-----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, GuUnhdIwQYRdST4Xf+0KFXx+JjqQGksR329nRtGQA2OoKhXOYlEoxy/lwh4ThDKK G4akMWu5A5Pi/VjI+8h25w== 0000950134-01-500830.txt : 20010430 0000950134-01-500830.hdr.sgml : 20010430 ACCESSION NUMBER: 0000950134-01-500830 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HALLWOOD REALTY PARTNERS L P CENTRAL INDEX KEY: 0000865439 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 752313955 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10643 FILM NUMBER: 1612488 BUSINESS ADDRESS: STREET 1: 3710 RAWLINS STE 1500 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2145285588 MAIL ADDRESS: STREET 2: 3710 RAWLINS SUITE 1500 CITY: DALLAS STATE: TX ZIP: 75219 10-Q 1 d86508e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-10643 ---------- HALLWOOD REALTY PARTNERS, L.P. (Exact name of registrant as specified in its charter) ---------- DELAWARE 75-2313955 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3710 RAWLINS SUITE 1500 DALLAS, TEXAS 75219-4298 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 528-5588 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 --- --- THE REGISTRANT IS A LIMITED PARTNERSHIP AND ISSUES UNITS REPRESENTING OWNERSHIP OF LIMITED PARTNER INTERESTS. NUMBER OF UNITS OUTSTANDING AT APRIL 24, 2001: 1,589,948 UNITS. ================================================================================ Page 1 2 HALLWOOD REALTY PARTNERS, L.P. FORM 10-Q TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page ---- Item 1 Financial Statements: Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000 3 Consolidated Statements of Income for the Three Months Ended March 31, 2001 and 2000 (unaudited) 4 Consolidated Statement of Partners' Capital for the Three Months ended March 31, 2001 (unaudited) 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 (unaudited) 6 Notes to Consolidated Financial Statements (unaudited) 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources 11 Item 3 Quantitative and Qualitative Disclosures About Market Risk 14 PART II - OTHER INFORMATION Items 1 to 6 Other Information 15 Signature 16
Page 2 3 HALLWOOD REALTY PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT UNIT AMOUNTS)
MARCH 31, December 31, 2001 2000 ------------ ------------ (UNAUDITED) ASSETS Real estate: Land $ 59,015 $ 60,236 Buildings and improvements 289,836 293,742 Tenant improvements 22,200 23,284 ------------ ------------ 371,051 377,262 Accumulated depreciation and amortization (170,149) (170,870) ------------ ------------ Real estate, net 200,902 206,392 Cash and cash equivalents 20,491 16,457 Accounts receivable 2,312 3,211 Lease commissions, net 11,384 11,035 Loan reserves and escrows 8,878 7,109 Loan costs, net 3,681 3,879 Prepaid expenses and other assets 5,844 6,421 ------------ ------------ Total assets $ 253,492 $ 254,504 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Liabilities: Mortgages payable $ 196,471 $ 200,096 Accounts payable and accrued expenses 4,381 5,570 Prepaid rent, security deposits and other 4,640 4,192 Payable to affiliates, net 291 156 ------------ ------------ Total liabilities 205,783 210,014 ------------ ------------ Commitments and contingencies Partners' capital: Limited partners - 1,589,948 units outstanding 47,232 44,045 General partner 477 445 ------------ ------------ Total partners' capital 47,709 44,490 ------------ ------------ Total liabilities and partners' capital $ 253,492 $ 254,504 ============ ============
See notes to consolidated financial statements. Page 3 4 HALLWOOD REALTY PARTNERS, L.P. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2001 2000 ------------ ------------ REVENUES: Property operations $ 17,506 $ 15,977 Gain from property sales 4,219 -- Interest 365 192 ------------ ------------ Total revenues 22,090 16,169 ------------ ------------ EXPENSES: Property operations 7,088 6,457 Interest 4,204 3,561 Depreciation and amortization 3,577 3,222 General and administrative 1,075 863 Litigation costs 2,690 616 ------------ ------------ Total expenses 18,634 14,719 ------------ ------------ INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF SFAS NO. 133 ADOPTION 3,456 1,450 Extraordinary loss from early extinguishment of debt (45) -- ------------ ------------ INCOME BEFORE CUMULATIVE EFFECT OF SFAS NO. 133 ADOPTION 3,411 1,450 Cumulative effect of SFAS No. 133 adoption (192) -- ------------ ------------ NET INCOME $ 3,219 $ 1,450 ============ ============ ALLOCATION OF NET INCOME: Limited partners $ 3,187 $ 1,436 General partner 32 14 ------------ ------------ Total $ 3,219 $ 1,450 ============ ============ NET INCOME PER UNIT AND POTENTIAL UNIT: Earnings per unit - basic Income before