10-Q 1 0001.txt FORM 10-Q 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 QUARTER ENDED JUNE 30, 2000 ------------- Commission File Number 1-9648 ------ NATIONAL REALTY, L.P. ------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 75-2163175 ------------------ ------------------ (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 . --- --- Units of Limited Partner Interest 6,285,323 --------------------------------- -------------------------------- (Class) (Outstanding at July 31, 2000) 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ----------------------------- The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants, but in the opinion of the management of National Realty, L.P. ("NRLP"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated results of operations, consolidated financial position and consolidated cash flows at the dates and for the periods indicated, have been included. NATIONAL REALTY, L.P. CONSOLIDATED BALANCE SHEETS June 30, December 31, 2000 1999 ---------- -------------- (dollars in thousands) Assets ---------------------------------------------------- Notes and interest receivable Performing (including $163,685 in 2000 and $149,980 in 1999 from affiliates)................ $ 168,767 $ 165,155 Nonperforming (including $1,398 in 2000 and $1,353 in 1999 from affiliate)................... 2,920 2,909 --------- --------- 171,687 168,064 Less - allowance for estimated losses.............. (1,910) (1,910) --------- --------- 169,777 166,154 Real estate held for investment Land.............................................. 37,314 39,842 Buildings and improvements........................ 263,104 282,521 --------- --------- 300,418 322,363 Less - accumulated depreciation.................... (126,578) (146,534) --------- --------- 173,840 175,829 Foreclosed real estate, held for sale............... 7,633 7,633 Cash and cash equivalents........................... 1,694 2,066 Accounts receivable (including $45,170 in 2000 and $489 in 1999 from affiliates)..................... 46,724 2,873 Prepaid expenses.................................... 1,302 1,324 Escrow deposits and other assets (including $1,244 in 1999 from affiliates)................... 6,756 6,796 Marketable equity securities of affiliate, (at market)........................................... 1,321 3,327 Deferred financing costs............................ 7,669 9,279 --------- --------- $ 416,716 $ 375,281 ========= ========= The accompanying notes are an integral part of these Consolidated Financial Statements. 2 NATIONAL REALTY, L.P. CONSOLIDATED BALANCE SHEETS - Continued June 30, December 31, 2000 1999 --------- -------------- (dollars in thousands) Liabilities and Partners' Equity -------------------------------- Liabilities Notes and interest payable........................ $ 257,078 $ 277,734 Accrued property taxes............................ 3,184 3,660 Tenant security deposits.......................... 1,765 2,033 Accounts payable and other liabilities (including $7,232 in 2000 and $345 in 1999 to affiliates).................................. 7,044 2,168 -------- -------- 269,071 285,595 Commitments and contingencies Partners' equity General Partner................................... 3,293 2,076 Limited Partners (6,285,323 units in 2000 and 6,321,522 units in 1999)........................ 143,300 84,552 Unrealized gain on marketable equity securities of affiliate.................................... 1,052 3,058 -------- -------- 147,645 89,686 -------- -------- $416,716 $375,281 ======== ======== The accompanying notes are an integral part of these Consolidated Financial Statements. 3 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------ ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (dollars in thousands, except per unit) Property revenue Rents......................................... $ 16,556 $ 23,130 $ $33,581 $ 47,155 Property expense Property taxes and insurance. 1,816 2,382 3,761 4,788 Utilities..................................... 1,602 2,082 3,409 4,435 Property-level payroll costs. 961 1,148 2,005 2,568 Repairs and maintenance....................... 3,738 4,891 6,977 9,932 Other operating expenses...................... 663 791 1,389 1,978 Property management fees...................... 791 1,157 1,603 2,349 ----------- ---------- ---------- ---------- 9,571 12,451 19,144 26,050 ----------- ---------- ---------- ---------- Operating income............................. 6,985 10,679 14,437 21,105 Other income Interest (including $4,381 and $8,689 in 2000 and $2,904 and $4,900 in 1999 from affiliates)............................. 4,523 4,781 10,447 8,572 Gain on sale of real estate................... 37,515 8,738 55,598 24,405 ----------- ---------- ---------- ---------- 42,038 13,519 66,045 32,977 Other expense Interest...................................... 6,581 6,988 12,378 14,074 Depreciation.................................. 1,844 2,033 3,770 4,100 General and administrative.................... 1,067 2,120 2,619 3,963 General partner incentive fee 561 - 561 948 ----------- ---------- ---------- ---------- 10,053 11,141 19,328 23,085 ----------- ---------- ---------- ---------- Net income..................... $ 38,970 $ 13,057 $ 61,154 $ 30,997 =========== ========== ========== ========== Earnings per unit Net income................... $ 6.04 $ 2.02 $ 9.48 $ 4.80 Weighted average units of limited partner interest used in computing earnings per unit..................... 6 ,320,701 6,321,529 6,321,112 6,321,538 =========== ========== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 4 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENT OF PARTNERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30 , 2000
