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, 1995
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 3,162,267
- -------------------------------------------- ----------------------------
(Class) (Outstanding at May 5, 1995)
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements for the period ended March
31, 1995 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 the Trust's consolidated financial position, consolidated
results of operations and consolidated cash flows at the dates and for the
periods indicated, have been included.
NATIONAL INCOME REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
------------------- -------------------
1995 1994
------------------- -------------------
(unaudited) (audited)
Assets
------
Real Estate
Held for investment, net of accumulated depreciation
($39,937 in 1995 and $38,532 in 1994) . . . . . . . . . . . $ 178,903 $ 179,086
Held for sale, net of accumulated depreciation
($934 in 1995 and $895 in 1994) . . . . . . . . . . . . . . 6,826 6,850
------------------ ------------------
185,729 185,936
Less - allowance for estimated losses . . . . . . . . . . . . . . (700) (700)
------------------ ------------------
185,029 185,236
Notes and interest receivable
Performing . . . . . . . . . . . . . . . . . . . . . . . . . . 14,771 14,762
Nonperforming, nonaccruing . . . . . . . . . . . . . . . . . . 1,507 1,509
------------------ ------------------
16,278 16,271
Less - allowance for estimated losses . . . . . . . . . . . . . . (6,274) (6,274)
------------------ ------------------
10,004 9,997
Investments in partnerships . . . . . . . . . . . . . . . . . . . 10,953 11,026
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 4,428 3,484
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . 3,315 3,222
Investment in marketable equity securities . . . . . . . . . . . - 593
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 3,520 3,482
------------------ ------------------
$ 217,249 $ 217,040
================== ==================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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NATIONAL INCOME REALTY TRUST
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
March 31, December 31,
----------------- ----------------
1995 1994
----------------- ----------------
(unaudited) (audited)
Liabilities and Shareholders' Equity
------------------------------------
Liabilities
Notes, debentures and interest payable . . . . . . . . . . . . . $ 139,542 $ 138,316
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 5,743 5,364
------------------- ------------------
145,285 143,680
Commitments and contingencies
Shareholders' equity
Shares of beneficial interest, no par value; authorized
shares, unlimited; 3,178,267 shares outstanding in 1995
and 3,216,267 shares outstanding in 1994 (after
deducting 325,875 shares in 1995 and 287,875 shares
in 1994 held in treasury) . . . . . . . . . . . . . . . . . . . 9,543 9,657
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 274,847 275,178
Accumulated distributions in excess of
accumulated earnings . . . . . . . . . . . . . . . . . . . . . (212,426) (211,887)
Unrealized gains on marketable equity securities . . . . . . . . - 412
------------------- ------------------
71,964 73,360
------------------- ------------------
$ 217,249 $ 217,040
=================== ==================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
For the Three Months Ended
March 31,
------------------------------------------
1995 1994
------------------ ------------------
(unaudited) (unaudited)
Income
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,488 $ 9,159
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 343
Equity in income of partnerships . . . . . . . . . . . . . . . . . 190 85
--------------- ---------------
10,978 9,587
Expenses
Property operations . . . . . . . . . . . . . . . . . . . . . . . . 6,031 5,291
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,071 2,529
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,444 1,181
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 -
Advisory fee to prior advisor . . . . . . . . . . . . . . . . . . . - 468
General and administrative . . . . . . . . . . . . . . . . . . . . 473 352
--------------- ---------------
11,315 9,821
--------------- ---------------
(Loss) before gain on sale of investments . . . . . . . . . . . . . . (337) (234)
Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . 412 -
--------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75 $ (234)
=============== ===============
Earnings per share
(Loss) before gain on sale of investments . . . . . . . . . . . . . . $ (.11) $ (.07)
Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . .13 -
--------------- ---------------
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . $ .02 $ (.07)
=============== ===============
Weighted average shares of beneficial interest used in
computing earnings per share . . . . . . . . . . . . . . . . . . . 3,190,209 3,376,103