extraordinary loss and cumulative effect of SFAS No. 133 adoption $ 2.15 $ 0.86 Loss from early extinguishment of debt (0.03) -- Cumulative effect of SFAS No. 133 adoption (0.12) -- ------------ ------------ Net income $ 2.00 $ 0.86 ============ ============ Earnings per unit - assuming dilution Income before extraordinary loss and cumulative effect of SFAS No. 133 adoption $ 2.08 $ 0.83 Loss from early extinguishment of debt (0.03) -- Cumulative effect of SFAS No. 133 adoption (0.11) -- ------------ ------------ Net income $ 1.94 $ 0.83 ============ ============ WEIGHTED AVERAGE UNITS USED IN COMPUTING NET INCOME PER UNIT AND POTENTIAL UNIT: Basic 1,590 1,673 ============ ============ Assuming dilution 1,645 1,737 ============ ============
See notes to consolidated financial statements. Page 4 5 HALLWOOD REALTY PARTNERS, L.P. CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) (UNAUDITED)
Limited Partnership General Limited Units Partner Partners Total Outstanding ------------ ------------ ------------ ------------ PARTNERS' CAPITAL, JANUARY 1, 2001 $ 445 $ 44,045 $ 44,490 1,589,948 Net income 32 3,187 3,219 -- ------------ ------------ ------------ ------------ PARTNERS' CAPITAL, MARCH 31, 2001 $ 477 $ 47,232 $ 47,709 1,589,948 ============ ============ ============ ============
See notes to consolidated financial statements. Page 5 6 HALLWOOD REALTY PARTNERS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------------- 2001 2000 ---------- ---------- OPERATING ACTIVITIES: Net income $ 3,219 $ 1,450 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,577 3,222 Gain from property sales (4,219) -- Loss from early extinguishment of debt 45 -- Cumulative effect of SFAS No. 133 adoption 192 Effective rent adjustments (44) (274) Changes in assets and liabilities: Receivables 899 15 Lease commission payments (1,064) (745) Prepaid expenses, loan reserves and other assets (1,183) (818) Accounts payable and other liabilities (606) 1,094 ---------- ---------- Net cash provided by operating activities 816 3,944 ---------- ---------- INVESTING ACTIVITIES: Property and tenant improvements (906) (1,870) Property development cost (714) (4,596) Property acquisition -- (7,791) Cash proceeds from property sales, net of selling costs 8,470 -- ---------- ---------- Net cash provided by (used in) investing activities 6,850 (14,257) ---------- ---------- FINANCING ACTIVITIES: Mortgage principal payments (1,500) (719) Mortgage principal early payoff (2,125) -- Mortgage principal proceeds -- 9,087 Loan fees, expenses and prepayment penalty (7) (142) ---------- ---------- Net cash (used in) provided by financing activities (3,632) 8,226 ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,034 (2,087) BEGINNING CASH AND CASH EQUIVALENTS 16,457 8,332 ---------- ---------- ENDING CASH AND CASH EQUIVALENTS $ 20,491 $ 6,245 ========== ==========
See notes to consolidated financial statements. Page 6 7 HALLWOOD REALTY PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) 1 ORGANIZATION AND ACCOUNTING POLICIES Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited partnership, operates in the commercial real estate business segment. HRP's activities include the acquisition, ownership and operation of its commercial real estate assets. Units representing limited partnership interests are traded on the American Stock Exchange under the symbol "HRY". As of March 31, 2001, there were 1,589,948 units outstanding. Hallwood Realty, LLC ("Realty" or the "General Partner"), a Delaware limited liability company and indirectly wholly-owned subsidiary of The Hallwood Group Incorporated ("Hallwood"), is HRP's general partner and is responsible for asset management of HRP and its real estate properties. Hallwood Commercial Real Estate, LLC ("HCRE"), another indirectly wholly-owned subsidiary of Hallwood, provides property management, leasing and construction supervision services for HRP's real estate properties. The accompanying unaudited consolidated financial statements of Hallwood Realty Partners, L.P. have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures thereto included in Form 10-K for the year ended December 31, 2000. HRP had no items of other comprehensive income for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues, and expenses as of and for the reporting periods. Actual results may differ from these estimates. Operating results for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. Certain reclassifications have been made to prior period's amounts to conform to the classifications used in the current period. The reclassifications had no effect on the previously reported net income. 2 TRANSACTIONS WITH RELATED PARTIES Realty and HCRE are compensated for services provided to HRP and its real estate properties, as set forth in the following table for the periods presented (in thousands):