Other Accumulated General Limited Comprehensive Partners' Partner Partners Income Equity --------- ---------- -------------- ------------ (dollars in thousands, except per unit) Balance, January 1, 2000......................... $ 2,076 $ 84,552 $ 3,058 $ 89,686 Comprehensive income Unrealized (loss) on Marketable equity securities of Affiliate...................... -- -- (2,006) (2,006) Net income..................................... 1,217 59,937 -- 61,154 ---------- 59,148 Repurchase of units of limited partner interest.. -- (399) -- (399) Distributions ($.125 per unit)................... - (790) - (790) --------- ---------- --------- ---------- Balance, June 30, 2000........................... $ 3,293 $ 143,300 $ 1,052 $ 147,645 ========= ========== ========= ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 5 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, -------------------------- 2000 1999 ------------ ------------ (dollars in thousands) Cash Flows From Operating Activities Rents collected.................................. $ 33,424 $ 47,506 Payments for property operations................. (15,195) (25,508) Interest collected............................... 4,047 4,957 Interest paid.................................... (10,606) (13,063) General and administrative expenses paid......... (2,588) (3,822) Other.......................................... 920 (33) ------------ ------------ Net cash provided by operating activities..... 10,002 10,037 Cash Flows From Investing Activities Proceeds from sales of real estate............. 41,570 41,323 Acquisition of real estate..................... -- (6,443) Real estate improvements......................... (8,326) (1,197) Construction and development................... (8,030) -- Funding of notes receivable.................... (9,198) (70,754) Collections on notes receivable................ 12,857 13,866 General Partner incentive disposition fee...... (561) (948) ------------ ------------ Net cash provided by (used in) investing activities................................... 28,312 (24,153) Cash Flows From Financing Activities Proceeds from notes payable.................... 38,683 22,563 Payments on notes payable........................ (31,757) (33,753) /refund of deposits on pending financings and acquisitions................... (190) 742 Escrow refunds................................. -- 1,029 Advances (to) payments from affiliates......... (43,941) 18,144 Deferred financing costs....................... (45) (558) Repurchase of units............................ (399) -- Distributions to unitholders................... (790) (1,578) Distributions to general partner............... (247) (399) ------------ ------------ Net cash (used in) provided by financing activities...................................... (38,686) 6,190 ------------ ------------ Net (decrease) in cash and cash equivalents..... (372) (7,926) Cash and cash equivalents at beginning of period.. 2,066 9,025 ------------ ------------ Cash and cash equivalents at end of period........ $ 1,694 $ 1,099 ============ ============ The accompanying notes are an integral part of these Consolidated Financial Statements. 6 NATIONAL REALTY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued For the Six Months Ended June 30, 1999 2000 ---------- ---------- (dollars in thousands) Reconciliation of net income to net cash provided by operating activities Net income...................................... $ 61,154 $ 30,997 Adjustments to reconcile net income to net cash provided by operating activities Gain on sale of real estate............... (55,598) (24,405) Depreciation.............................. 3,770 4,100 Amortization of deferred financing costs.. 1,655 1,053 Decrease in other assets.................. 356 1,917 (Increase) in interest receivable......... (6,378) (3,614) Increase in interest payable................... 117 (42) Increase in other liabilities.................. 4,926 31 ---------- ---------- Net cash provided by operating activities.... $ 10,002 $ 10,037 ========== ========== Schedule of noncash financing activities Unrealized (loss) gain on marketable equity securities of affiliate................. (2,006) $ 122 Notes payable assumed by buyer on sale of real estate............................. 27,914 8,584 Acquisition of real estate in satisfaction of note receivable......................... (2,989) -- The accompanying notes are an integral part of these Consolidated Financial Statements. 7 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION ------------------------------ The accompanying Consolidated Financial Statements have been prepared in conformity 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. Dollar amounts in tables are in thousands, except per unit amounts. Certain balances for 1999 have been reclassified to conform to the 2000 presentation. Operating results for the six month period ended June 30, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the Consolidated Financial Statements and Notes thereto included in NRLP's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form 10-K"). NOTE 2. ORGANIZATION --------------------- NRLP is a Delaware limited partnership which commenced operations on September 18, 1987, when through National Operating, L.P. ("NOLP") it acquired all of the assets and assumed all of the liabilities of 35 public and private limited partnerships. NRLP is the sole limited partner of NOLP and owns 99% of the beneficial interest in NOLP. The general partner and owner of 1% of the beneficial interest in each of NRLP and NOLP is NRLP Management Corp. ("NMC"), a wholly-owned subsidiary of American Realty Trust, Inc. ("ART"), a publicly held real estate company. As of July 31, 2000, ART owned approximately 56.2% of NRLP's outstanding units of limited partner interest. In November 1992, NOLP, to facilitate the refinancing of 52 of its apartments and a wraparound mortgage note receivable, with a financial institution, transferred those assets to Garden Capital, L.P. ("GCLP"), a limited partnership. NOLP is the sole limited partner with a 99.3% limited partner interest in GCLP. GCLP transferred the acquired net apartment assets in exchange for a 99% limited partner interest in single asset limited partnerships which were formed for the purpose of operating, refinancing and holding title to the apartments. The single asset limited partnerships have no significant assets other than an apartment encumbered by mortgage debt. Garden National Realty, Inc. ("GNRI"), a wholly-owned subsidiary of ART, is the .7% general partner of GCLP and 1% general partner of the single asset partnerships. Transaction with American Realty Investors, Inc. On November 3, 1999, NRLP and ART