss) to net
cash provided by operating activities
Gain on sale of real estate........................... (385) (945)
Gain on sale of marketable equity securities.......... (141) -
Depreciation and amortization......................... 3,749 3,453
Equity in income of partnerships...................... (161) (107)
(Increase) in interest receivable..................... (62) (47)
(Increase) in other assets............................ (1,549) (16)
(Decrease) in other liabilities....................... (117) (368)
Increase in interest payable.......................... 353 954
-------- -------
Net cash provided by operating
activities.......................................... $ 1,343 $ 2,022
======= =======
Noncash investing and financing activities
Carrying value of real estate acquired through
foreclosure (in satisfaction of notes receivable
with a carrying value of $297 in 1994 and $5,465
in 1993).............................................. $1,085 $10,121
Note payable from acquisition of real estate........... 3,711 6,651
Share distributions (10% share distributions).......... 3,280 3,007
The accompanying notes are an integral part of these Consolidated Financial Statements.
6
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
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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,
1994 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1994. 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").
Certain 1993 balances have been reclassified to conform to the 1994
presentation.
NOTE 2. INVESTMENTS IN MARKETABLE SECURITIES
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At December 31, 1993, the Trust owned 54,500 shares of beneficial interest of
Continental Mortgage and Equity Trust ("CMET"), purchased through open market
transactions, at a total cost to the Trust of $250,000. In June 1994, the Trust
sold 15,000 shares of beneficial interest of CMET for $210,000 through open
market transactions and, as a result, recorded a $141,000 gain on sale of
investments in the second quarter of 1994. The market value of the remaining
39,500 shares held by the Trust was $553,000 at September 30, 1994. Mr. Willie
K. Davis, a Trustee of the Trust, is also a trustee of CMET.
NOTE 3. INVESTMENTS IN PARTNERSHIPS
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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 Indcon, L.P. ("Indcon"),
formerly known as Adams Properties Associates, which owns 33 industrial
warehouses. The Indcon partnership agreement requires the consent of both the
Trust and CMET for any material changes in the operations of the partnership's
properties, including sales, refinancings and changes in property management.
The Trust, as a noncontrolling partner, accounts for its investment in Indcon
using the equity method.
In May 1994, Indcon sold a warehouse located in Dallas, Texas for $4.4 million
in cash. Indcon received net cash of $2.2 million, of which the Trust's equity
share was $871,000, after the payoff of an existing first mortgage with a
principal balance of $1.8 million and prepayment penalties of $133,000. Indcon
recognized a gain on the sale of $962,000, of which the Trust's equity share was
$385,000. In connection with the sale, a sales commission of $26,100 was paid
to Tarragon Realty Advisors, Inc. ("Tarragon"), the Trust's advisor, based on
the $4.4 million sales price of the property. 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 John A. Doyle, who serves as Director, President and Chief Operating
Officer of Tarragon, and Executive Vice President of the Trust. Mr. Friedman's
family owns approximately 30% of the outstanding shares of the Trust.
NOTE 4. NOTES AND INTEREST RECEIVABLE
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In February 1994, the Trust obtained a judgment against three individual
guarantors of a nonperforming first mortgage note, with a carrying value of $1.0
million and a legal balance of $2.7 million at September 30, 1994,
7
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. NOTES AND INTEREST RECEIVABLE (Continued)
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secured by the Casa Bonita Apartments in Paris, Texas. The Trust is continuing
to negotiate with the borrower on a discounted payout of the judgment.
Regardless of the outcome of these negotiations, the Trust does not anticipate
incurring any loss, as the note has been previously fully reserved.
In March 1994, the United States Bankruptcy Court approved the borrower's plan
of reorganization affecting the Alder Creek mortgage note receivable, secured by
50 acres of developed land located near Sacramento, California. The approved
plan modified the mortgage note to require monthly interest payments at 9% per
annum, increasing to 24% per annum until maturity in June 1999, and called for
principal payments on the note balance as the collateral parcels were sold. In
January 1994, approximately 6 acres of the collateral property was sold for
$252,000, reducing the carrying value of the mortgage note receivable to
$649,000 at such date. In connection with the sale, the Trust accepted a five
year note in the principal amount of $207,000. This new note, secured by the 6
acres sold, also required monthly interest payments at 9% per annum, increasing
to 24% per annum until maturity in June 1999.