THREE MONTHS ENDED ENTITY MARCH 31, PAID OR ------------------------- REIMBURSED 2001 2000 ---------- ---------- ---------- Asset management fee Realty $ 155 $ 140 Acquisition fee Realty -- 74 Disposition fee Realty 120 -- Reimbursement of costs (a) Realty 711 612 Property management fee HCRE 513 463 Lease commissions HCRE 956 410 Construction fees HCRE 131 290
(a) These costs are mostly recorded as general and administrative expenses and represent reimbursement to Realty, at cost, for partnership level salaries and compensation, bonuses, employee and director insurance, and certain overhead costs. HRP pays the balance of its account with Realty on a monthly basis. In January 2001, HRP acquired a construction development consulting contract from Hallwood regarding a project in Tulsa, Oklahoma with an unrelated third party. In connection therewith, HRP reimbursed Hallwood for its actual costs incurred of $281,000. Page 7 8 HALLWOOD REALTY PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) 3 COMPUTATION OF NET INCOME PER UNIT Basic net income per unit is computed by dividing net income attributable to the limited partners' interests by the weighted average number of units outstanding. Net income per unit assuming dilution is computed by dividing net income attributable to the limited partners' interests by the weighted average number of units and potential units outstanding. Options to acquire units were issued during 1995 and are considered to be potential units. The number of potential units is computed using the treasury stock method which assumes that the increase in the number of units is reduced by the number of units which could have been repurchased by HRP with the proceeds from the exercise of these options. The following table illustrates the amounts used to calculate the weighted average number of units outstanding:
Three Months Ended March 31, -------------------------- 2001 2000 ---------- ---------- Weighted average units outstanding - basic 1,590 1,673 Weighted average units issued from options 69 86 Repurchase of units from unit option proceeds (14) (22) ---------- ---------- Weighted average units outstanding - assuming dilution 1,645 1,737 ========== ==========
4 STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information - Cash interest payments were $4,398,000 and $3,371,000 (net of capitalized interest of $151,000) in the three months ended March 31, 2001 and 2000, respectively. 5 PROPERTY DEVELOPMENT In early 2001, HRP demolished a 1-story office building at its Executive Park property in Atlanta, Georgia that contained 18,000 net rentable square feet. In order to do so, HRP had to obtain a release of the building from Executive Park's mortgage lien by substituting for such collateral $608,000 of United States Treasury Bonds, which have various maturity dates through December 2007. In February 2001, HRP began constructing a 5-story office building containing 122,000 net rentable square feet. The estimated construction and development costs for the building and tenant improvements are approximately $21,000,000 (excluding the existing land cost). HRP is anticipating the leasing of substantially all of the building in the second or third quarter of 2001, with occupancy to begin after building completion in early 2002. Financing of the development will be a combination of existing cash and proceeds from a construction loan that HRP also anticipates closing in the second or third quarter of 2001. As of March 31, 2001, HRP had incurred and capitalized $714,000 of construction development costs. Page 8 9 HALLWOOD REALTY PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) 6 PROPERTY SALES In January 2001, HRP sold one of the warehouse buildings at Seattle Business Parks that contained 63,000 net rentable square feet on 3.9 acres for a gross selling price of $3,287,000. The carrying value of the assets was $885,000. The sale resulted in $3,035,000 of net proceeds, which were added to HRP's working capital, and a net gain of $2,150,000. Also in January 2001, HRP sold one building at Fairlane Commerce Park that contained less than 2,000 net rentable square feet on 0.5 acres for a gross selling price of $575,000. The carrying value of the assets was $372,000. The sale resulted in $525,000 of net proceeds, which were added to HRP's working capital, and a net gain of $153,000. In late March, HRP sold Joy Road Distribution Center that contained 442,000 net rentable square feet on 21 acres for a gross selling price of $5,326,000. The carrying value of