jointly announced their agreement to combine, in a tax-free exchange, under the ownership of a new company to be named American Realty Investors, Inc. ("ARI"). The share exchange was subject to a vote of stockholders/unitholders of both entities. Approval required the vote of the unitholders holding a majority of NRLP's outstanding 8 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. ORGANIZATION (Continued) --------------------- units, and the vote of the stockholders holding a majority of ART's outstanding shares of common and preferred stock. At special meetings held on March 21, 2000, NRLP unitholders and ART stockholders approved the proposal. The transaction was closed on August 2, 2000. Shares of ARI common stock were issued to ART stockholders and NRLP unitholders. NRLP unitholders, except for ART, received one share of ARI common stock for each NRLP unit held. ART stockholders received .91 shares of ARI common stock for each share of ART common stock held. Each share of ART preferred stock converted into one share of preferred stock of ARI, having substantially the same rights as ART's preferred stock. The NRLP units ceased trading on the American Stock Exchange on August 2, 2000. ARI common stock commenced trading on the New York Stock Exchange on August 3, 2000. NOTE 3. EARNINGS PER UNIT -------------------------- Income per unit of limited partner interest is presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share". Income per unit is computed by multiplying NRLP's net income by 98.01% and dividing the result by the weighted average number of units outstanding during each period. NOTE 4. NOTES RECEIVABLE ------------------------- In January 2000, a $365,000 note receivable was collected in full, including accrued but unpaid interest. In March 2000, a $942,000 note receivable was collected in full, including accrued but unpaid interest. In June 2000, NRLP sold the 124,322 sq.ft. Marina Playa Office Building in Santa Clara, California, for $25.8 million, receiving $7.6 million in cash and providing financing of $18.8 million. Also in June 2000, NRLP sold the note receivable, net of the underlying debt, for $6.2 million, retaining a $3.9 million participation. In August 1999, a $2.6 million loan was funded to JNC Enterprises, Inc. ("JNC"). The loan was subsequently split into two pieces. The loans were secured by second liens on a 3.5 acre and a 1.2561 acre parcel of land in Dallas, Texas, the guarantee of the borrower and the personal guarantees of its shareholders. The loans bore interest at 16.0% per annum and matured in February 2000. All principal and interest were due at maturity. In March 2000, the $2.0 million loan secured by the 3.5 acre land parcel was collected in full, including accrued but unpaid interest. In April 2000, the remaining loan, with a principal balance of $600,000, was collected in full, including accrued but unpaid interest. In September 1999, in conjunction with the sale of two apartments, NRLP provided $2.1 million in purchase money financing secured by limited partnership interests in two limited partnerships owned by the buyer. The financing bore interest at 16.0% per annum, required monthly payments of interest only at 6.0% beginning in February 2000, and a 9 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES RECEIVABLE (Continued) ------------------------- $200,000 principal paydown in December 1999, which was not received, and matured in August 2000. NRLP had the option to obtain the buyer's general and limited partnership interests in the collateral partnerships in full satisfaction of the financing. In March 2000, NRLP agreed to forbear foreclosing on the collateral securing the note, and released one of the partnership interests, in exchange for payment of $250,000 and executed deeds of trusts on certain properties owned by the borrower. In March 2000, the borrower made a $1.1 million payment, upon receipt of which NRLP returned the deeds of trust and terminated the option agreement. The borrower executed a replacement promissory note for the remaining note balance of $1.0 million, which is unsecured, non-interest bearing and matures in April 2003. In April 2000, NRLP funded a $100,000 loan to the borrower. The loan is secured by five second lien deeds of trust, is non- interest bearing and matures in September 2001. In December 1999, a note with a principal balance of $1.2 million and secured by a pledge of partnership interest in a partnership which owns real estate in Addison, Texas, matured. The maturity date was extended to April 2000 in exchange for an increase in the interest rate to 14.0% per annum. All other terms remained the same. Negotiations are in process to further modify and extend the loan. In June 1998, a $4.2 million loan was funded to Cuchara Partners, Ltd. and Ski Rio Partners, Ltd., affiliates of JNC. The loan was secured by (1) a first lien on approximately 450 acres of land in Huerfano County, Colorado, known as Cuchara Valley Mountain Ski Resort; (2) an assignment of a $2.0 million promissory note secured by approximately 2,623 acres of land in Taos County, New Mexico, known as Ski Rio Resort; and (3) a pledge of all related partnership interests. The loan bore interest at 16.0% per annum and had an extended maturity of March 2000. All principal and interest were due at maturity. In the fourth quarter of 1998, $109,000 was received on the sale of 11 parcels of the collateral property in Taos, New Mexico. In August and September 1999, paydowns totaling $3.3 million were received. The loan had a principal balance of $1.6 million at March 31, 2000. In April 2000, the loan was collected in full, including accrued but unpaid interest. In August 1998, a $635,000 loan was funded to La Quinta Partners, LLC. The loan was secured by interest bearing accounts prior to being used as escrow deposits toward the purchase of a total of 956 acres of land in La Quinta, California, and the personal guarantee of the manager of the borrower. The loan had an extended maturity of November 1999. All principal and interest were due at maturity. In November and December 1998, $250,000 in principal paydowns were received. In the second quarter of 1999, the loan was