In September 1994, the Trust agreed to a modification of the terms of the Alder
Creek first mortgage note receivable and the settlement of the $207,000 note
receivable related to the January 1994 sale, described above. The Trust
received $1.2 million in cash and released all of the collateral other than a
first mortgage on approximately 16 acres. As a result, the Trust recognized
$285,000 of interest income and recovered its carrying value in the Alder Creek
note.
At September 30, 1994, four of the Trust's junior mortgages were classified as
nonperforming, as more fully described below.
A nonperforming junior mortgage note with a carrying value of $256,000 at
September 30, 1994 is secured by a retirement center in Tucson, Arizona. The
borrower on this note, Eldercare Housing Foundation ("Eldercare"), and the Trust
are negotiating a settlement of the note balance. The Trust does not anticipate
incurring a loss on this note in excess of previously established reserves. Ted
P. Stokely, a former Trustee of the Trust, was employed as a real estate
consultant for Eldercare from April 1992 to December 1993.
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, and expects that such settlement will not result in any
loss in excess of previously established reserves.
NOTE 5. REAL ESTATE
- - --------------------
As disclosed in the Trust's 1993 Form 10-K, in January 1993, the Trust ceased
operations at the Lake Highlands Apartments due to a change in zoning of the
property. The Trust did not expect to be able to operate the property as an
apartment complex in the future and, consequently, is in the process of
demolishing the apartment buildings. Negotiations are ongoing to sell the land,
and 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.
8
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. REAL ESTATE (Continued)
- - --------------------
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. In
addition, the Trust has ceased making the required monthly payments on the $1.0
million note payable issued in connection with the original 1991 acquisition of
the Pepperkorn Building. The matter is presently in litigation and a tentative
trial date has been scheduled for December 1994. Based on the information
presently available, the Trust does not anticipate incurring any losses in
excess of previously established reserves.
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
comprising 622 apartment units in Lakeland, Florida; Lexington, Kentucky and
Oklahoma City, Oklahoma. The properties are subject to existing first mortgage
liens totaling $11.6 million. On May 16, 1994, the Trust submitted proposals to
reinstate the mortgages secured by these properties through contributions from
the Trust of approximately $1.1 million and the application of current escrow
balances totaling $275,000. The Trust has obtained the approval of the
Department of Housing and Urban Development ("HUD") for the transfer of physical
assets on the three properties and will complete the acquisitions in the fourth
quarter of 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 and the property
is subject to an existing first mortgage of $3.7 million. This nonrecourse
mortgage has an effective interest rate of 8.6% per annum, requires monthly
principal and interest payments of approximately $31,000 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.
In September 1994, the Trust recorded the acquisition of the Mariposa Manor
Apartments, obtained through a deed in lieu of foreclosure on a $297,000
nonperforming second lien mortgage note receivable. The property, a 41 unit
apartment complex in Los Angeles, California, had an estimated fair value of
$1.1 million as of the date of acquisition and is subject to an existing
$788,000 first lien mortgage, which was modified and assumed on a nonrecourse
basis by the Trust. The modified note initially accrues interest at 6% per
annum and, thereafter, is periodically adjusted based on a defined variable rate
plus 3.25% per annum, with the highest note interest rate not to exceed 15.5%
per annum. Initial monthly principal and interest payments of $5,000 are called
for under the provisions of this note which matures April 1, 2002. The Trust
has included this property in "Real estate held for sale" in the consolidated
financial statements.
NOTE 6. NOTES PAYABLE
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In January 1994, the Trust obtained new first mortgage financing secured by the
Bay West Apartments. The Trust received net cash of $1.0 million after the
payoff of the existing $3.9 million mortgage debt, which was scheduled to mature
in January 1994. The remaining proceeds were used to fund escrows and to pay
real estate taxes and various closing costs associated with the transaction.
This $5.1 million nonrecourse mortgage initially bears interest at 8.89% per
annum, calls for monthly principal and interest payments of $42,400 and matures
in January 2019. 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
9
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. NOTES PAYABLE (Continued)
- - ----------------------
over the remaining term of the loan. The Trust paid a mortgage brokerage and
equity refinancing fee of $15,300 to Basic Capital Management ("BCM"), the
Trust's advisor until March 31, 1994, based on the new mortgage of $5.1
million.
In March 1994, the Trust refinanced the Carlyle Towers Apartments in Southfield,
Michigan. The Trust received net refinancing proceeds of $2.2 million after the
payoff of the existing $2.3 million mortgage debt and related closing costs.