=============== ===============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Accumulated Unrealized
Shares of Distributions Gains on
Beneficial Interest in Excess of Marketable
--------------------- Paid-in Accumulated Equity Shareholders'
Shares Amount Capital Earnings Securities Equity
-------- -------- -------------- --------------- ------------- ----------------
Balance, January 1, 1995 . . . 3,216,267 $ 9,657 $ 275,178 $ (211,887) $ 412 $ 73,360
Repurchase of shares
of beneficial interest . . . (38,000) (114) (331) - - (445)
Cash distribution
declared ($0.19 per share) . - - - (614) - (614)
Realized gains on sale of
marketable equity securities - - - - (412) (412)
Net income . . . . . . . . . . - - - 75 - 75
--------- ------- --------- ---------- -------- ---------
Balance, March 31, 1995 . . . . 3,178,267 $ 9,543 $ 274,847 $ (212,426) $ - $ 71,964
========= ======= ========= ========== ======== =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Three Months Ended
March 31,
------------------------------------
1995 1994
----------------- ------------------
(unaudited) (unaudited)
Cash Flows from Operating Activities
Rentals collected . . . . . . . . . . . . . . . . . . . . . . . $ 10,537 $ 8,995
Interest collected . . . . . . . . . . . . . . . . . . . . . . 287 325
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . (3,018) (2,306)
Payments for property operations . . . . . . . . . . . . . . . (6,459) (6,151)
General and administrative expenses paid . . . . . . . . . . . (606) (580)
Advisory fee paid to affiliate . . . . . . . . . . . . . . . . (271) (100)
Advisory fee paid to prior advisor . . . . . . . . . . . . . . - (469)
Deferred borrowing costs . . . . . . . . . . . . . . . . . . . (345) (350)
---------------- ---------------
Net cash provided by (used in) operating activities . . . . 125 (636)
Cash Flows from Investing Activities
Acquisition of real estate . . . . . . . . . . . . . . . . . . (380) (975)
Real estate improvements . . . . . . . . . . . . . . . . . . . (956) (305)
Collections on notes receivable . . . . . . . . . . . . . . . . 5 3
Sale of investments . . . . . . . . . . . . . . . . . . . . . . 593 -
Distributions from partnerships . . . . . . . . . . . . . . . . 263 115
---------------- ---------------
Net cash (used in) investing activities . . . . . . . . . . (475) (1,162)
Cash Flows from Financing Activities
Borrowings from financial institutions . . . . . . . . . . . . 5,800 12,600
Payments of mortgage notes payable . . . . . . . . . . . . . . (4,383) (8,833)
Payments to prior advisor . . . . . . . . . . . . . . . . . . . - (494)
Repurchase of shares of beneficial interest . . . . . . . . . . (445) (672)
Borrowings on margin account . . . . . . . . . . . . . . . . . 320 472
Replacement escrow deposits, net . . . . . . . . . . . . . . . 2 (226)
Distributions to shareholders . . . . . . . . . . . . . . . . . - (440)
Cash collateral deposited . . . . . . . . . . . . . . . . . . . - (750)
---------------- ---------------
Net cash provided by financing activities . . . . . . . . . 1,294 1,657
---------------- ---------------
Net increase (decrease) in cash and cash equivalents . . . . . . 944 (141)
Cash and cash equivalents, beginning of period . . . . . . . . . 3,484 1,060
---------------- ---------------
Cash and cash equivalents, end of period . . . . . . . . . . . . $ 4,428 $ 919
================ ===============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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NATIONAL INCOME REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
For the Three Months Ended
March 31,
--------------------------------------
1995 1994
----------------- ------------------
(unaudited) (unaudited)
Reconciliation of net income (loss) to net
cash provided by (used in) operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 75 $ (234)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Gain on sale of investments . . . . . . . . . . . . . . . . . . (412) -
Depreciation and amortization . . . . . . . . . . . . . . . . . 1,543 1,306
Equity in (income) of partnerships . . . . . . . . . . . . . . (190) (85)
(Increase) in interest receivable . . . . . . . . . . . . . . . (13) (17)
(Increase) decrease in other assets . . . . . . . . . . . . . . (359) 121
(Decrease) in other liabilities . . . . . . . . . . . . . . . . (486) (1,901)
Increase (decrease) in interest payable . . . . . . . . . . . . (33) 174
----------------- ----------------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . . . . $ 125 $ (636)
================= ================
Schedule of noncash investing activities
Note payable from acquisition of real estate . . . . . . . . . $ - $ 3,711
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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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, 1995
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1995. 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, 1994 ("1994 Form 10-K").
