-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BzLOE0ksdJ9d4edoemQGAva2Stw3SN7IEB5VR7twlOTy8USJAhShWxBNv/Hoi13Q WWF99YLdPHVhCyQ56/Y05Q== 0000950134-95-002846.txt : 19951119 0000950134-95-002846.hdr.sgml : 19951119 ACCESSION NUMBER: 0000950134-95-002846 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSCONTINENTAL REALTY INVESTORS INC CENTRAL INDEX KEY: 0000733590 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946565852 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09240 FILM NUMBER: 95590696 BUSINESS ADDRESS: STREET 1: 10670 N CENTRAL EXPRWY STE 300 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2146924700 MAIL ADDRESS: STREET 1: 10670 N CENTRAL EXPRWY STREET 2: SUITE 300 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: JOHNSTOWN CONSOLIDATED REALTY TRUST /CA/ DATE OF NAME CHANGE: 19890815 FORMER COMPANY: FORMER CONFORMED NAME: JOHNSTOWN CONSOLIDATED REALTY TRUST DATE OF NAME CHANGE: 19861005 10-Q 1 FORM 10-Q 1 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, 1995 ------------------ Commission File Number 0-13291 ------- TRANSCONTINENTAL REALTY INVESTORS, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Nevada 94-6565852 - --------------------------------- --------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10670 North Central Expressway, Suite 300, Dallas, Texas 75231 - -------------------------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) (214) 692-4700 ------------------------------- (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 . --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.01 par value 2,674,850 - ---------------------------- --------------------------------- (Class) (Outstanding at November 3, 1995) 1 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements have not been examined by independent certified public accountants, but in the opinion of the management of Transcontinental Realty Investors, Inc. (the "Company"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Company's consolidated financial position, consolidated results of operations and consolidated cash flows at the dates and for the periods indicated, have been included. TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1995 1994 --------------- -------------- Assets (dollars in thousands) ------ Notes and interest receivable Performing............................................. $ 10,603 $ 10,659 Nonperforming, nonaccruing............................. 434 1,502 -------------- -------------- 11,037 12,161 Real estate held for sale, net of accumulated depreciation ($627 in 1995 and $514 in 1994)........... 8,388 8,373 Less - allowance for estimated losses................... (948) (960) -------------- -------------- 18,477 19,574 Real estate held for investment, net of accumulated depreciation ($45,129 in 1995 and $31,035 in 1994)....................................... 238,069 213,445 Investment in real estate entities...................... 5,226 8,577 Cash and cash equivalents............................... 981 563 Other assets (including $681 in 1995 and $212 in 1994 from affiliates).................................. 9,237 5,805 -------------- -------------- $ 271,990 $ 247,964 ============== ============== Liabilities and Stockholders' Equity ------------------------------------ Liabilities Notes and interest payable.............................. $ 173,852 $ 145,514 Other liabilities (including $28 in 1995 and $2,314 in 1994 to affiliates).......................... 10,416 9,273 -------------- -------------- 184,268 154,787 Stockholders' equity Common stock, $.01 par value, authorized, 10,000,000 shares; issued and outstanding, 2,674,850 shares....... 27 27 Paid-in capital......................................... 219,049 219,049 Accumulated distributions in excess of accumulated earnings................................... (131,354) (125,899) -------------- -------------- 87,722 93,177 -------------- -------------- $ 271,990 $ 247,964 ============== ==============
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 3 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months Ended September 30, Ended September 30, --------------------------------- --------------------------------- 1995 1994 1995 1994 ------------- ------------- ------------- ------------ (dollars in thousands, except per share) Income Rents............................ $ 11,972 $ 9,104 $ 34,965 $ 26,376 Interest......................... 373 353 1,097 1,160 Equity in (losses) of investees...................... (153) (66) (1,152) (77) -------------- -------------- --------------- ------------- 12,192 9,391 34,910 27,459 Expenses Property operations.............. 7,700 6,622 22,623 20,317 Interest......................... 4,170 2,783 11,772 7,711 Depreciation..................... 2,304 1,544 6,413 4,472 Advisory fee to affiliate........ 517 438 1,511 1,280 General and administrative....... 460 402 1,523 1,280 Litigation settlement............ - - (500) - -------------- -------------- --------------- ------------- 15,151 11,789 43,342 35,060 -------------- -------------- --------------- ------------- (Loss) before gain on sale of partnership interests, gain on sale of real estate and extraordinary gain............... (2,959) (2,398) (8,432) (7,601) Gain on sale of partnership interests........................ - - - 2,514 Gain on sale of real estate....... 1,636 2,153 1,636 2,153 Extraordinary gain................ - 1,189 1,341 1,189 -------------- -------------- --------------- ------------- Net income (loss)................. $ (1,323) $ 944 $ (5,455) $ (1,745) ============== ============== =============== ============= Earnings Per Share (Loss) before extraordinary gain............................. $ (.49) $ (.09) $ (2.54) $ (1.10) Extraordinary gain................ - .44 .50 .44 -------------- -------------- --------------- ------------- Net income (loss)................. $ (.49) $ .35 $ (2.04) $ (.66) ============== ============== =============== ============= Common shares used in computing earnings per share..... 2,674,850 2,674,850 2,674,850 2,674,850 ============== ============== =============== =============