The new $4.5 million nonrecourse mortgage loan bears interest at the London
Interbank Offering Rate ("LIBOR") plus 3.25% and matures in March 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. The Trust paid mortgage brokerage and equity refinancing fees of
$45,000 to BCM based on the new mortgage of $4.5 million.
Also in March 1994, the Trust completed the refinancing of the Woodcreek
Apartments, located in Denver, Colorado. The Trust received net cash of $1.2
million after the payoff of $1.7 million in existing property debt that was
scheduled to mature in October 1994. The remainder of the financing proceeds
were used to pay real estate taxes and the associated closing costs. This $3.0
million nonrecourse mortgage note bears interest at the LIBOR rate plus 3.25%
and matures in March 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 paid a mortgage brokerage
and equity refinancing fee of $30,000 to BCM based upon the new first mortgage
financing of $3.0 million.
In September 1994, the Trust completed the refinancing of the $6.6 million
nonrecourse mortgage note secured by the Lakepointe Apartments in Memphis,
Tennessee. The new $7.2 million nonrecourse mortgage loan bears interest at 9%
per annum and calls for monthly principal and interest payments of $62,000
through maturity in October 2001. The Trust paid net refinancing costs of
$310,000 which included the payoff of the existing $6.6 million first mortgage,
over $650,000 in escrow deposit requirements and other various closing costs.
In connection with the restructured mortgage note payable secured by the Century
Centre II Office Building, in March 1994, the Trust deposited $750,000 in cash
with the lender as additional collateral on the first mortgage. The Trust
subsequently pledged one of its properties held for sale, Stewart Square
Shopping Center, as substitute collateral and the cash collateral funds were
returned to the Trust in July 1994.
On November 8, 1994, the Trust obtained first mortgage financing of $3.0
million, secured by the Palm Court Apartments located in Miami, Florida. The
Trust received net cash of $1.3 million after payment of the existing first
mortgage loan of $1.4 million. The remaining proceeds were used to fund escrow
deposits and pay property taxes and the related loan closing costs. The new
$3.0 million nonrecourse mortgage loan bears interest at 9.7% per annum, with
monthly principal and interest payments of $27,000 and matures December 2004.
On November 5, 1994, the $743,000 first mortgage secured by the Sandstone
Apartments matured. The Trust is currently negotiating to extend the maturity
24 months to November 1996; however, if the negotiations are not successful the
Trust is prepared to payoff the mortgage.
10
NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. DISTRIBUTIONS
- - ----------------------
On August 17, 1994, the Trust's Board of Trustees approved the payment of a 10%
share dividend which was paid September 21, 1994 to shareholders of record on
September 1, 1994. As a result of the share dividend, an additional 282,151
shares were issued and outstanding at September 30, 1994. All share and per
share data have been restated to give effect to this distribution.
NOTE 8. COMMITMENTS AND CONTINGENCIES
- - --------------------------------------
The Trust is involved in various lawsuits arising in the ordinary course of
business. Management of the Trust is of the opinion that the outcome of these
lawsuits would have no material impact on the Trust's financial condition.
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 $2.6 million at September 30, 1994,
compared with $1.1 million at December 31, 1993. The principal reasons for this
increase in cash are discussed in the following paragraphs. 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.
The Trust's cash flow from property operations (rentals collected less payments
for property operating expenses) increased from $10.1 million for the nine
months ended September 30, 1993 to $10.4 million for the nine months ended
September 30, 1994. This increase is primarily attributable to the two
apartment complexes acquired through foreclosure in March 1993, and the
purchase of the Summit on the Lake Apartments in March 1994. These increases
were partially offset by the escrow funding of approximately $650,000 paid in
connection with Lakepointe Apartments refinancing in September 1994.
Interest paid increased from $6.6 million for the nine months ended September
30, 1993 to $7.2 million for the nine months ended September 30, 1994. The
increase is primarily due to mortgage interest paid of $454,000 associated with
the Lakepointe Apartments, which were acquired through foreclosure in March
1993, and the Summit on the Lake Apartments, purchased in March 1994. The
increase is also due to the Trust obtaining first mortgage financing of $2.1
million, secured by the previously unencumbered Bayfront Apartments, in June
1993, and mortgage payments commencing on the first mortgage secured by the
Emerson Center Office Building in June 1994, both of which increased 1994
interest payments an additional $173,000.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- - -------------------------------
These increases are partially offset by the reduction in the variable interest
rate on the mortgage note payable secured by the Pinecrest Apartments.
