0000950134-95-001808.txt : 19950810 0000950134-95-001808.hdr.sgml : 19950810 ACCESSION NUMBER: 0000950134-95-001808 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950809 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: INCOME OPPORTUNITY REALTY TRUST CENTRAL INDEX KEY: 0000760730 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946578120 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09525 FILM NUMBER: 95560179 BUSINESS ADDRESS: STREET 1: 10670 N CENTRAL EXPRSWY STE 300 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2146924700 MAIL ADDRESS: STREET 1: 10670 NORTH CENTRAL EXPRESSWAY STREET 2: SUITE 600 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: INCOME OPPORTUNITY REALTY INVESTORS INC DATE OF NAME CHANGE: 19911003 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED CAPITAL INCOME OPPORTUNITY TRUST 2 DATE OF NAME CHANGE: 19900815 10-Q 1 FORM 10-Q, INCOME OPPORTUNITY REALTY TRUST 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [XI QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1995 Commission File Number 1-9525 INCOME OPPORTUNITY REALTY TRUST ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) California 94-6578120 ------------------------------- ----------------------- (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 . --- --- Shares of Beneficial Interest, no par value 791,444 ------------------------------ ------------------------------- (Class) (Outstanding at July 28, 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 Income Opportunity 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. INCOME OPPORTUNITY REALTY TRUST CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1995 1994 ----------- ------------- Assets (dollars in thousands) Notes and interest receivable Performing . . . . . . . . . . . . . . . . . . . . . $ 1,980 $ 1,974 Real estate held for sale, net of accumulated depreciation ($5,576 in 1995 and $5,055 in 1994) . . 40,756 41,156 Less - allowance for estimated losses . . . . . . . . . (121) (121) ---------- --------- 42,615 43,009 Investment in partnerships . . . . . . . . . . . . . . 3,300 3,980 Cash and cash equivalents . . . . . . . . . . . . . . . 447 232 Other assets (including $215 in 1995 and $44 in 1994 from affiliates) . . . . . . . . . . . . . . . 1,498 1,814 ---------- --------- $ 47,860 $ 49,035 ========== ========= Liabilities and Shareholders' Equity Liabilities Notes and interest payable . . . . . . . . . . . . . . $ 20,413 $ 20,717 Other liabilities (including $805 in 1995 and $407 in 1994 to affiliates) . . . . . . . . . . . . . . . 2,985 2,746 ---------- --------- 23,398 23,463 Commitments and contingencies Shareholders, equity Shares of beneficial interest, no par value; authorized shares, unlimited; issued and outstanding, 791,444 shares . . . . . . . . . . . . 3,347 3,347 Paid-in capital . . . . . . . . . . . . . . . . . . . . 62,093 62,093 Accumulated distributions in excess of accumulated earnings . . . . . . . . . . . . . . . . . . . . . . (40,978) (39,868) ---------- --------- 24,462 25,572 ---------- --------- $ 47,860 $ 49,035 ========== =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 3 INCOME OPPORTUNITY REALTY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------- ------------------------- 1995 1994 1995 1994 --------- --------- --------- --------- (dollars in thousands, except per share) INCOME Rents . . . . . . . . . . . . . . . $ 1,950 $ 1,722 $ 3,700 $ 3,252 Interest . . . . . . . . . . . . . . 51 69 113 141 Equity in income (loss) of partnerships . . . . . . . . . . . (729) (22) (644) 29 -------- -------- -------- -------- 1,272 1,769 3,169 3,422 EXPENSES Property operations . . . . . . . . 1,068 691 2,003 1,523 Interest . . . . . . . . . . . . . 466 479 936 962 Depreciation . . . . . . . . . . . . 264 240 521 478 Advisory fee to affiliate . . . . . 91 84 183 182 General and administrative . . . . . 263 138 398 279 -------- -------- -------- -------- 2,152 1,632 4,041 3,424 -------- -------- -------- -------- Net income (loss) . . . . . . . . . . $ (880) $ 137 $ (872) $ (2) ======== ======== ======== ======== Earnings Per Share Net income (loss) . . . . . . . . . $ (1.11) $ .17 $ (1.10) $ - ======== ======== ======== ======== Shares of beneficial interest used in computing earnings per share . . . . . . . . . . . . . 791,444 791,444 791,444 791,444 ======== ======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 3 4 INCOME OPPORTUNITY REALTY TRUST CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For the Three Months Ended June 30, 1995