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 4 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 1995
Accumulated Distributions Common Stock in Excess of -------------------------- Paid-in Accumulated Stockholders' Shares Amount Capital Earnings Equity ----------- ----------- ------------ ---------- ------------- (dollars in thousands) Balance, January 1, 1995..................... 2,674,850 $ 27 $ 219,049 $ (125,899) $ 93,177 Net (loss)................. - - - (5,455) (5,455) ------------- ----------- -------------- -------------- -------------- Balance, September 30, 1995..................... 2,674,850 $ 27 $ 219,049 $ (131,354) $ 87,722 ============= =========== ============== ============== ==============
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 5 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, ---------------------------------- 1995 1994 ----------- ----------- (dollars in thousands) Cash Flows from Operating Activities Rents collected....................................... $ 35,209 $ 26,319 Interest collected.................................... 905 969 Interest paid......................................... (10,770) (6,593) Payments for property operations...................... (22,768) (21,648) Advisory fee paid to affiliate........................ (1,538) (1,299) General and administrative expenses paid.............. (1,609) (1,852) Distributions from operating cash flow of equity investees.......................................... 447 240 Cash from replacement reserves........................ 594 125 Litigation settlement................................. 500 - Other................................................. (447) (733) -------------- -------------- Net cash provided by (used in) operating activities...................................... 523 (4,472) Cash Flows from Investing Activities Collections on notes receivable....................... 2,725 1,748 Real estate improvements.............................. (6,910) (2,432) Acquisition of real estate............................ (168) (1,775) Contributions to equity investees..................... (424) (2,878) Proceeds from sale of partnership interests........... - 2,076 Proceeds from sale of real estate..................... - 3,285 -------------- -------------- Net cash provided by (used in) investing activities...................................... (4,777) 24 Cash Flows from Financing Activities Distributions from financing cash flow of equity investees.......................................... 853 - Payments on notes payable............................. (16,058) (1,519) Proceeds from notes payable........................... 20,075 4,881 Reimbursements to advisor............................. (198) - -------------- -------------- Net cash provided by financing activities.......... 4,672 3,362 Net increase (decrease) in cash and cash equivalents........................................... 418 (1,086) Cash and cash equivalents, beginning of period......... 563 5,902 -------------- -------------- Cash and cash equivalents, end of period............... $ 981 $ 4,816 ============== ==============
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 6 TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Nine Months Ended September 30, --------------------------------- 1995 1994 ----------- ----------- (dollars in thousands) Reconciliation of net (loss) to net cash provided by (used in) operating activities Net (loss).............................................. $ (5,455) $ (1,745) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities Depreciation and amortization.......................... 6,736 4,651 Gain on sale of partnership interests.................. - (2,514) Gain on sale of real estate............................ (1,636) (2,153) Extraordinary gain..................................... (1,341) (1,189) Equity in losses of equity investees................... 1,152 77 Distributions from operating cash flow of equity investees........................................... 447 240 Decrease in interest receivable........................ (11) (1) (Increase) decrease in other assets.................... 723 (789) Increase in interest payable........................... 497 748 (Decrease) in other liabilities........................ (589) (1,797) -------------- -------------- Net cash provided by (used in) operating activities....................................... $ 523 $ (4,472) ============== ============== Noncash investing and financing activities Real estate obtained in satisfaction of a note receivable with no carrying value Carrying value of real estate received................. $ 2,519 $ - Carrying value of debt assumed......................... 2,675 - Notes payable from acquisition of real estate........... - 10,584 Notes receivable from sale of real estate with carrying value of $2,679............................... - 5,637 Acquisition of remaining general partner interests in three partnerships Carrying value of assets received...................... 22,807 - Carrying value of liabilities assumed.................. 21,481 -