Certain 1994 balances have been reclassified to conform to the 1995
presentation.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Accounting changes. Effective January 1, 1995, the Trust adopted, as required,
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. The
Trust also adopted, as required, SFAS No. 118 - "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure", which eliminates the
income recognition provisions of SFAS No. 114, substituting disclosure of the
creditor's policy of income recognition on impaired notes. There was no
cumulative effect nor any impact on the Trust's financial position as a result
of the adoptions.
NOTE 3. INVESTMENTS IN PARTNERSHIPS
The Trust's investments in partnerships, accounted for using the equity method,
consisted of the following at March 31, 1995:
Sacramento Nine ("SAC 9") . . . . . . . . . . . $ 2,149
Indcon, L.P. ("Indcon") . . . . . . . . . . . . 8,660
Other . . . . . . . . . . . . . . . . . . . . . 144
--------
$ 10,953
========
The Trust, in partnership with Continental Mortgage and Equity Trust ("CMET"),
owns SAC 9, which currently owns two office buildings in the vicinity of
Sacramento, California. The Trust has a 70% interest in the partnership's
earnings, losses and distributions. The SAC 9 partnership agreement requires
unanimous 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 the partnership under the equity method.
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NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 3. INVESTMENTS IN PARTNERSHIPS (Continued)
The Trust and CMET are also 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, formerly known as Adams Properties Associates, which owned 32 industrial
warehouses at March 31, 1995. The Trust, as a noncontrolling partner, accounts
for its investment in Indcon using the equity method.
The following information summarizes the results of operations of these
partnerships the Trust accounts for using the equity method for the three
months ended March 31, 1995:
Rentals . . . . . . . . . . . . . . . . . . . . $ 2,400
Depreciation . . . . . . . . . . . . . . . . . . (612)
Property operations . . . . . . . . . . . . . . (723)
Interest . . . . . . . . . . . . . . . . . . . . (743)
---------
Net income . . . . . . . . . . . . . . . . . . . $ 322
=========
NOTE 4. NOTES AND INTEREST RECEIVABLE
As disclosed in the Trust's 1994 Form 10-K, in January 1995, the Trust agreed
to a modification of the terms of a $1.5 million first mortgage note
receivable, secured by 4.5 acres of land (subject to a ground lease) in Dallas,
Texas. In accordance with the modified terms, the Trust released part of the
land securing the loan (approximately 15,000 square feet) and in exchange, the
ground lease was terminated. Additionally, the mortgage interest rate was
increased from 15% per annum to 18% per annum and the maturity date was
shortened 20 months from September 1997 to January 1996.
NOTE 5. REAL ESTATE
Also as disclosed in the Trust's 1994 Form 10-K, in February 1995, the Trust
purchased the Park Side Apartments, a 39-unit apartment complex in Los Angeles,
California for $376,000 in cash. In connection with the acquisition and in
accordance with the advisory agreement dated February 15, 1994 ("Advisory
Agreement"), the Trust paid Tarragon Realty Advisors, Inc. ("Tarragon") a 1%
real estate acquisition fee of $3,750.
NOTE 6. INVESTMENTS IN MARKETABLE SECURITIES
At December 31, 1994, the Trust owned 39,500 shares of beneficial interest of
CMET, purchased through open market transactions in 1990 and 1991, at a total
cost to the Trust of $181,000. During the first quarter of 1995, the Trust
sold these shares for $593,000 and, as a result, recorded a $412,000 gain on
sale of investments.
NOTE 7. NOTES PAYABLE
In January 1995, the Trust obtained first mortgage financing secured by the
Cross Creek Apartments in the amount of $2.0 million. The Trust received net
refinancing proceeds of $884,000 after the payoff of the existing first
mortgage loan of $973,000. The remainder of the refinancing proceeds were used
to fund escrows for repairs, property taxes and insurance and to pay the
associated closing costs. The new $2.0 million nonrecourse mortgage loan bears
interest at 9.8% per annum, calls for monthly principal and interest payments
of $17,850
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NATIONAL INCOME REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
NOTE 7. NOTES PAYABLE (Continued)
and matures February 2000.