modified, increasing the interest rate to 15.0% per annum and extending the maturity date to November 1999. Accrued but unpaid interest was added to the principal balance, increasing it by $42,000 to $402,000. In the fourth quarter of 1999, an additional $2,000 was funded, increasing the loan's principal balance to 10 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES RECEIVABLE (Continued) ------------------------- $404,000 at March 31, 2000. In March 2000, $25,000 in interest was collected and the loan's maturity was extended to April 2000. The borrower did not make the required payments and the loan was classified nonperforming. NRLP has begun legal proceedings to collect the balance due. No loss is expected in excess of previously established reserves if NRLP is unable to collect the balance due. In October 1998, a $2.1 million loan was funded to Frisco Panther Partners, Ltd., an affiliate of JNC. The loan was secured by a second lien on 408.23 acres of land in Frisco, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bore interest at 16.0% per annum and had an extended maturity of March 2000. All principal and interest were due at maturity. In April 2000, the loan was collected in full, including accrued but unpaid interest. In December 1998, $3.3 million of a $5.0 million loan commitment was funded to JNC. In January 1999, a $1.3 million paydown was received and subsequently in 1999 an additional $3.0 million was funded, increasing the loan balance to $5.0 million. The loan was secured by a second lien on 1,791 acres of land in Denton County, Texas, and a second lien on 91 acres of land in Collin County, Texas. The loan bore interest at 16.0% per annum, and had an extended maturity of March 2000. All principal and interest were due at maturity. At March 31, 2000, the loan had a principal balance of $5.0 million. In April 2000, the loan was collected in full, including accrued but unpaid interest. In conjunction with the April 2000 JNC loan payoffs, described above, NRLP paid off $5.0 million in mortgage debt secured by the notes. Related Party. GCLP has funded a $125.0 million loan commitment to ART. The loan is secured by second liens on six ART properties in Minnesota, Mississippi and Texas; by the stock of ART Holdings, Inc., a wholly-owned subsidiary of ART that owns 3,268,535 NRLP limited partner units; by the stock of NMC, also a wholly-owned subsidiary of ART and the general partner of NRLP; a pledge of 820,675 NRLP limited partner units owned by Basic Capital Management, Inc. ("BCM") and a pledge of 284,434 NRLP limited partner units owned by ART. The loan bears interest at 12.0% per annum, required monthly payments of interest only and matures in November 2003. In March 2000, ART sold 3.254 acres of improved land in Farmers Branch, Texas, adjacent to NRLP's Centura Tower Office Building, to NRLP for its carrying cost of $3.0 million, with sales price being applied as a paydown on the loan. No interest payments have been received in 2000. At June 30, 2000, approximately $146.6 million, including accrued interest, of the $171.7 million in notes receivable, was due from ART. On August 2, 2000, the effective date of the combination of ART and NRLP, this receivable, and any unpaid interest, was eliminated without payment. See NOTE 2. "ORGANIZATION - Transaction with American Realty Investors, Inc." 11 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES RECEIVABLE (Continued) ------------------------- In 1998, a loan commitment of $1.8 million was funded to Warwick of Summit, Inc. ("Warwick"). The loan was secured by a second lien on a shopping center in Rhode Island, by 100% of the stock of the borrower and by the personal guarantee of the principal shareholder of the borrower. The loan bears interest at 14.0% per annum and has an extended maturity of December 2000. All principal and interest are due at maturity. In December 1999, the borrower sold the collateral property. NRLP received $810,000 of the net proceeds of the sale, of which $386,000 was applied to accrued interest and the remaining $424,000 was applied to principal, reducing the principal balance to $1.7 million. NRLP is to receive escrowed monies of $377,000 in 2000. Through June 30, 2000, $50,000 has been received. The loan is currently unsecured. Richard D. Morgan, a Warwick shareholder, is a Director of NMC, the general partner of NRLP. Beginning in 1997 and through January 1999, a $1.6 million loan commitment was funded to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by (1) a 100% membership interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux members. The loan bears interest at 14.0% per annum. In November 1998, the loan was modified to allow interest payments based on monthly cash flow of the collateral property and the maturity date was extended to December 1999. In the second quarter of 1999, the loan was again modified, increasing the loan commitment to $2.1 million and an additional $33,000 was funded. In the third quarter of 1999, an additional $213,000 was funded. The property has had no cash flow, therefore, NRLP ceased accruing interest on the loan in the second quarter of 1999. In October 1999, a $724,000 paydown was received, which was applied first to accrued but unpaid interest due of $261,000, then to principal, reducing the loan balance to $1.4 million. The note was further modified, changing the loan commitment to $1.5 million, the maturity date to December 2000, and payment requirement to net revenues of the shopping center, defined as gross receipts less all costs and expenses incurred in connection with the operation of the property. Richard D. Morgan, a Bordeaux member, is a Director of NMC, the general partner of NRLP. In February 1999, a $5.0 million unsecured loan was funded to One Realco Corporation which at June 30, 2000, owned approximately 15.8% of the outstanding shares of ART's common stock. The loan bears interest at 12.0% per annum and originally matured in February 2000. All principal and interest were due at maturity. The loan was guaranteed by BCM, an affiliate of NMC. In March 2000, the note was modified and extended, increasing the loan commitment to $11.0 million, and an additional $1.2 million was