The accompanying notes are an integral part of these Consolidated Financial Statements. 6 7 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The Company, a Nevada corporation, is successor to a California business trust which was organized on September 6, 1983. The Company invests in real estate through direct equity ownership, leases and partnerships and also has invested in mortgage loans on real estate, including first, wraparound and junior mortgage loans. The Company is no longer seeking to fund or acquire new mortgage loans other than those which it may originate in conjunction with providing purchase money financing of a property sale. 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, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K"). NOTE 2. NOTES AND INTEREST RECEIVABLE In February 1994, the Company provided $6.7 million of purchase money financing in conjunction with the sale of 1,406 acres of land in sixteen developed residential and commercial subdivisions located in Maumelle, Arkansas secured by a first lien on the properties sold. The note receivable bore interest at 8.0% per annum, required annual payments of principal of $850,000 plus accrued interest and matured in February 1998. The note was guaranteed by companies affiliated with the borrower. The borrower did not make the scheduled February 1995 principal and interest payments. In September 1995, the Company reached a settlement with the borrower that provided the following: (i) the payment by the borrower of $2.5 million in cash; (ii) the Company's release of all land securing the note; (iii) the Company's acceptance of a new $1.4 million note secured by 36.3 acres of commercial land, such note bears interest at 9.0% and matures 120 days from closing (January 1996) and (iv) the Company's receipt of 700,000 shares of the borrower's capital stock, which the borrower has the option to repurchase at $5.00 per share for two years from closing. The original sale had been recorded under the cost recovery method with gain being deferred until the note was collected. With the Company's receipt of $2.5 million on September 12, 1995, it recognized $1.6 million of the gain previously deferred. In April 1995, a note receivable with a principal balance of $100,000 plus accrued interest was paid in full. 7 8 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued) In June 1995, the Company obtained the Gladstell Forest Apartments, a 136 unit apartment complex in Conroe, Texas through foreclosure of a note receivable which the Company had received in December 1991 in satisfaction of a debtor's guarantee of another obligation to the Company. The Company had assigned no value to the note receivable. In conjunction with the foreclosure, the Company refinanced the property's $2.7 million mortgage for a like amount with the Company receiving no net refinancing proceeds. In April and May 1995, two mortgage notes receivable, secured by developed residential lots in Greensboro, North Carolina, in the amounts of $19,000 and $21,000, respectively, were paid in full. In June 1991, in an effort to develop a potential source for future financing, the Company entered into an asset sales agreement whereby the Company sold a participation in one of its mortgage notes in the amount of $1.1 million in exchange for the assignment of a first mortgage note for the same amount from an insurance company. In December 1991, the participation in the Company's mortgage note was increased by $181,000. In return, the Company received a participation for a like amount in another first mortgage note (the "loan participation"). In conjunction with these transactions, the Company entered into a put and guaranty agreement. Both the mortgage note and the loan participation received by the Company were in default at December 31, 1991. In the first quarter of 1992, the Company recorded a provision for losses of $366,000 to reduce the carrying value of the $1.1 million mortgage note to the estimated fair value of the collateral property. In April 1992, the property securing the note was deeded to the Company in lieu of foreclosure. In September 1993, the Company sold the collateral property for $850,000, receiving $125,000 in cash and providing purchase money financing of $725,000. The Company recognized no loss on the sale beyond the amount previously provided. In the third quarter of 1992, the Company recorded a provision for losses of $184,000 to fully reserve for the carrying value of the loan participation. In March 1992, the insurance company was placed in receivership and in June 1992, the Company provided notice to the insurance company, under the terms of the put and guaranty agreement, of its desire to divest itself of all assets received. The Receiver refused to allow the enforcement of the terms of the put and guaranty agreement. A settlement between the Company and the Receiver was approved by the court on February 15, 1995. Under the terms of the settlement, the Company paid the insurance company a total of $1.1 million in July 1995. In exchange, the Company retained the assets transferred to it by the insurance company as well as received back from the insurance company the loan participation that the insurance company had received from the Company. The Company incurred no loss on the settlement. 