Also in January 1995, the Trust obtained first mortgage financing secured by
the Woodcreek Apartments located in Jacksonville, Florida in the amount of $3.8
million. The Trust received net refinancing proceeds of $907,000 after the
payoff of the existing mortgage loan of $2.6 million. The remainder of the
refinancing proceeds were used to fund escrows for repairs, real estate taxes
and insurance and to pay the associated closing costs. The new $3.8 million
nonrecourse mortgage loan bears interest at 9.7% per annum, calls for monthly
principal and interest payments of $33,810 and matures February 2005.
In connection with the above transactions and in accordance with the Advisory
Agreement approved by the Trust's Board of Trustees, refinancing fees of
$58,000 were paid to Tarragon based on the new first mortgage loans totaling
$5.8 million.
NOTE 8. INCOME TAXES
No provision has been made for federal income taxes because the Trust believes
it has qualified as a Real Estate Investment Trust ("REIT") and expects that it
will continue to do so.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Trust is involved in various lawsuits arising in the ordinary course of
business. The Trust's management is of the opinion that the outcome of these
lawsuits would have no material impact on the Trust's financial condition.
NOTE 10. SUBSEQUENT EVENTS
At the March 1995 Board of Trustees' meeting, the Trustees approved a new
revised form of advisory agreement, effective April 1, 1995, which is to be
submitted to shareholders for their approval at the next meeting of
shareholders, whether annual or special. In addition to technical changes
designed to clarify the responsibilities and rights of Tarragon, the new
agreement eliminates the $100,000 annual base fee and certain incentive sales
compensation. Moreover, it provides that real estate commissions shall be
payable to Tarragon and its affiliates only following specific Board approval
for each transaction rather than pursuant to a general agreement.
In April 1995, the Trust purchased the Marina Park Apartments in North Miami,
Florida for $3.1 million. The Trust paid $852,000 in cash and financed the
remainder through a $2.5 million first mortgage loan, which accounted for $2.2
million of the purchase price after loan closing costs and the funding of a
$300,000 repair escrow deposit. This nonrecourse mortgage bears interest at
the prime rate plus .5% per annum and requires payments of interest only for
the first six months. Beginning in November 1995, monthly payments of
principal and interest are due through maturity in May 1998. In connection
with the acquisition, the Trust paid a $85,000 real estate brokerage and
acquisition commission, based on the $3.1 million purchase price.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
National Income Realty Trust (the "Trust") was organized on October 31, 1978 to
invest in real estate, through acquisitions, leases and partnerships and, to a
lesser extent, in mortgage loans on real estate. The Trust's policy, at
present, is to make mortgage loans only in connection with, and to facilitate,
the sale or acquisition of real estate. Accordingly, as existing mortgages are
paid off, the Trust's portfolio of mortgage notes receivable is expected to
decline.
The Trust's real estate portfolio at March 31, 1995 consisted of 53 properties
located throughout the United States, with concentrations in the Southeast, 8
of which are held for sale and 45 held for investment. These properties
consist of 31 apartment complexes, 14 shopping centers, 4 office buildings,
three parcels of land and one single-family residence. All of the Trust's real
estate, except eleven properties, is pledged to secure first mortgage notes
payable.
The Trust's management plans to continue its efforts of enhancing the long-term
value of shareholder investments through efficient asset and property
management, as well as, selective investments in underperforming apartment
properties in the same geographical regions that the Trust currently operates.
Additionally, management intends to raise capital through refinancings and
dispositions of certain assets and increase cash distributions to shareholders
after making adequate provisions for capital investments in the Trust's
existing portfolio and share repurchases.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $4.4 million at March 31, 1995, compared
with $3.5 million at December 31, 1994. The principal reasons for this
increase in cash 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 $614,000, or $.19 per share
of beneficial interest, was declared on March 1, 1995 to be paid on April 10,
1995 to shareholders of record as of March 31, 1995. Such distribution will
exceed first quarter 1995 net income by $539,000. The Trust recorded the
declaration as a reduction in Consolidated Shareholders' Equity during the
first quarter of 1995.