funded. The maturity date was extended to February 2002. In exchange for the modification and extension, the borrower paid all accrued but unpaid interest and pledged collateral consisting of a $10.0 million promissory note secured by the stock of World Trade Company, Ltd., which owns a hotel in 12 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. NOTES RECEIVABLE (Continued) ------------------------- Bulgaria. Through June 30, 2000, $10.2 million has been funded. In July 2000, the note was again modified, increasing the loan commitment to $15.0 million. During 1998 and 1999, a total of $31.0 million of a $52.5 million loan commitment was funded to Centura Tower, Ltd. ("Centura"). The loan was secured by 2.244 acres of land and an office building under construction in Farmers Branch, Texas. In August 1999, NRLP exercised its option contained in the loan agreement and obtained a combined 80% general and limited partnership interest in Centura in exchange for a $24.1 million capital contribution through conversion of a portion of its note receivable to an equity interest. NRLP has contracted to purchase an additional 10.0% limited partnership interest in both Centura and NLP/CH, Ltd., an affiliated partnership that owns land adjacent to the office building, for a total of $1.3 million. Through July 2000, $697,000 has been paid. NOTE 5. REAL ESTATE -------------------- In 2000, NRLP purchased the following properties:
Net Units/ Purchase Cash Debt Interest Maturity Property Location Acres/Sq.Ft. Price Paid Incurred Rate Date --------------- ------------------ ------------ -------- ------- -------- -------- -------- First Quarter Land Clark Farmers Branch, TX 3.25 acres $2,972 $2,972 -- -- --
In 2000, NRLP sold the following properties:
Net Sales Debt Cash Gain on Property Location Units/Sq.Ft. Price Discharged Received Sale ------------------ --------------- -------------- ------- ---------- -------- ------- First Quarter Apartments Summerwind Reseda, CA 172 Units $ 9,000 $ 5,568 * $3,082 $ 7,351 Windtree Reseda, CA 159 Units 8,350 5,063 * 2,911 6,740 Whispering Pines Canoga Park, CA 102 Units 5,300 3,437 * 1,597 3,529 Shopping Center Katella Plaza Orange, CA 62,290 Sq.Ft. 1,814 1,188 283 463 Second Quarter Apartments Pines Little Rock, AR 257 Units 4,650 3,063 1,281 2,936 Four Seasons Denver, CO 384 Units 16,600 9,220 * 6,543 9,906 Sherwood Glen Urbandale, IA 180 Units 6,250 4,626 * 1,244 4,837 Office Building Marina Playa Santa Clara, CA 124,205 Sq.Ft. 25,750 7,766 7,627 19,835 Third Quarter Apartment Fair Oaks Euless, TX 208 Units 6,850 5,711 609 4,082
------------- * Debt assumed by purchaser. 13 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. NOTES AND INTEREST PAYABLE ----------------------------------- In 2000, NRLP financed or obtained second mortgage financing on the following properties:
Net Acres/ Debt Debt Cash Interest Maturity Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date ------------------- ------------------ -------------- -------- ---------- -------- --------- -------- First Quarter Land Centura, Clark and Woolley Farmers Branch, TX 10.08 Acres $ 7,150 $ - $ 6,960 14.00% 03/03 Second Quarter Apartments Rockborough Denver, CO 345 Units 2,222 - 1,942 8.37 11/10 Confederate Point Jacksonville, FL 206 Units 7,440 5,879 1,039 8.12 05/07 Whispering Pines Topeka, KS 320 Units 7,530 6,829 302 8.12 05/07 Third Quarter Office Building Centura Tower Farmers Branch, TX 410,901 Sq.Ft. 15,000 -- 14,612 16.9 07/02
NOTE 7. GENERAL PARTNER FEES AND COMPENSATION ---------------------------------------------- Fees and cost reimbursements to NMC and its affiliates for the six months ended: June 30, 2000 -------- Property and construction management fees*.. $ 586 Loan placement fees......................... 243 Real estate commissions..................... 2,285 General Partner fees........................ 561 Leasing commissions......................... 16 Reimbursement of administrative expenses.... 1,883 -------- $ 5,574 ======== ----------------- * Net of property management fees paid to subcontractors, other than Regis Realty, Inc., which is owned by an affiliate of BCM. NOTE 8. OPERATING SEGMENTS --------------------------- Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of general and administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to each of them based on their operating income and cash flow. Expenses that are not reflected in the segments are $2.6 million and $4.0 million of general and administrative expenses for the six months ended June 30, 2000 and 1999, respectively, and $561,000 and $948,000 in general partner incentive fees in the six months ended June 30, 2000 and 1999. Excluded from operating segment assets are assets of $65.9 million at June 30, 14 NATIONAL REALTY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 8. OPERATING SEGMENTS (Continued) --------------------------- 2000, and $25.7 million at June 30, 1999, which are not identifiable with an operating segment. There are no intersegment revenues and expenses and all business is conducted in the United States. Presented below is the operating income of each operating segment for the six months ended June 30, and each segment's assets at June 30. Commercial 2000 Properties Apartments Receivables Total ---------- ---------- ----------- -------- Rents................. $ 2,576 $ 31,005 $ -- $ 33,581 Property operating expenses.......... 1,688 17,456 -- 19,144 Interest income....... -- -- 10,425 10,425 Interest expense - notes receivable.. -- -- 593 593 ---------- ---------- ----------- -------- Segment operating income............... $ 888 $ 13,549 $ 9,832 $ 24,269 ========== ========== =========== ======== Depreciation.......... $ 1,698 $ 2,072 $ -- $ 3,770 Interest on debt...... 3,279 8,732 -- 12,011 Real estate improvements...... 8,289 37 -- 8,326 Construction expenditures...... -- 8,030 -- 8,030 Assets................ 97,465 84,008 169,777 351,250 Commercial Property Sales Properties Apartments Total ---------- ---------- -------- Sales price........... $ 27,564 $ 50,150 $ 77,714 Cost of sales......... 