8 9 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 3. REAL ESTATE AND DEPRECIATION In February 1995, the Company purchased 8,153 square feet of land across from the Republic Towers Office Building ("Republic Towers") in Dallas, Texas for $166,000 in cash. As discussed in NOTE 2. "NOTES AND INTEREST RECEIVABLE," in June 1995, the Company obtained the Gladstell Forest Apartments through foreclosure. On May 5, 1995, Republic Towers sustained considerable damage from flooding, which disabled the electrical and mechanical systems of the building. The building was shut down for repairs from May 8, 1995 through July 17, 1995. The Company believes that the loss is adequately covered by insurance. NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES At December 31, 1994, the Company was a 50% general partner in both Twinbrook Village Associates, which owns Twinbrook Village Apartments in Rockville, Maryland, and Gate Laurel Associates, which owns the Westgate of Laurel Apartments in Laurel, Maryland. Effective January 1, 1995, the other 50% general partners conveyed their interests in the partnerships to the Company in exchange for a release from their general partner liability. In January 1995, the Company refinanced the mortgage debt secured by the Shadow Run Apartments, an apartment complex in Pinellas Park, Florida. The new first mortgage of $7.2 million bears interest at 10.21% per annum, requires monthly payments of principal and interest of $64,305 and matures February 1, 2002. The Company used the refinancing proceeds and $300,000 of its cash reserves to pay the existing mortgage of $7.0 million, accrued but unpaid interest, real estate taxes, financing fees and closing costs. The Company paid a mortgage brokerage and equity refinancing fee of $72,000 to Basic Capital Management, Inc. ("BCM"), the Company's advisor, based on the $7.2 million refinancing. Prior to the refinancing, the Company had agreed to purchase the remaining general partner interest in Shadow Run Associates, which owns the Shadow Run Apartments, for $50,000 in cash. The purchase was completed in April 1995. The Company owns a combined 63.7% limited and general partner interest and Income Opportunity Realty Trust ("IORT") owns a 36.3% general partner interest in Tri-City Limited Partnership ("Tri-City") which owns five properties in Texas. In July 1995, Tri-City obtained first mortgage financing of $1.4 million secured by the previously unencumbered MacArthur Mills Office Park located in Dallas, Texas. The mortgage bears interest at 9.32% per annum, requires monthly payments of principal and interest of $12,186 and matures August 1, 2005. The Company received $929,000 of the net financing proceeds. In conjunction with the financing, Tri-City paid a mortgage brokerage and equity refinancing fee of $14,000 to BCM, based on the $1.4 million financing. 9 10 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES (Continued) The Company owns a 60% general partner interest in Nakash Income Associates ("NIA"). NIA owns two wraparound mortgage notes receivable, one of which is secured by the Green Hills Shopping Center ("Green Hills") in Onandaga, New York. The shopping center in turn is owned by Green Hills Associates ("GHA"). In July 1995, GHA determined that further investment in Green Hills was not justified, and further that it intends to deed the property back to the first lienholder in lieu of foreclosure. As GHA has no other assets, the wraparound note receivable held by NIA will become uncollectible, and therefore, at June 30, 1995, NIA recorded a provision for loss of $1.5 million to write its wraparound note receivable down to the balance of the first lien mortgage. The Company's equity share of the loss is $901,000. In September 1995, the Company received notice from NIA that one of its wraparound notes receivable had been modified in conjunction with the modification of the underlying note payable. NIA recorded a provision for loss of $212,000 on such modification of which the Company's share is $127,000. Set forth below is summarized results of operations for the real estate entities the Company accounts for using the equity method for the nine months ended September 30, 1995 (dollars in thousands):
1995 --------- Rents and interest income............................. $ 7,929 Depreciation.......................................... (1,317) Property operations................................... (5,366) Interest expense...................................... (2,006) Provision for loss.................................... (1,714) --------- Net loss.............................................. $ (2,474) =========