Accumulated Shares of Beneficial Distributions Interest in Excess of -------------------------- Paid-In Accumulated Shareholders' Shares Amount Capital Earnings Equity ---------- ---------- ------------- ---------------- ------------- (dollars in thousands) Balance, January 1, 1995 . . . . . . . . . 791,444 $ 3,347 $ 62,093 $ (39,868) $ 25,572 Distributions ($.30 per share) . . . . . . . . - - - (238) (238) Net loss . . . . . . . . - - - (872) (872) -------- ------- -------- --------- -------- Balance, June 30, 1995 . 791,444 $ 3,347 $ 62,093 $ (40,978) $ 24,462 ======== ======= ======== ========= ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 5 INCOME OPPORTUNITY REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, --------------------------- 1995 1994 --------- --------- (dollars in thousands) Cash Flows from Operating Activities Rents collected . . . . . . . . . . . . . . . . . . . . $ 3,687 $ 3,389 Interest collected . . . . . . . . . . . . . . . . . . . 107 135 Interest paid . . . . . . . . . . . . . . . . . . . . . (896) (920) Payments for property operations . . . . . . . . . . . . (1,743) (1,595) Advisory fee paid to affiliate . . . . . . . . . . . . . (183) (178) General and administrative expenses paid . . . . . . . . (551) (508) Distribution from equity partnerships' operating cash flow . . . . . . . . . . . . . . . . . . . . . . . 39 20 Other . . . . . . . . . . . . . . . . . . . . . . . . . (328) (52) -------- ------- Net cash provided by operating activities . . . . . . 132 291 Cash Flows from Investing Activities Real estate improvements . . . . . . . . . . . . . . . . (120) (65) -------- ------- Net cash (used in) investing activities . . . . . . . (120) (65) Cash Flows from Financing Activities Payments on notes payable . . . . . . . . . . . . . . . (302) (339) Distributions to shareholders . . . . . . . . . . . . . (238) (231) Advances from advisor . . . . . . . . . . . . . . . . . 743 - -------- ------- Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . 203 (570) Net increase (decrease) in cash and cash equivalents . . 215 (344) Cash and cash equivalents, beginning of period . . . . . 232 582 -------- ------- Cash and cash equivalents, end of period . . . . . . . . $ 447 $ 238 ======== ======= Reconciliation of net (loss) to net cash provided by operating activities Net (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (872) $ (2) Adjustments to reconcile net (loss) to net cash provided by operating activities Depreciation and amortization . . . . . . . . . . . . . 558 515 Funding of equity partnerships . . . . . . . . . . . . . (5) (85) Equity in (income) losses of partnerships . . . . . . . 644 (29) Distributions from partnerships in excess of current period earnings . . . . . . . . . . . . . . . . 39 107 (Increase) decrease in other assets . . . . . . . . . . (199) 65 (Decrease) in interest payable . . . . . . . . . . . . (2) (2) (Decrease) in other liabilities . . . . . . . . . . . . (31) (278) -------- ------- Net cash provided by operating activities . . . . . . . $ 132 $ 291 ======== =======
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 6 INCOME OPPORTUNITY REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. Operating results for the three month period ended June 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 Trust'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 November 1993, the Trust placed the $1.1 million wraparound mortgage note, secured by the Cedars Apartments in Irving, Texas on nonperforming, nonaccrual status. The Trust had sold the property securing the mortgage in 1992 providing purchase money financing in conjunction with the sale. In December 1993, the borrower filed for bankruptcy protection. The Trust recorded the property as an insubstance foreclosure as of December 31, 1994 and accepted a deed in lieu of foreclosure on March 2, 1995. The Trust did not incur a loss on foreclosure as the fair value of the property, less estimated costs of sale, exceeded the principal balance of the note receivable. NOTE 3. REAL ESTATE AND DEPRECIATION As discussed in NOTE 2. "NOTES AND INTEREST RECEIVABLE," as of December 31, 1994, the Trust recorded the insubstance foreclosure of the Cedars Apartments. Upon foreclosure, the property was renamed the Spanish Trace Apartments. NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS In September 1989, the Trust purchased a 40% general partner interest in Nakash Income Associates ("NIA") for a total of $2.6 million in cash, assets and shares of beneficial interest. 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 lien holder 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 Trust's equity portion of the loss is $792,000. 