During fiscal 1994, the Trust incurred expenses of $768,000 in connection with
the refinancing of four Trust properties, as more fully discussed below.
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 in November 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, and the property is subject
to an existing first mortgage of $3.7 million. The Trust has also entered into
contracts for the purchase of two other Dallas, Texas apartment properties and a
Baton Rouge, Louisiana property.
The Trust has made $1.7 million of improvements to its properties during the
nine months ended September 30, 1994, and anticipates an additional $400,000
will be made during the remainder of 1994.
As described in Note 4. "NOTES AND INTEREST RECEIVABLE", the Trust received
$1.2 million as partial settlement on the Alder Creek mortgage note receivable,
of which $285,000 was recorded as interest collected. In addition, the Trust
collected $232,000 as payment in full on one of the Trust's first mortgage notes
receivable.
The Trust and Continental Mortgage and Equity Trust ("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 Indcon, L.P. ("Indcon"), formerly known as Adams
Properties Associates, which owns 33 industrial warehouses. In May 1994,
Indcon sold a warehouse for $4.4 million. Indcon received $2.2 million in cash,
of which the Trust's equity share was $871,000. Mr. Willie K. Davis, a Trustee
of the Trust, is also a trustee of CMET.
During 1994, the Trust obtained first mortgage financing on four Trust
properties totaling $19.8 million, receiving net cash proceeds of $4.1 million
after the payoff of $14.5 million in existing debt ($5.6 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. In addition, the Trust made other mortgage note payments of $2.0
million during 1994, including the first mortgage principal payoff of $143,000,
secured by the Stewart Square Shopping Center in Las Vegas, Nevada. In November
1994, the Trust completed a $3.0 million refinancing on the Palm Court
Apartments, receiving net cash of $1.3 million.
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 subsequently pledged
one of its properties held for sale, Stewart Square Shopping Center, as
substitute collateral and the cash collateral funds were returned to the Trust
in July 1994.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- - -------------------------------
In June 1994, the Trust sold 15,000 shares of beneficial interest of CMET for
$210,000. At September 30, 1994, the Trust owned 39,500 shares of beneficial
interest of CMET, which had a market value at that date of $553,000.
During the nine months ended September 30, 1994, the Trust repurchased 145,000
of its shares of beneficial interest at a cost to the Trust of $1.8 million,
pursuant to a repurchase program originally announced by the Trust on December
5, 1989. The Trust's Board of Trustees authorized the Trust to repurchase a
total of 1,026,667 shares under such repurchase program, of which all 1,026,667
shares have been purchased as of September 30, 1994. On May 19, 1994, the
Trust's Board of Trustee's approved an authorization for the Trust to repurchase
300,000 additional shares of beneficial interest through open market or
negotiated transactions, of which 12,202 shares have been purchased as of
September 30, 1994.
Based on the performance of the Trust's properties, on July 1, 1993, the Trust's
Board of Trustees approved the resumption of regular quarterly distributions to
shareholders. The Trust has paid distributions totaling $1.5 million or $.49
per share during 1994.
Results of Operations
- - ---------------------
For the three and nine months ended September 30, 1994, the Trust had a net loss
of $182,000 and $344,000, respectively, compared with a net loss of $432,000 and
$902,000 for the three and nine months ended September 30, 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 $3.6 million and $10.7 million for the three and nine months ended
September 30, 1993 to $3.7 million and $11.7 million for the three and nine
months ended September 30, 1994. Of these increases, $128,000 and $763,000 are
due to the two apartment complexes acquired through foreclosure in March 1993
and the acquisition of the Summit on the Lake Apartments in March 1994. The
remaining increase for the nine month period is primarily due to higher rental
rates and increased occupancy levels achieved during 1994.
Interest income increased from $331,000 and $1.1 million for the three and nine
month periods ended September 30, 1993 to $578,000 and $1.3 million for the
three and nine month periods ended September 30, 1994. As described in NOTE 4.
"NOTES AND INTEREST RECEIVABLE", interest income increased $285,000 due to the
partial settlement received in September 1994 on the Alder Creek mortgage note
receivable, which had been previously nonperforming.