NOTE 5. NOTES PAYABLE The Company owns Institute Place Lofts, an office building in Chicago, Illinois. The Company did not payoff the $6.5 million mortgage secured by the property on its June 1, 1993 maturity, as the Company determined further investment in the property could not be justified without a substantial modification of the mortgage. In July 1994, the property was placed in bankruptcy. In January 1995, the bankruptcy court approved a plan of reorganization which provided for a reduction in the mortgage's principal balance to $4.1 million, reduced the pay rate to 6% per annum in the first year, increasing to 10.25% per annum in the fourth year, with interest accruing at 10.25% per annum. In February and March 1995, the Company funded required escrows of $500,000 to satisfy outstanding property taxes and to cover projected negative cash flow of the property. The Company recorded no gain or loss as a result of the debt restructuring. In March 1995, the Company refinanced the mortgage debt secured by the Fountain Village Apartments in Tucson, Arizona, in the amount of $6.2 10 11 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. NOTES PAYABLE (Continued) million. The Company received net cash of $1.1 million after the payoff of $4.9 million in existing mortgage debt. The remainder of the refinancing proceeds were used to fund required repair and tax escrows and the payment of various closing costs associated with the refinancing. The new mortgage bears interest at a variable rate of 2.75% above the average yield of United States Treasury Securities, adjusted annually, (9.13% per annum at September 30, 1995), requires monthly payments of principal and interest and matures April 1, 1998. The Company guaranteed repayment of $1.3 million of the mortgage. The Company recognized an extraordinary gain of $1.3 million on the payoff of the existing mortgage. The Company paid a mortgage brokerage and equity refinancing fee of $62,000 to BCM based on the $6.2 million refinancing. In April 1995, the Company obtained mortgage financing of $1.2 million secured by the previously unencumbered Venture Centre Office Building in Atlanta, Georgia. The Company received net cash of $1.1 million after funding required tax and insurance escrows and the payment of various closing costs associated with the financing. The mortgage bears interest at 9.79% per annum, requires monthly payments of principal and interest of $10,405 and matures May 1, 2005. The Company guaranteed repayment of the mortgage. The Company paid a mortgage brokerage and equity refinancing fee of $12,000 to BCM based on the $1.2 million financing. Also in April 1995, the Company modified and extended three of the mortgage loans secured by the Dunes Plaza Shopping Center in Michigan City, Indiana. The three loans, totaling $4.6 million after a principal reduction payment of $185,000, were consolidated into one loan. In consideration of the Company's principal paydown, the lender forgave $48,000 of the consolidated loan's principal balance. The Company recorded an extraordinary gain of $48,000 on the debt forgiveness. The consolidated loan provides that for every $3.86 of principal prepayments made by the Company during the first year, the lender will forgive $1.00 of indebtedness, up to $191,632. Also, for each $3.86 of certain capital and tenant improvement expenditures approved by the lender, the lender shall forgive an additional $1.00 of indebtedness, up to $323,507. The consolidated loan bears interest at 9.5% per annum, requires monthly payments of principal and interest of $42,505 and matures March 10, 2000. In May 1995, the Company obtained mortgage financing of $3.0 million secured by the previously unencumbered Plaza Tower Office Building in St. Petersburg, Florida. The Company received net cash of $2.2 million after funding required tax and repair escrows and the payment of various closing costs associated with the financing. The mortgage bears interest at a variable rate of 3.25% over the London Interbank Offered Rate ("LIBOR") three month rate, adjusted quarterly, (10.82% per annum at September 30, 1995), requires monthly payments of principal and 11 12 TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 5. NOTES PAYABLE (Continued) interest of $27,964, and matures May 2000. The Company paid a mortgage brokerage and equity refinancing fee of $30,000 to BCM based on the $3.0 million financing. A mortgage principal paydown of $1.6 million was due in June 1995 on the mortgage secured by the Spa Cove Apartments, in Annapolis, Maryland. The lender agreed to an extension of such payment until July 31, 1995, in exchange for the Company's agreement to increase its pay down by $300,000. The Company made the required $1.9 million paydown. Upon payment, all of the Company's shareholdings of IORT which had been pledged to the lender as additional collateral for the mortgage were released. In July 1995, the Company obtained mortgage financing of $5.5 million secured by the previously unencumbered Chesapeake Ridge Office Park in San Diego, California. The Company received net cash of $4.6 million after funding required tax, insurance, repair and tenant finish escrows and the payment of various closing costs associated with the financing. The mortgage bears interest at 9.0% per annum, requires monthly payments of principal and interest of $46,156 and matures August 2002. The Company paid a mortgage brokerage and equity refinancing fee of $55,000 to BCM based on the $5.5 million financing. NOTE 6. COMMITMENTS AND CONTINGENCIES The Company is involved in various lawsuits arising in the ordinary course of business. The opinion of the Company's management is that the outcome of these lawsuits will have no material impact on the Company's financial condition or results of operations. NOTE 7. SUBSEQUENT EVENTS In October 1995, the Company obtained first mortgage financing of $750,000 secured by the previously unencumbered Parkway Center in Dallas, Texas. The Company received net cash of $712,000 after funding required tax and insurance escrows and the payment of various closing costs associated with the financing. The mortgage bears interest at a variable rate of prime plus 1.0% adjusted daily (currently 8.13% per annum), requires monthly payments of principal and interest of $7,114 and matures November 2000. The Company paid a mortgage brokerage and equity refinancing fee of $7,500 to BCM based on the financing. [THIS SPACE INTENTIONALLY LEFT BLANK.] 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Transcontinental Realty Investors, Inc. (the "Company") invests in real estate through direct ownership, leases and partnerships and has invested in mortgage loans, including first, wraparound and junior mortgage loans. The Company has determined that it will no longer seek to fund or acquire new mortgage loans, other than those which it may originate in conjunction with providing purchase money financing of a property sale. The Company was organized on September 6, 1983 and commenced operations on January 31, 1984. Liquidity and Capital Resources Cash and cash equivalents aggregated $981,000 at September 30, 1995 compared with $563,000 at December 31, 1994. The Company's principal sources of cash have been and will continue to be from property operations, proceeds from property sales, the collection of mortgage notes receivable, borrowings and distributions from equity investees. The Company anticipates that its cash on hand, as well as cash generated from the collection of mortgage notes receivable, sales of properties, borrowings against certain of the Company's unencumbered properties and refinancing or extending certain of its mortgage debt will be sufficient to meet all of the Company's cash requirements, including debt service obligations and expenditures for property maintenance and improvements. In March 1995, the Company refinanced the mortgage debt secured by the Fountain Village Apartments in Tucson, Arizona, in the amount of $6.2 million. The Company received net cash of $1.1 million after the payoff of $4.9 million in existing mortgage debt. The remainder of the refinancing proceeds were used to fund required repair and tax escrows and for the payment of various closing costs associated with the refinancing. In April 1995, the Company obtained mortgage financing secured by the previously unencumbered Venture Centre Office Building in Atlanta, Georgia, in the amount of $1.2 million. The Company received net cash of $1.1 million after the funding of required tax and insurance escrows and the payment of various closing costs associated with the financing. Also in April 1995, the Company modified, extended and consolidated three of the mortgage loans secured by the Dunes Plaza Shopping Center in Michigan City, Indiana. In conjunction with the modification, the Company made a $185,000 principal paydown. In May 1995, the Company obtained mortgage financing secured by the previously unencumbered Plaza Tower Office Building in St. Petersburg, Florida in the amount of $3.0 million. The Company received net cash of $2.2 million after the funding of required tax and repair escrows and the payment of various closing costs associated with the financing. In June 1995, the Company received $500,000 in partial settlement from one of the defendants in a lawsuit brought by the Company against the former owners of the RCA Building and their agents. The Company made a 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) loan secured by the building in 1987 and filed a foreclosure action which was subsequently amended in 1990, to include claims of negligent misrepresentation against the borrowers, their legal counsel, architect and engineers. The Company owns a combined 63.7% limited and general partner interest in Tri-City Limited Partnership which owns five properties in Texas. In July 1995, the Company received distributions of $223,000 from the partnership's operating cash flow, and $929,000 from its financing cash flow. See NOTE 4. "INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES." In July 1995, the Company obtained mortgage financing secured by the previously unencumbered Chesapeake Ridge Office Park in San Diego, California in the amount of $5.5 million. The Company received net cash of $4.6 million after funding required tax, insurance, repair and tenant finish escrows and the payment of various closing costs associated with the financing. Also in July 1995, the Company made a mortgage principal paydown of $1.9 million on the mortgage secured by the Spa Cove Apartments in Annapolis, Maryland. The Company's Board of Directors has approved the Company's repurchase of a total of 458,000 shares of its Common Stock. Through September 30, 1995, the Company had purchased a total of 233,725 shares, for an aggregate purchase price of $1.7 million. The Company has repurchased none of its shares during 1995. On a quarterly basis, the Company's management reviews the carrying amount of the Company's mortgage notes receivable, properties held for investment and properties held for sale. Generally accepted accounting principles require that the carrying amount of such assets cannot exceed the lower of their respective carrying amounts or estimated net realizable value. In an instance where the estimated net realizable value is less than the carrying amount at the time of evaluation, a provision for loss is recorded by a charge against earnings. The estimate of net realizable value of the mortgage notes receivable is based on management's review and evaluation of the collateral property securing each mortgage note. The property 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 the maintenance requirements, discussions with the manager of the property and a review of the surrounding area. See "Recent Accounting Pronouncement," below. Results of Operations The Company's net loss for the three and nine months ended September 30, 1995 was $4.6 million and $5.5 million, respectively, as compared to net income of $944,000 and a net loss of $1.7 million in the corresponding 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) periods in 1994. The Company's 1995 net loss includes extraordinary gains of $1.3 million and a gain on sale of real estate of $1.6 million and its 1994 net income includes a gain on sale of partnership interest of $2.5 million, a gain on sale of real estate of $2.2 million and an extraordinary gain of $1.2 million. Fluctuations in the components of the Company's revenues and expenses between the 1994 and 1995 periods are described below. Net rental income (rental income less expenses applicable to rental income) was $4.3 million and $12.3 million for the three and nine months ended September 30, 1995 compared to $2.5 million and $6.1 million for the corresponding periods in 1994. The increase in net rental income for the three and nine months of 1995 is attributable in part to properties acquired subsequent to September 30, 1994 of $507,000 and $1.7 million, respectively, increases of $961,000 and $2.9 million, respectively, due to increased rental revenue and decreased property operating expenses at several of the Company's commercial properties primarily in Texas and California, increases of $596,000 and $1.7 million due to the acquisition of the remaining general partner interests in three partnerships in 1995, and an increase of $800,000 related to a lease buy out in the second quarter of 1994 at the Northtown Mall. These increases are partially offset by decreases of $123,000 and $556,000 in the three and nine months ended September 30, 1995, respectively, due to properties sold in 1994. Interest income for the three and nine months ended September 30, 1995 of $323,000 and $1.1 million was comparable to the $353,000 and $1.2 million for the corresponding periods in 1994. Equity in losses of investees was $153,000 and $1.2 million for the three and nine months ended September 30, 1995 compared to $66,000 and $77,000 for the corresponding periods in 1994. The increased equity loss for the three months is primarily due to the modification of a wraparound mortgage note receivable and underlying note payable by Nakash Income Associates ("NIA"), a partnership in which the Company has a 60% general partner interest. The increased equity loss for the nine months is primarily due to the modification discussed above, and the writedown of a wraparound mortgage note receivable to the balance of an underlying first lien mortgage also by NIA. The Company's equity share of the loss on the note modification was $127,000 and its equity share of the note writedown was $901,000. See NOTE 4. "INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES." Interest expense increased to $4.2 million and $11.8 million in the three and nine months ended September 30, 1995 as compared to $2.8 million and $7.7 million for the corresponding periods in 1994. These increases are attributable to properties acquired and property financings and refinancings subsequent to September 30, 1994. Depreciation expense increased to $2.3 million and $6.4 million in the three and nine months ended September 30, 1995 as compared to $1.5 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) million and $4.5 million in the corresponding periods in 1994. Increases of $409,000 and $1.1 million, in the three and nine months of 1995 are due to properties acquired by the Company subsequent to September 30, 1994 and increases of $299,000 and $876,000, in the three and nine months of 1995 are due to increased depreciation of property and tenant improvements. The increases are partially offset by decreases of $41,000 and $175,000 in the three and nine months of 1995 due to properties sold in 1994. The advisory fee increased to $517,000 and $1.5 million in the three and nine months ended September 30, 1995 as compared to $438,000 and $1.3 million in the corresponding periods in 1994. The increase is due to the increase in the Company's gross assets, the basis for such fee. Such fee is expected to increase as the Company's asset base increases. General and administrative expenses increased to $460,000 and $1.5 million for the three and nine months ended September 30, 1995 compared to $402,000 and $1.3 million in the corresponding periods in 1994. The increases are due to increases in advisor cost reimbursements, legal fees, and costs related to the Company's 1994 annual meeting of stockholders, which meeting was held in March 1995. There was no annual meeting of shareholders held in 1994. In the three months ended September 30, 1995, the Company recognized a gain of $1.6 million on the collection of the note receivable secured by the Maumelle land. See NOTE 2. "NOTES AND INTEREST RECEIVABLE." In the first nine months of 1995, the Company recognized extraordinary gains totaling $1.3 million on the payoff of the mortgage debt secured by the Fountain Village Apartments and a principal pay down and modification of the mortgage debt secured by the Dunes Plaza Shopping Center. See NOTE 5. "NOTES PAYABLE." For the three and nine months ended September 30, 1994, the Company recognized a gain of $2.1 million on the sale of Cedar Creek Apartments, and an extraordinary gain of $1.2 million on the disposition of a limited partnership interest. In the first quarter of 1994, the Company recognized a gain of $2.5 million on the sale of its interests in two partnerships. No such gain was recognized in 1995. Tax Matters As more fully discussed in the Company's 1994 Form 10-K, the Company has elected and, in the opinion of the Company'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, as amended, (the "Code"). To continue to qualify for federal taxation as a REIT under the Code, the Company is required to hold at least 75% of the value of its total assets in real estate assets, government securities, cash and cash equivalents at the close of each quarter of each taxable year. The Code also requires a REIT to distribute at least 95% of its REIT taxable income, plus 95% of its net income from foreclosure property, all as defined in Section 857 of the Code, on an annual basis to stockholders. 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Inflation The effects of inflation on the Company's operations are not quantifiable. Revenues from property operations generally fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties, and correspondingly, the ultimate gains to be realized by the Company from property sales. To the effect that inflation affects interest rates, the Company's earnings from short-term investments and the cost of new financings as well as the cost of its variable note financing will be affected. Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, the Company 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 Company for personal injury associated with such materials. The Company's management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on the Company's business, assets or results of operations. Recent Accounting Pronouncement In March 1995, the Financial Accounting Standards Board 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". The statement requires that long-lived assets be considered impaired "...if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset." If impairment exists, an impairment loss shall be recognized, by a charge against earnings, equal to "...the amount by which the carrying amount of the asset exceeds the fair value of the asset." If impairment of a long-lived asset is recognized, the carrying amount of the asset shall be reduced by the amount of the impairment, shall be accounted for as the asset's "new cost" and such new cost shall be depreciated over the asset's remaining useful life. SFAS No. 121 further requires that long-lived assets held for sale "...be reported at the lower of carrying amount or fair value less cost to sell." If a reduction in a held for sale asset's carrying amount to fair value less cost to sell is required, a provision for loss shall be recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale asset's fair value less cost to sell shall be recorded as an adjustment to the asset's carrying amount, 17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Recent Accounting Pronouncement (Continued) but not in excess of the assets carrying amount when originally classified or held for sale. A corresponding charge or credit to earnings is to be recognized. Long-lived assets held for sale are not to be depreciated. SFAS No. 121 is effective for fiscal years beginning after December 15, 1995. The Company's management has not fully evaluated the effects of adopting SFAS No. 121, but expects that the Company's policy with regard to the classification of foreclosed revenue producing properties as assets held for sale will require reevaluation. The Company's management estimates that if the Company had adopted SFAS No. 121 effective January 1, 1995, without a change in its policy of classifying foreclosed revenue producing assets as held for sale its depreciation in the three and nine months ended September 30, 1995 would have been reduced by $37,000 and $105,000, respectively, its net loss reduced by a like amount in each period and that a provision for loss for either impairment of its properties held for investment or for a decline in estimated fair value less cost to sell of its properties held for sale would not have been required in either period. _______________________________________ PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit Number Description - ------- --------------------------------------------------------- 27.0 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K as follows: None. 18 19 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. TRANSCONTINENTAL REALTY INVESTORS, INC. Date: November 13, 1995 By: /s/ Randall M. Paulson ---------------------------- -------------------------------- Randall M. Paulson President Date: November 13, 1995 By: /s/ Thomas A. Holland ---------------------------- -------------------------------- Thomas A. Holland Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
19 20 TRANSCONTINENTAL REALTY INVESTORS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Three Months ended September 30, 1995
Exhibit Page Number Description Number - ------- --------------------------------------------------- ------ 27.0 Financial Data Schedule 21
20 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 981 0 11,037 948 0 0 292,213 45,756 271,990 0 173,852 27 0 0 87,695 271,990 0 34,965 0 22,623 6,413 0 11,772 (8,432) 0 (8,432) 0 1,341 0 (5,455) (2.04) (2.04)
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