the assets was $2,994,000. The sale resulted in $4,910,000 of net proceeds to HRP and a net gain of $1,916,000. The net sale proceeds were used (i) to pay the outstanding mortgage principal balance of $2,125,000, (ii) to pay a prepayment penalty of $14,000 to the lender, and (iii) to add $2,771,000 to general working capital. The prepayment penalty along with the writeoff of $31,000 of unamortized loan costs associated with the retired loan were expensed and are included in the Consolidated Statements of Income as an extraordinary item. 7 MORTGAGES PAYABLE On July 27, 2000, HRP purchased an interest rate cap for Allfirst Building's mortgage loan for $288,000, which limits HRP's exposure to changing interest rates to a maximum of 10%. This interest rate cap, which has a notional amount of $25,000,000, has terms consistent with the Allfirst Building's mortgage loan. Allfirst Building's cash interest rate was 6.58% and 8.12% as of March 31, 2001 and December 31, 2000, respectively. The interest rate cap is a derivative and designated as a cash flow hedge. Hedge effectiveness is measured based on using the intrinsic value of the interest rate cap. All changes in the fair value of the time value of the cap are recorded directly to earnings. With the January 1, 2001 adoption of Statements of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities", HRP recorded the cumulative effect of the adoption in income of $192,000, or the amount of the difference between the carrying value as of January 1, 2001 of $267,000 and the then estimated fair value of $75,000, all of which represented change in time value. The impact on HRP's financial statements for the first three months of 2001 was $20,000, which was recorded in interest expense, as the estimated fair value of the interest rate cap was reduced to $55,000 as of March 31, 2001. Other than Allfirst Building's mortgage, the rest of the mortgages payable have fixed interest rates. Accordingly, changes in LIBOR or the prime rate do not significantly impact the amount of interest paid by HRP. Page 9 10 HALLWOOD REALTY PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) 8 LITIGATION Beginning in 1997, HRP has been a defendant in two lawsuits that were brought by Gotham Partners, L.P. in the Delaware Court of Chancery. The first suit was filed on February 27, 1997 in the Court of Chancery for New Castle County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty Partners, L.P. and Hallwood Realty Corporation (C.A. No. 15578), and it sought access to certain books and records of HRP and was subsequently settled, allowing certain access. On April 9, 2001 the case was dismissed. The second action was filed on June 20, 1997 in a separate complaint in the Court of Chancery for New Castle County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., et al. (C.A. No. 15754). This action alleges claims of breach of fiduciary duties, breach of HRP's partnership agreement, and fraud in connection with certain transactions involving HRP's units in the mid 1990's. Hallwood is alleged to have aided and abetted the alleged breaches. On June 21, 2000, after completing fact discovery, all parties moved for summary judgment on several issues. In September and October, 2000, the Delaware court issued three separate written opinions resolving the summary judgment motions. In the opinions, the court ruled that trial would be required as to all issues, except that (i) Gotham was found to have standing to pursue its derivative claims; (ii) defendants were entitled to judgment dismissing the fraud claim; (iii) the general partner was entitled to judgment dismissing the breach of fiduciary duty claims brought against it; and (iv) the general partner's outside directors were entitled to judgment dismissing all claims brought against them. A five-day trial was held in January 2001. The Court requested post-trial briefing, which was completed by mid-April 2001. Post-trial argument is scheduled for May 1, 2001. Given the nature of the plaintiff's claims and the usual uncertainties in litigation, we are not able to predict the outcome of the litigation or whether any of the claims or defenses will ultimately be successful. On February 15, 2000, HRP filed a lawsuit in the United States District Court for the Southern District of New York styled Hallwood Realty Partners, L.P. v. Gotham Partners L.P., et al. (Civ. No. 00 CV 1115) alleging violations of the Securities Exchange Act of 1934 by certain purchasers of its units, including Gotham Partners, L.P., Gotham Partners III, L.P., Private Management Group, Inc., Interstate Properties, Steven Roth and EFO Realty, Inc., by virtue of those purchasers' misrepresentations