Interest expense decreased from $7.8 million for the nine month period ended
September 30, 1993 to $7.7 million for the nine month period ended September 30,
1994. This decrease 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. This
decrease is also due to the reduction in the variable interest rate on the note
payable secured by the Pinecrest Apartments. These decreases are offset by
interest expense of $480,000 related to the Lakepointe Apartments acquired
through foreclosure in March 1993 and the acquisition of the Summit on the Lake
Apartments in March 1994. Interest expense also increased due to the
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - -------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- - ---------------------
$2.1 million mortgage financing obtained in June 1993 secured by the previously
unencumbered Bayfront Apartments. Interest expense remained constant at $2.5
million for the three month periods ended September 30, 1994 and 1993,
respectively.
Depreciation expense increased from $1.2 million and $3.5 million for the three
and nine months ended September 30, 1993 to $1.3 million and $3.7 million for
the three and nine months ended September 30, 1994. These increases are
attributable to the two properties acquired through foreclosure in March 1993 as
well as the depreciation of additional improvements of $1.7 million made to the
Trust properties subsequent to September 30, 1993.
General and administrative expense, including advisory fees, increased from
$827,000 and $2.4 million for the three and nine month periods ended September
30, 1993 to $879,000 and $2.6 million for the three and nine month periods ended
September 30, 1994. These increases are due to an increase in expense
reimbursements to Tarragon, which are partially offset by decreases in the
advisory fees to Tarragon, as compared to 1993 fees to Basic Capital Management
("BCM"), the Trust's advisor until March 31, 1994, and decreases in
legal fees related to the Olive litigation, as described in Part II. "OTHER
INFORMATION".
For the nine months ended September 30, 1994, the Trust reported gains on sales
of real estate of $385,000 related to sale of the warehouse by Indcon in May
1994. In addition, the Trust recognized a gain on sale of investments of
$141,000 related to the sale of the 15,000 shares of beneficial interest of
CMET.
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 1993 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - -------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Environmental Matters
- - ---------------------
Under various federal, state and local environmental laws, ordinances and
regulations, the Trust may be potentially liable for removal or remediation
costs, as well as certain other potential costs 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
- - --------------------------------
In May 1993, the Financial Accounting Standards Board ("FASB") 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 notes receivable be
considered impaired when "based on current information and events, it is
probable that a creditor will be unable to collect all amounts due, both
principal and interest, according to the contractual terms of the loan
agreement". Impairment is to be measured either on the present value of
expected future cash flows discounted at the note's effective interest rate or,
if the note is collateral dependent, on the fair value of the collateral. In
October 1994, the FASB issued SFAS No. 118 - "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure" which amends SFAS No.
114. SFAS No. 118 eliminates the income recognition provisions of SFAS No. 114,
substituting disclosure of the creditor's policy of income recognition on
impaired notes. SFAS No. 114 and SFAS No. 118 are both effective for fiscal
years beginning after December 15, 1994. The Trust's management has not fully
evaluated the effects of implementing these statements, but expects that they
will not affect the Trust's interest income recognition policy but may require
the classification of otherwise performing loans as impaired.
--------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- - --------------------------
Olive Litigation. In February 1990, the Trust, together with 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 the operation and management of each of the entities.
On April 23, 1990, the court granted final approval of the terms of the
settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settles subsequent
claims of breaches of the settlement agreement which were asserted by the
plaintiffs and modifies certain provisions of the April 1990 settlement. The
Modification was preliminarily approved by the court on July 1, 1994. At a
hearing held on November 1, 1994, the court indicated that it would enter a
judgment approving the Modification. The Modification shall become effective
15
PART II. OTHER INFORMATION (Continued)
ITEM 1. LEGAL PROCEEDINGS (Continued)
- - --------------------------
at such time as the court's judgment becomes final.
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
requirements for the approval of any transactions with affiliates over the next
five years. In addition, BCM, Gene E. Phillips and William S. Friedman have
agreed to pay a total of $1.2 million to the Trust, CMET, IORT and TCI.
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
persons or entities. The Modification also requires that any 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
(a) Exhibits: The following exhibits are filed herewith:
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K.
None.
16
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: November 14, 1994 By: /s/ William S. Friedman
--------------------- -----------------------------
William S. Friedman
President, Chief Executive
Officer and Trustee
Date: November 14, 1994 By: /s/ Ivan Roth
--------------------- -----------------------------
Ivan Roth
Treasurer and
Chief Financial Officer
Date: November 14, 1994 By: /s/ Katie Jackson
--------------------- -----------------------------
Katie Jackson
Vice President and
Chief Accounting Officer
17