7,265 14,851 22,116 ---------- ---------- -------- Gain on sale.......... $ 20,299 $ 35,299 $ 55,598 ========== ========== ======== Commercial 1999 Properties Apartments Receivables Total ---------- ---------- ----------- -------- Rents................. $ 5,171 $ 41,984 $ -- $ 47,155 Property operating expenses.......... 1,933 24,117 -- 26,050 Interest income....... -- -- 8,405 8,405 Interest expense - notes receivable.. -- -- 559 559 ---------- ---------- ----------- -------- Operating income...... $ 3,238 $ 17,867 $ 7,846 $ 28,951 ========== ========== =========== ======== Depreciation.......... $ 1,055 $ 3,045 $ -- $ 4,100 Interest on debt...... 1,082 12,278 -- 13,360 Real estate improvements...... 218 979 -- 1,197 Assets................ 26,328 125,356 175,027 326,711 Property Sales Apartments Total ---------- -------- Sales price........... $ 45,800 $ 45,800 Cost of sales......... 21,395 21,395 ---------- -------- Gain on sale.......... $ 24,405 $ 24,405 ========== ======== 15 NATIONAL REALTY, L.P. --------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 9. INCOME TAXES --------------------- No federal or state income taxes have been provided for in the accompanying Consolidated Statements of Operations as the partners include their share of NRLP's income or loss in their respective tax returns. For income or loss allocation purposes, limited partners are allocated their proportionate share of income or loss commencing with the calendar month subsequent to their entry into NRLP. NOTE 10. LEGAL PROCEEDINGS -------------------------- NRLP is involved in various lawsuits arising in the ordinary course of business. In the opinion of management, the outcome of these lawsuits will not have a material effect on NRLP's financial condition, results of operations or liquidity. ------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ----------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Introduction ------------ NRLP is a Delaware limited partnership formed on January 29, 1987, which owns and operates through NOLP, also a Delaware limited partnership, a portfolio of real estate and mortgage notes. Most of NOLP's properties were acquired in transactions consummated on September 18, 1987, when NOLP acquired all of the assets and assumed all of the liabilities of 35 public and private limited partnerships. Transaction with American Realty Investors, Inc. On November 3, 1999, NRLP and ART jointly announced their agreement to combine, in a tax-free exchange, under the ownership of a new company to be named American Realty Investors, Inc. ("ARI"). The share exchange was subject to a vote of stockholders/unitholders of both entities. Approval required the vote of the unitholders holding a majority of NRLP's outstanding units, and the vote of the stockholders holding a majority of ART's outstanding shares of common and preferred stock. At special meetings held on March 21, 2000, NRLP unitholders and ART stockholders approved the proposal. The transaction was closed on August 2, 2000. Shares of ARI common stock were issued to ART stockholders and NRLP unitholders. NRLP unitholders, except for ART, received one share of ARI common stock for each NRLP unit held. ART stockholders received .91 shares of ARI common stock for each share of ART common stock held. Each share of ART preferred stock converted into one share of preferred stock of ARI, having substantially the same rights as ART's preferred stock. The NRLP units ceased trading on the American Stock Exchange on August 2, 2000. ARI common stock commenced trading on the New York Stock Exchange on August 3, 2000. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ----------------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources ------------------------------- Cash and cash equivalents totaled $1.7 million at June 30, 2000, compared to $2.1 million at December 31, 1999. The principal sources and uses of cash are discussed in the paragraphs below. NMC, the General Partner of NRLP, has discretion in determining methods of obtaining funds for NRLP's operations. NRLP's governing documents place no limitation on the amount of leverage that NRLP may incur either in the aggregate or with respect to any particular property or other investment. At June 30, 2000, the aggregate loan-to-value ratio of NRLP's real estate portfolio was 44.8%, computed on the basis of the ratio of total property-related debt to aggregate estimated current values as compared with a loan-to-value ratio of 41.1% at December 31, 1999. NRLP's principal sources of cash have been and will continue to be from property operations, collection of principal and interest on its mortgage notes receivable and externally generated funds. Externally generated funds include borrowings, proceeds from the sale of properties and other assets and proceeds from borrowings secured by properties or mortgage notes receivable. Management expects that NRLP's cash flow from property operations together with externally generated funds will be sufficient to meet NRLP's various cash needs during the remainder of 2000, including, but not limited to, funding of lending commitments, distributions to unitholders, debt service obligations coming due and property maintenance and improvements, as more fully discussed in the paragraphs below. Cash from property operations (rents collected less payments for property operating expenses) decreased to $18.2 million in the six months ended June 30, 2000, from $22.0 million in the six months ended June 30, 1999. The decrease was primarily due to the sale of six apartments and two commercial properties in the first six months of 2000 and 14 apartments in 1999. Interest collected on mortgage notes receivable decreased to $4.0 million in the six months ended June 30, 2000, from $5.0 million in 1999. Of this decrease, $891,000 was due to loans which were paid off in 1999, and $3.4 million was due to no interest payments being received from ART. These decreases were partially offset by increases of $2.7 million due to the collection of interest on the payoffs of six mortgage loans and $750,000 due to the collection of interest on the paydown of a loan in 2000 for which interest was not due until the loan's payoff or maturity. Interest paid decreased to $10.6 million in the six months ended June 30, 2000, from $13.1 million in 1999. Of this decrease, $4.3 million was due to the sale of 20 properties, subject to debt in 1999 and 2000. This decrease was partially offset by an increase of $2.7 million due to properties refinanced, where the debt balance was increased or unencumbered properties financed in 2000 and 1999 and $124,000 was due to properties acquired in 1999. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------------------------------------------------------------------------------- OF OPERATIONS (Continued) ------------- Liquidity and Capital Resources (Continued) ------------------------------- General and administrative expenses paid decreased to $2.6 million in the six months ended June 30, 2000, from $3.8 million in 1999. The decrease was due to a decrease in cost reimbursements and other expenses. Incentive disposition fees totaling $561,000 were paid to NMC, NRLP's general partner, in the six months ended June 30, 2000, related to the sales of Four Seasons Apartments and Marina Plaza Office Building. An incentive disposition fee of $948,000 was paid to NMC, NRLP's general partner, in the six months ended June 30, 1999, related to the sale of Mesa Ridge Apartments. In the first six months of 2000, NRLP received a total of $11.7 million on the collection of seven mortgage notes receivable and $1.1 million in a partial paydown of another mortgage note receivable. In the first six months of 2000, NRLP sold six apartments, one office building and one shopping center for a total of $77.7 million, receiving net cash of $24.6 million after the payment of various closing costs and the payment of or the buyer's assumption of $39.9 million in mortgage debt. NRLP obtained new mortgage financing secured by three parcels of unimproved land of $7.2 million, receiving net cash of $7.0 million after the payment of various closing costs. NRLP obtained second mortgage financing secured by an apartment of $2.2 million, receiving net cash of $1.9 million after the payment of various closing costs. NRLP also refinanced the mortgage debt secured by two apartments in the amount of $15.0 million, receiving net cash of $1.3 million, after paying off $12.7 million in existing mortgage debt and the payment of various closing costs. In the first six months of 2000, NRLP paid distributions of $.125 per unit, or a total of $790,000. In March 1999, the Board of Directors of NMC affirmed NRLP's unit repurchase program which was established in 1987. The Board also established a new authorization for the repurchase of up to an additional 500,000 NRLP units in open-market transactions. Through December 31, 1999, NRLP had repurchased a total of 402,960 units under the prior authorization at a total cost of $5.1 million. Through June 30, 2000, NRLP repurchased a total of 36,200 units at a total cost of $399,000. Management reviews the carrying values of NRLP's properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------------------------------------------------------------------------------- OF OPERATIONS (Continued) ------------- Liquidity and Capital Resources (Continued) ------------------------------- exist, a provision for loss is recorded by a charge against earnings. Management's review of a mortgage note receivable includes an evaluation of the collateral property securing such note. The property review generally includes (1) selective property inspections, (2) a review of the property's current rents compared to market rents, (3) a review of the property's expenses, (4) a review of maintenance requirements, (5) a review of the property's cash flow, (6) discussions with the property manager, and (7) a review of properties in the surrounding area. Results of Operations --------------------- NRLP reported net income of $39.0 million and $61.2 million for the three and six months ended June 30, 2000, including gains on the sale of real estate of $37.5 million and $55.6 million, compared to net income of $13.1 million and $31.0 million for the three and six months ended June 30, 1999, including gains on the sale of real estate totaling $8.7 million and $24.4 million. The primary factors affecting NRLP's operating results are discussed in the following paragraphs. Rents decreased to $16.6 million and $33.6 million in the three and six months ended June 30, 2000, from $23.1 million and $47.2 million in 1999. $7.3 million and $14.6 million of the decrease was due to the sale of six apartments and two commercial properties in 2000 and 14 apartments in 1999. These decreases were partially offset by an increase of $690,000 and $970,000 due to increased rental rates at NRLP's apartment and commercial properties. Rents are expected to continue to decrease during the remainder of 2000 as NRLP continues to selectively sell properties. Interest income was $4.5 million and $10.4 million in the three and six months ended June 30, 2000, as compared to $4.8 million and $8.6 million in 1999. The three month decrease was due to decreases of $406,000 due to loans paid off or paid down during 2000 and 1999, $768,000 due to loans converted to partnership interests, $229,000 due to loans foreclosed in 1999 and $249,000 due to a decrease in short term investment income, partially offset by an increase of $1.4 million due to loans funded in 1999 and additional fundings on existing loans. The six month increase was due to an increase of $4.9 million was attributable to loans funded in 1999 and additional fundings on existing loans. This increase was partially offset by decreases of $836,000 due to loans paid off or paid down during 2000 and 1999, $1.3 million due to loans converted to partnership interests and $374,000 due to loans foreclosed in 1999. Interest income is expected to decrease during the remainder of 2000 due to loans paid off in 1999 and 2000. In the three and six months ended June 30, 2000, gains on sale of real estate totaled $37.5 million and $55.6 million, including $7.4 million on the sale of Summerwind Apartments, $6.7 million on the sale of Windtree Apartments, $3.5 million on the sale of Whispering Pines 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------------------------------------------------------------------------------- OF OPERATIONS (Continued) ------------- Results of Operations (Continued) --------------------- Apartments, $463,000 on the sale of Katella Plaza Shopping Center, $2.9 million on the sale of Pines Apartments, $10.1 million on the sale of Four Seasons Apartments, $4.8 million on the sale of Sherwood Glen Apartments and $19.8 million on the sale of Marina Playa Office Building. In the three and six months ended June 30, 1999, gains on sale of real estate totaled $8.7 million and $24.4 million, including $2.7 million on the sale of Olde Towne Apartments, $1.3 million on the sale of Santa Fe Apartments, $11.7 million on the sale of Mesa Ridge Apartments, $2.2 million on the sale of the Horizon East Apartments, $2.6 million on the sale of the Lantern Ridge Apartments and $3.2 million on the sale of the Barcelona Apartments. Interest expense decreased to $6.6 million and $12.4 million in the three and six months ended June 30, 2000, from $7.0 million and $14.1 million in 1999. Decreases of $2.2 million and $4.3 million were due to the sale of a total of 20 properties, subject to debt, in 1999 and 2000. These decreases were partially offset by increases of $1.8 million and $2.7 million due to interest expense recorded on borrowings in 1999 and 2000 secured by mortgages on three unencumbered apartments, three commercial properties and three parcels of unimproved land and the refinancing of mortgages in 1999 and 2000 where the loan balance was increased. Interest expense is expected to decline during the remainder of 2000 as NRLP continues to selectively sell properties. Depreciation, property taxes and insurance, utilities, property level payroll, repairs and maintenance, other operating expenses and property management fees in the three and six months ended June 30, 2000, all declined from 1999 due to the sale of six apartments and two commercial properties in 2000 and 14 apartments in 1999. These costs are expected to continue to decrease during the remainder of 2000 as NRLP continues to selectively sell properties. General and administrative expenses decreased to $1.1 million and $2.6 million in the three and six months ended June 30, 2000, from $2.1 million and $4.0 million in 1999. The decreases were due to a decrease in cost reimbursements and other expenses. NMC, NRLP's general partner, earned a $561,000 incentive disposition fee in the three and six months ended June 30, 2000, related to the sales of Four Seasons Apartments and Marina Playa Office Building. NMC, NRLP's general partner, earned a $948,000 incentive disposition fee in the six months ended June 30, 1999, related to the sale of Mesa Ridge Apartments. Tax Matters ----------- NRLP is a publicly traded limited partnership and, for federal income tax purposes, all income or loss generated by it is included in the 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------------------------------------------------------------------------------- OF OPERATIONS (Continued) ------------- Tax Matters (Continued) ----------- income tax returns of the individual partners. Under Internal Revenue Service guidelines generally applicable to publicly traded partnerships, a limited partner's use of his or her share of partnership losses is subject to special limitations. Inflation --------- The effects of inflation on NRLP's operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and the ultimate gains to be realized from property sales. To the extent that inflation affects interest rates, NRLP's earnings from short-term investments, the cost of new financings as well as the cost of variable interest rate debt will be affected. Environmental Matters --------------------- Under various federal, state and local environmental laws, ordinances and regulations, NRLP 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 NRLP for personal injury associated with such materials. Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on NRLP's business, assets or results of operations. Year 2000 --------- Even though January 1, 2000, has passed and no adverse impact from the transition to the year 2000 was experienced, no assurance can be provided that NRLP's suppliers and tenants have not been affected in a manner not yet apparent. As a result, management will continue to monitor NRLP's year 2000 compliance and the year 2000 compliance of its suppliers and tenants. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS ------------------------------------------------------------------- At June 30, 2000, NRLP's exposure to a change in interest rates on its debt is as follows: Weighted Effect of 1% Average Increase In Balance Interest Rate Base Rates --------- --------------- ------------- (Amounts in thousands, except per unit) Notes payable: Variable rate.................. $ 55,881 7.50% $ 559 Notes receivable: Variable rate.................. 12,425 8.28% (124) --------- Total decrease in NRLP's annual net income..................... $ 435 ========= Per unit......................... $ .07 ========= 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: A Current Report on Form 8-K, dated June 22, 2000, was filed with respect to ITEM 5. "OTHER EVENTS," AND ITEM 7. "FINANCIAL STATEMENTS AND EXHIBITS," which reports the postponement of NRLP's reorganization and combination with American Realty Trust, Inc. A Current Report on Form 8-K, dated August 1, 2000, was filed with respect to ITEM 5. "OTHER EVENTS," which reports the rescheduling of NRLP's reorganization and combination with American Realty Trust, Inc. on or before August 3, 2000. 22 SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL REALTY, L.P. By its General Partner: NRLP MANAGEMENT CORP. Date: August 14, 2000 By: /s/ Karl L. Blaha ------------------------- ----------------------------------- Karl L. Blaha President Date: August 14, 2000 By: /s/ Mark W. Branigan ------------------------- ---------------------------------- Mark W. Branigan Executive Vice President and Chief Financial Officer (Principal Financial Officer) 23 NATIONAL REALTY, L.P. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Quarter ended June 30, 2000 Exhibit Page Number Description Number ------- --------------------------------------------------- -------- 27.0 Financial Data Schedule 25 24