and/or omissions in connection with filings required under the Securities Exchange Act of 1934. The complaint further alleged that defendants, by acquiring more than 15% of the outstanding HRP units, have triggered certain rights under its Unit Purchase Rights Agreement, for which HRP was seeking declaratory relief. HRP sought various forms of relief, including declaratory judgments, divestiture, corrective disclosures, a "cooling-off" period and damages, including costs and disbursements. On November 16, 2000, the Court granted HRP's motion to add as defendants Gotham Holdings II, L.L.C., Hallwood Investors, L.P., Liberty Realty Partners, L.P. and EFO/Liberty, Inc. and to remove EFO Realty, Inc. as a defendant. Discovery was completed in December 2000 and trial was held in February 2001. On February 23, 2001, the Court rendered a decision in favor of the defendants and on February 28, 2001, the Court issued a judgment of dismissal. On March 29, 2001, HRP filed a Notice of Appeal with respect to the February 28, 2001 judgment. The appeal has not yet been perfected. HRP is from time to time involved in various other legal proceedings and claims which arise in the ordinary course of business. These matters are generally covered by insurance. Management believes that the resolution of these matters will not have a material adverse effect on HRP's financial position, cash flow or operations. Page 10 11 HALLWOOD REALTY PARTNERS, L.P. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES RESULTS OF OPERATIONS FIRST QUARTER OF 2001 COMPARED TO THE FIRST QUARTER OF 2000 REVENUE FROM PROPERTY OPERATIONS increased $1,529,000, or 9.6%, for the first quarter of 2001, compared to the 2000 first quarter. The following table illustrates the components of the change, in thousands: Rental income, net $ 1,297 Other property income 235 -------- Net increase $ 1,529 ========
Net rental income increased due to revenues generated from the addition and completion of one development property at Corporate Square in mid-2000 and overall higher rental rates at most of HRP's real estate properties, partially offset by a decline in average occupancy between the comparable periods from 92.2% to 88.6%. GAIN FROM PROPERTY SALES of $4,219,000 in the first three months of 2001 is comprised of (i) the January sale of one building at Seattle Business Parks for a gross selling price of $3,287,000, resulting in a gain of $2,150,000, (ii) the January sale of one building at Fairlane Commerce Park for a gross selling price of $575,000, resulting in a gain of $153,000, and (iii) the March sale of Joy Road Distribution Center for a gross selling price of $5,326,000, resulting in a gain of $1,916,000. INTEREST INCOME increased by $173,000, or 90.1%, as a result of increased earnings on overnight investments due to a higher average cash balance available for investment during the 2001 period. PROPERTY OPERATING EXPENSES increased $631,000, or 9.8%, for the first quarter of 2001, compared to the same period in 2000. The increase is comprised primarily of the following components: o Operating cost with respect to the addition of the one development property at Corporate Square completed in mid-2000 contributed $211,000 towards the increase. o Real estate taxes increased $110,000 for comparable properties due to higher property tax values at certain properties and refunds included in the 2000 first quarter. o Utilities increased $212,000 for comparable properties due to higher rates for gas heating, and to a lesser extent, usage increases due to a colder winter in 2001 compared to the 2000 period. o Combined, all other operating costs increased $98,000, or less than 2%, between the periods. INTEREST EXPENSE increased $643,000, or 18.1%, for the first quarter of 2001 as compared to the same period in 2000, as a result of an increase in mortgage interest of $584,000 (due to a higher average mortgage balance, in the aggregate, between the periods) and, due to a lesser extent, an increase in loan cost amortization and other interest costs of $59,000. DEPRECIATION AND AMORTIZATION EXPENSE increased $355,000, or 11.0%, primarily due to the cost additions incurred from the development and completion of a new building at Corporate Square in July 2000 and the substantial completion of building and tenant improvements to Riverbank Plaza in April 2000. GENERAL AND ADMINISTRATIVE EXPENSES increased $212,000, or 24.6%, for the first quarter of 2001, as compared to the same period in 2000, due to higher personnel costs and certain overhead costs. LITIGATION COSTS were $2,690,000 and $616,000 for the first quarter of 2001 and 2000, respectively, and are related to the lawsuits described