"The maximum shareholder value will be realized from selling portions of the portfolio to support homebuilding," chairman and CEO William Friedman pointed out during a company conference call. The company has identified approximately 2,000 apartment units that could be converted to condominiums and is also targeting a large office park for redevelopment. The rental properties will become a discontinued operation.
Friedman said Tarragon, together with its investment bankers, LazardFreres & Co. LLC, explored other possibilities including a spin-off and IPO, but determined a sale was the best route to go. Friedman pointed out that half of the company's consolidated debt is associated with the rental properties. "The large amount of debt associated with our rental properties distorts the financial strength of our company, impeding our continued rapid growth. The capital is worth more to us in homebuilding."
Homebuilding division revenues, including revenues from unconsolidatedcommunities, doubled in 2004 from $154 million in 2003 to $315 million. Approximately 75% of revenues were generated by Floridahome sales. Friedman sees more strength in the pipeline. "Our homebuilding pipeline includes over 3,800 units with potential sales in excess of $1.5 billion in communities where we have site control, and have initially determined project feasibility. Last year, that pipeline was less than $700 million.
Key markets will remain Florida, Texas and the Northeast. "There are signs of a pent-up demand in Florida," Friedman said. He estimates that each property receives approximately five times the number of applicants. That demand is not just limited to Florida. The firm plans to begin work this year on the second phase of its Orion project in Houston and is anticipating demand for its Hoboken, NJ developments. "The demand in Hoboken is far more than what can physically be built in Hoboken."
Tarragon's consolidated revenues for 2004 grew to $311 million, up 136% from revenues of $131.6 million in 2003. According to Friedman, increased revenue primarily reflects strong home sales, which grew, on a consolidated basis, from $56.3 million in 2003 to $220.5 million in 2004. In 2004, the firm had 1,404 signed contracts representing $360 million in sales, while the year before the company had 457 contracts representing $106 million. Tarragon also reported record profits of $44.7 million, a 43% increase over 2003 net income of $31.2 million.
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