The Trust's cash flow from property operations (rentals collected less payments
for property operating expenses) increased from $2.8 million for the first
quarter of 1994 to $4.1 million for the corresponding period in 1995, primarily
due to the six properties acquired by the Trust during 1994. Additionally,
approximately $1.0 million of prior year real estate taxes were paid during the
first quarter of 1994.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
In February 1995, the Trust purchased the Park Side Apartments located in Los
Angeles, California for $376,000 in cash. In April 1995, the Trust purchased
the Marina Park Apartments in North Miami, Florida for $3.1 million. The Trust
paid $852,000 in cash and financed the remainder through a $2.5 million first
mortgage loan, which accounted for $2.2 million of the purchase price after
loan closing costs and the funding of a $300,000 repair escrow deposit.
During the quarter ended March 31, 1995, the Trust obtained first mortgage
financing on two Trust properties totaling $5.8 million, receiving net cash
proceeds of $1.8 million after the payoff of $3.6 million in existing debt.
The remainder of the financing proceeds were used to fund escrows for
replacements and repairs and to pay closing costs associated with the
refinancings. The Trust intends to continue to seek financing or refinancing
for various Trust properties. However, there is no assurance that the Trust
will continue to be successful in its efforts in this regard.
In January 1995, the Trust paid off a $236,000 mortgage note payable, which was
secured by the Lakeview Mall in Manitowoc, Wisconsin.
During the three months ended March 31, 1995, the Trust repurchased 38,000 of
its shares of beneficial interest at a total cost to the Trust of $445,000. In
May 1994, the Trust's Board of Trustees authorized the Trust to repurchase up
to 300,000 additional shares of beneficial interest through open market or
negotiated transactions, of which 97,202 have been purchased as of March 31,
1995.
In January and February 1995, the Trust sold its remaining 39,500 shares of
beneficial interest of Continental Mortgage and Equity Trust ("CMET") for
$593,000 in cash and, as a result, recorded a $412,000 gain on sale of
investments.
Results of Operations
The Trust recorded net income of $75,000 for the three months ended March 31,
1995 as compared to a net loss of $234,000 for the three months ended March 31,
1994. The primary factors contributing to this improvement in the Trust's
operating results are discussed in the following paragraphs.
Net rental income (rental income less property operating expenses) increased
from $3.9 million for the three months ended March 31, 1994 to $4.5 million for
the three months ended March 31, 1995. Of this increase, $532,000 is related
to the six Trust properties acquired during 1994, two of which were obtained
through foreclosure of the Trust's mortgage loans. Net rental income increased
$57,000 for Trust properties held in both the first quarter of 1994 and the
first quarter of 1995. The Trust's weighted average occupancy percentages for
these properties during the first quarter of 1995 increased slightly for both
residential and commercial properties in the Mountain region of the United
States and decreased slightly for both residential and commercial properties in
the Southeast region of the United States as compared to the first quarter of
1994.
Interest income decreased from $343,000 for the three months ended March 31,
1994 to $300,000 for the three months ended March 31, 1995 due to the payoff or
foreclosure of five notes receivable in 1994.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Equity in income of partnerships increased from $85,000 for the three months
ended March 31, 1994 to $190,000 for the three months ended March 31, 1995
primarily due to Indcon, L.P. ("Indcon") and Sacramento Nine ("SAC 9").
Indcon's net income increased due primarily to higher rental rates and common
area maintenance recoveries which were partially offset by the sale of one of
the warehouses in May 1994. During the first quarter of 1994, SAC 9 extended a
one month rent concession and modified a $2.1 million mortgage note, reducing
the interest rate from 12% per annum to 8% per annum.
Interest expense increased from $2.5 million for the three months ended March
31, 1994 to $3.1 million for the three months ended March 31, 1995. Interest
expense related to the six properties acquired by the Trust during 1994 totaled
$370,000. In addition, 1994 refinancings increased interest expense $115,000,
as well as, the amortization of additional loan costs which increased $49,000
for the first three months of 1995 as compared to the first three months of
1994.