in Note 8 to the consolidated financial statements. Page 11 12 HALLWOOD REALTY PARTNERS, L.P. LIQUIDITY AND CAPITAL RESOURCES HRP operates in the commercial real estate business segment. HRP's activities include the acquisition, ownership and operation of its commercial real estate assets. While it is the General Partner's intention to operate HRP's existing real estate investments and to acquire and operate additional real estate investments, Realty also continually evaluates each of HRP's real estate investments in light of current economic trends and operations to determine if any should be considered for disposal. As of March 31, 2000, HRP owned fourteen real estate properties located in six states containing 5,073,000 net rentable square feet. HRP seeks to maximize the value of its real estate by making capital and tenant improvements, by executing marketing programs to attract and retain tenants, and by controlling or reducing, where possible, operating expenses. HRP's cash position increased $4,034,000 during the first three months of 2001 to $20,491,000 as of March 31, 2001. The sources of cash during the period were $816,000 of cash provided by operating activities, $8,470,000 of net cash proceeds from property sales, and $7,000 of net loan fee reimbursements. The uses of cash were $906,000 for property and tenant improvements; $714,000 for property development costs; $1,500,000 for scheduled mortgage principal payments; $2,125,000 for the early payoff of mortgage principal; and a $14,000 mortgage prepayment penalty. Since August 2000, HRP has had available a $2,000,000 revolving line of credit. The line of credit matures July 31, 2001, has a variable interest rate of either prime plus 0.50% or LIBOR plus 3.0%, and requires monthly interest payments but no principal amortization. As of March 31, 2001, HRP had not borrowed against this facility. For the foreseeable future, HRP anticipates that mortgage principal payments, tenant and capital improvements, lease commissions and litigation costs will be funded by net cash from operations. The primary sources of capital to fund any future acquisitions or developments will be proceeds from the sale, financing or refinancing of one or more of its Properties. In addition to the commitment described below with regards to Executive Park, HRP has estimated and budgeted tenant and capital improvements of $6,900,000 and lease commissions of $1,800,000 for the remainder of 2001. Each quarter Realty reviews HRP's capacity to make cash distributions. HRP has not made any cash distributions since February, 1992. PROPERTY DEVELOPMENT - In early 2001, HRP demolished a 1-story office building at its Executive Park property in Atlanta, Georgia that contained 18,000 net rentable square feet. In order to do so, HRP had to obtain a release of the building from Executive Park's mortgage lien by substituting for such collateral $608,000 of United States Treasury Bonds, which have various maturity dates through December 2007. In February 2001, HRP began constructing a 5-story office building containing 122,000 net rentable square feet. The estimated construction and development costs for the building and tenant improvements are approximately $21,000,000 (excluding the existing land cost). HRP is anticipating the leasing of substantially all of the building in the second or third quarter of 2001, with occupancy to begin after building completion in early 2002. Financing of the development will be a combination of existing cash and proceeds from a construction loan that HRP also anticipates closing in the second or third quarter of 2001. As of March 31, 2001, HRP had incurred and capitalized $714,000 of construction development costs. PROPERTY AND MORTGAGE TRANSACTIONS - In January 2001, HRP sold one of the warehouse buildings at Seattle Business Parks that contained 63,000 net rentable square feet on 3.9 acres for a gross selling price of $3,287,000. The carrying value of the assets was $885,000. The sale resulted in $3,035,000 of net proceeds, which were added to HRP's working capital, and a net gain of $2,150,000. Also in January 2001, HRP sold one building at Fairlane Commerce Park that contained less than 2,000 net rentable square feet on 0.5 acres for a gross selling price of $575,000. The carrying value of the assets was $372,000. The sale resulted in $525,000 of net proceeds, which were added to HRP's working capital, and a net gain of $153,000. Page 12 13 HALLWOOD REALTY PARTNERS, L.P. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) - In late March, HRP sold Joy Road Distribution Center that contained 442,000 net rentable square feet on 21 acres for a gross selling price of $5,326,000. The carrying value of the assets was $2,994,000. The sale resulted in $4,910,000 of net proceeds to HRP and a net gain of $1,916,000. The net sale proceeds were used (i) to pay the outstanding mortgage principal balance of $2,125,000, (ii) to pay a prepayment penalty of $14,000 to the lender, and (iii) to add $2,771,000 to general working capital. The prepayment penalty along with the writeoff of $31,000 of unamortized loan costs associated with the retired loan were expensed and are included in the Consolidated Statements of Income as an extraordinary item. INFLATION - Inflation did not have a significant impact on HRP in 2000 and for the three months ended March 31, 2001. Additionally, inflation is not anticipated to have a material impact on HRP for the rest of 2001. FORWARD-LOOKING STATEMENTS - In the interest of providing investors with certain information regarding HRP's future plans and operations, certain statements set forth in this Form 10-Q relate to management's future plans, objectives and expectations. Such statements are forward-looking statements. Although any forward-looking statements contained in this Form 10-Q or otherwise expressed by or on behalf of HRP are, to the knowledge and in the judgment of the officers and directors of the General Partner, expected to prove true and come to pass, management is not able to predict the future with absolute certainty. Although HRP believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements will prove to be accurate. Forward-looking statements involve known and unknown risks and uncertainties, which may cause HRP's actual performance and financial results in future periods to differ materially from any projection, estimate or forecasted result. These risks and uncertainties include, among other things, interest rates, occupancy rates, lease rental rates, outcome of litigation, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of HRP; other risks and uncertainties may be described, from time to time, in HRP's periodic reports and filings with the Securities and Exchange Commission. Page 13 14 HALLWOOD REALTY PARTNERS, L.P. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK On July 27, 2000, HRP purchased an interest rate cap for Allfirst Building's mortgage loan for $288,000, which limits HRP's exposure to changing interest rates to a maximum of 10%. This interest rate cap, which has a notional amount of $25,000,000, has terms consistent with the Allfirst Building's mortgage loan. Allfirst Building's cash interest rate was 6.58% and 8.12% as of March 31, 2001 and December 31, 2000, respectively. The interest rate cap is a derivative and designated as a cash flow hedge. Hedge effectiveness is measured based on using the intrinsic value of the interest rate cap. All changes in the fair value of the time value of the cap are recorded directly to earnings. With the January 1, 2001 adoption of Statements of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities", HRP recorded the cumulative effect of the adoption in income of $192,000, or the amount of the difference between the carrying value as of January 1, 2001 of $267,000 and the then estimated fair value of $75,000, all of which represented change in time value. The impact on HRP's financial statements for the first three months of 2001 was $20,000, which was recorded in interest expense, as the estimated fair value of the interest rate cap was reduced to $55,000 as of March 31, 2001. Other than Allfirst Building's mortgage, the rest of the mortgages payable have fixed interest rates. Accordingly, changes in LIBOR or the prime rate do not significantly impact the amount of interest paid by HRP. Assuming a 1% change in LIBOR, interest paid by HRP would increase or decrease by approximately $250,000 on an annual basis. Page 14 15 HALLWOOD REALTY PARTNERS, L.P. PART II - OTHER INFORMATION
Item ---- 1 Legal Proceedings Reference is made to Item 8 - Note 10 of Form 10-K for the year ended December 31, 2000 and Note 8 of this Form 10-Q. 2 Changes in Securities and Use of Proceeds None. 3 Defaults upon Senior Securities None. 4 Submission of Matters to a Vote of Security Holders None. 5 Other Information None. 6 Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K None.
Page 15 16 HALLWOOD REALTY PARTNERS, L.P. SIGNATURE 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. HALLWOOD REALTY PARTNERS, L.P. ------------------------------ (Registrant) By: HALLWOOD REALTY, LLC General Partner Date: April 24, 2001 By: /s/ JEFFREY D. GENT -------------- -------------------------- Jeffrey D. Gent Vice President - Finance (Principal Financial and Accounting Officer) Page 16 -----END PRIVACY-ENHANCED MESSAGE-----