6 7 INCOME OPPORTUNITY REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 5. 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 will 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 Income Opportunity Realty Trust (the "Trust") was formed to invest in mortgage loans on real estate, including first, wraparound, and junior mortgage loans, and in equity interests in real estate through acquisitions, leases and partnerships. The Trust was organized on December 14, 1984 and commenced operations on April 10, 1985. The Trust is a self-liquidating trust and is scheduled, unless and until the Trust's shareholders decide on a contrary course of action, to begin liquidation of its assets prior to October 24, 1996. The Trust's declaration of Trust also requires the distribution to the Trust's shareholders of (i) the net cash proceeds from sale or refinancing of equity investments received by the Trust, and (ii) the net cash proceeds from the satisfaction of mortgage notes receivable received after October 24, 1996. However, the Trust's Board of Trustees has discretionary authority to hold any investment past October 24, 1996, should circumstances so dictate. The Trust's management periodically reviews the self-liquidation and finite-life provisions of the Trust's Declaration of Trust. The Trust's management has determined that it would be in the best interest of the Trust's shareholders to eliminate the self-liquidation and finite-life provisions of the Declaration of Trust and, in that regard, has recommended that the Trust's Board of Trustees approve a proposal to convert the Trust to a Nevada corporation. Upon approval by the Trust's Board of Trustees, the Trust will file a Proxy Statement/Prospectus with the Securities and Exchange Commission providing for a special meeting of the Trust's shareholders. At such meeting shareholders will be presented with a proposal to approve the conversion of the Trust to a corporation by way of the merger of the Trust into a wholly-owned subsidiary of the Trust. This proposal will require the approval of shareholders holding a majority of the Trust's outstanding shares of beneficial interest. Liquidity and Capital Resources Cash and cash equivalents at June 30, 1995 aggregated $447,000, compared with $232,000 at December 31, 1994. The Trust's principal sources of cash have been and will continue to be property operations and collection of interest on its mortgage note receivable and distributions 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) from partnerships. The Trust anticipates that it will have sufficient cash to meet its various cash requirements during the remainder of 1995, including the payment of distributions, debt service obligations and property maintenance and improvements. In the first six months of 1995, the Trust paid quarterly distributions aggregating $0.30 per share or a total of $238,000. As of July 28, 1995, the Trust had repurchased 67,952 of its shares of beneficial interest at a cost of $1.2 million pursuant to a repurchase program commenced in December 1989. None of such shares were repurchased in 1995. The Trust's Board of Trustees has authorized the Trust's repurchase of a total of 100,000 shares under such repurchase program, of which 32,048 shares remain to be repurchased. The level of any future share repurchases will depend on the market price of the Trust's shares and the continued availability to the Trust of excess funds. The Trust owns a 36.3% general partner interest in Tri-City Limited Partnership which in turn owns five properties in Texas. The Trust received a distribution of $127,000 from the partnership in July 1995. On a quarterly basis, the Trust's management reviews the carrying values of the Trust's mortgage note receivable and properties. Generally accepted accounting principles require that the carrying amount of an investment cannot exceed the lower of its cost or its estimated net realizable value. In an instance where the estimate of net realizable value of a Trust property or note is less than the carrying value thereof at the time of evaluation, a provision for loss is recorded by a charge against earnings. The estimate of net realizable value of the Trust's mortgage note receivable is based on management's review and evaluation of the collateral property securing the 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 For the six months ended June 30, 1995, the Trust incurred a net loss of $872,000, as compared with a net loss of $2,000 in the corresponding period in 1994. For the three months ended June 30, 1995, the Trust had net loss of $880,000 as compared with net income of $137,000 in the corresponding period in 1994. The primary factor contributing to the Trust's net loss in the three and six months ended June 30, 1995 was an increase in equity in losses of partnerships of $707,000 and $673,000, respectively, as discussed in detail below. Net rental income (rents less property operating expense) for the first six months of 1995 of $1.7 million approximated the $1.7 million in the 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (Continued) corresponding period in 1994. Net rental income for the three months ended June 30, 1995 was $882,000, as compared to $1.1 million in the corresponding period in 1994. The decline in second quarter net rental income is primarily due to operating losses incurred at the Cedars Apartments, a property obtained by deed-in-lieu of foreclosure in March 1995 and to higher expenses in both the Trust's residential and commercial portfolios. Equity in loss of partnerships was a loss of $729,000 and $644,000 for the three and six months ended June 30, 1995 compared to a loss of $22,000 and income of $29,000 in the corresponding periods in 1994, respectively. The increased equity loss is primarily due to the write down of a wraparound mortgage note receivable to the balance of the underlying mortgage payable by the Nakash Income Associates, a partnership in which the Trust has a 40% general partner interest. See NOTE 4. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS." Interest income, interest expense, depreciation and advisory fee expense for the three and six months ended June 30, 1995 all approximated that of the corresponding periods in 1994. General and administrative expenses increased to $263,000 and $398,000 for the three and six months ended June 30, 1995, from $138,000 and $279,000 in the corresponding periods in 1994, respectively. The increase is primarily due to higher communications and legal fees relating to the Trust's annual meeting of shareholders held in March 1995. Tax Matters As more fully discussed in the Trust's 1994 Form 10-K, the Trust has elected and, in management's opinion, 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 Trust 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 shareholders. Inflation The effects of inflation on the Trust'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 value of properties and, correspondingly, the ultimate realizable value of the Trust's real estate and notes receivable portfolios. 9 10 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 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." As discussed under "Introduction" above, the Trust is a self liquidating trust. Accordingly, all of the Trust's properties are classified as held for sale. SFAS No. 121 requires 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 estimated fair value less cost to sell shall be recorded as an adjustment to the asset's carrying amount, but not in excess of the asset's carrying amount when originally classified as held for sale. A corresponding charge against 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 Trust's management has not fully evaluated the effects of adopting SFAS No. 121, but it estimates that if the Trust had adopted SFAS No. 121 effective January 1, 1995, the Trust would have recorded no depreciation in the three and six months ended June 30, 1995, the Trust's reported net loss for the three and six months ended June 30, 1995 would have been decreased by $245,000 and $502,000, respectively, and that a provision for loss to reduce any property's carrying amount to its fair value less cost to sell would not have been required in either period. [This space intentionally left blank.] 10 11 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
Exhibit Number Description ------- ----------- 27. 0 Financial Data Schedule
(b) Reports on Form 8-K as follows: None. 11 12 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. INCOME OPPORTUNITY REALTY TRUST Date: August , 1995 By: /s/ OSCAR W. CASHWELL Oscar W. Cashwell President Date: August , 1995 By: /s/ THOMAS A. HOLLAND Thomas A. Holland Senior Vice President and Chief Accounting Officer 12 13 INCOME OPPORTUNITY REALTY TRUST EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Three Months Ended June 30, 1995
Exhibit Page Number Description Number ------- ----------- ------ 27. 0 Financial Data Schedule.
13 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 447 0 1,980 121 0 0 46,332 5,576 47,860 0 20,413 0 0 0 24,462 47,860 0 3,700 0 2,002 502 0 936 (872) 0 (872) 0 0 0 (872) (1.10) (1.10)