Depreciation expense increased from $1.2 million for the three months ended
March 31, 1994 to $1.4 million for the three months ended March 31, 1995
primarily due to the six properties acquired during 1994 and the additional
depreciation of capital improvements made to Trust properties during 1994 and
the first quarter of 1995. Several Trust properties during this time period
have incurred major renovations including, but not limited to, Dunhill
Apartments in Denver, Colorado ($541,000), Lake Point Apartments in Memphis,
Tennessee ($263,000), Emerson Center Shopping Center in Atlanta, Georgia
($402,000) and Century Centre Office Building in San Mateo, California
($195,000).
General and administrative expenses, including advisory fees, decreased from
$820,000 for the three months ended March 31, 1994 to $769,000 for the three
months ended March 31, 1995. Advisory fees to Basic Capital Management, Inc.
("BCM") were $468,000 for the three months ended March 31, 1994 as compared to
advisory fees to Tarragon Realty Advisors, Inc. ("Tarragon") of $296,000 for
the corresponding period in 1995. Under the BCM advisory agreement, which was
terminated March 31, 1994, the Trust paid a monthly fee equal to .0625% of the
average gross asset value of the Trust. Under the Tarragon advisory agreement,
effective April 1, 1994, the Trust paid an annual base fee of $100,000 plus a
monthly incentive fee equal to 16% per annum of funds from operations, as
defined in the advisory agreement dated February 15, 1994. This decrease is
partially offset by an increase in operating expense reimbursements to
Tarragon, as well as, legal fees related to the Olive litigation, as described
in "PART II. OTHER INFORMATION".
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Income Tax Aspects
As more fully discussed in the Trust's 1994 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. 121 - "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
This statement requires a review of long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS No. 121 is
effective for fiscal years beginning after December 15, 1995. The Trust's
management has not fully evaluated the effects of implementing this statement,
but expects that they will not be material as the Trust's policy has been, and
will continue to be, a quarterly review and an annual detailed analysis of all
property carrying values, and at such time, if necessary, a provision for
possible future losses has been recorded by a charge against earnings.
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
original settlement.
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ITEM 1. LEGAL PROCEEDINGS (Continued)
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification"), which settled subsequent
claims of breaches of the settlement which were asserted by the plaintiffs and
modified certain provisions of the April 1990 settlement. The Modification was
preliminarily approved by the court on July 1, 1994 and final court approval
was entered on December 12, 1994. The effective date of the Modification is
January 11, 1995.
The Modification, among other things, provided for the addition of at least
three new unaffiliated members to the Trust's Board of Trustees and set forth
new requirements for the approval of any transactions with affiliates over the
next five years. In accordance with the procedures set forth in the
Modification, Irving E. Cohen, Lance Liebman, Sally Hernandez-Pinero and L. G.
Schafran were appointed to the Board. 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, of which the Trust's share is $150,000.
Under the Modification, the Trust, CMET, IORT, TCI and their shareholders
released the defendants from any claims relating to the plaintiffs'
allegations. The Trust, CMET, IORT and TCI 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 terminated 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:
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K as follows:
During the quarter for which this report is filed, one current Report
on Form 8-K was filed on March 14, 1995, with respect to an event
occurring on March 9, 1995 reported under Item 5. "OTHER EVENTS" and
Item 6. "RESIGNATION OF REGISTRANT'S DIRECTORS". Also, one report
on Form 8-K was filed on May 3, 1995, with respect to the Advisory
Agreement dated April 1, 1995 between National Income Realty Trust and
Tarragon Realty Advisors, Inc.
[This space intentionally left blank.]
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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 10, 1995 By:/s/ William S. Friedman
------------------------------ --------------------------------
William S. Friedman
President, Chief Executive
Officer and Trustee
Date: May 10, 1995 By:/s/ Ivan Roth
------------------------------ ----------------------------------------
Ivan Roth
Treasurer and
Chief Financial Officer
Date: May 10, 1995 By:/s/ Katie Jackson
------------------------------ -------------------------------------
Katie Jackson
Vice President and
Chief Accounting Officer
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INDEX TO EXHIBITS
<Captin>
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule