SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2000
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Commission File Number 1-14784
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
NEVADA 75-2615944
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas, 75231
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(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
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(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 .
--- ---
Common Stock, $.01 par value 1,531,673
- ---------------------------- --------------------------------
(Class) (Outstanding at April 28, 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 Income Opportunity Realty Investors, Inc. ("IORI"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the IORI'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 INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
----------- --------------
(dollars in thousands,
except per share)
Assets
------
Real estate held for investment, net of
accumulated depreciation ($9,980 in 2000 and
$9,509 in 1999).................................... $ 82,314 $ 86,542
Investment in partnerships.......................... 105 907
Cash and cash equivalents........................... 1,731 722
Other assets (including $421 in 2000 and $107 in
1999 from affiliates).............................. 2,980 3,014
-------- --------
$ 87,130 $ 91,185
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable.......................... $ 58,809 $ 62,852
Other liabilities (including $359 in 2000 and
$721 in 1999 to affiliates)........................ 3,960 4,342
-------- --------
62,769 67,194
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value;
authorized, 10,000,000 shares; issued and
outstanding, 1,530,500 shares in 2000 and
1,528,908 in 1999.................................. 15 15
Paid-in capital..................................... 64,882 64,874
Accumulated distributions in excess of accumulated
earnings........................................... (40,536) (40,898)
-------- --------
24,361 23,991
-------- --------
$ 87,130 $ 91,185
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended March 31,
-------------------------
2000 1999
----------- ----------
(dollars in thousands,
except per share)
Property revenue
Rents..................................... $ 4,115 $ 3,728
Property expense
Property operations...................... 1,848 1,672
---------- ----------
Operating income........................ 2,267 2,056
Other income
Interest.................................. 7 7
Equity in income/(loss) of partnerships.. (46) 52
Gain on sale of real estate.............. 903 --
---------- ----------
864 59
Other expense
Interest.................................. 1,415 1,371
Depreciation.............................. 711 643
Advisory fee to affiliate................. 167 166
Net income fee to affiliate.............. 48 --
General and administrative................ 198 156
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2,539 2,336
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Net income (loss).......................... $ 592 $ (221)
========== ==========
Earnings Per Share
Net income (loss)...................... $ .39 $ (.14)
========== ==========
Weighted average Common shares used in computing
earnings per share..................... 1,530,413 1,526,043
========== ==========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2000
Accumulated
Distributions
Common Stock in Excess of
------------------ Paid-In Accumulated Stockholders'
Shares Amount Capital Earnings Equity
---------- -------- ---------- -------------- -------------
(dollars in thousands, except per share)
Balance, January 1, 2000.. 1,528,908 $ 15 $ 64,874 $ (40,898) $ 23,991
Sale of Common Stock under
dividend reinvestment
plan.................... 1,592 - 8 - 8
Dividends ($.15 per share) - - - (230) (230)
Net income................ - - - 592 592
--------- ----- --------- ---------- ---------
Balance, March 31, 2000... 1,530,500 $ 15 $ 64,882 $ (40,536) $ 24,361
========= ===== ========= ========== =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
------------------------
2000 1999
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(dollars in thousands)
Cash Flows from Operating Activities
Rents collected...................................... $ 4,047 $ 3,862
Payments for property operations..................... (1,840) (2,079)
Interest collected................................... 7 7
Interest paid........................................ (1,358) (1,330)
Advisory fee (to)/refunded from affiliate............ (169) 167
General and administrative expenses paid............. (202) (170)
Distributions from equity partnership's operating
cash flow......................................... 25 93
Other................................................ 242 431
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Net cash provided by operating activities........... 752 981
Cash Flows from Investing Activities
Funding of equity partnerships..................... (8) (1)
Real estate improvements............................. (488) (866)
Proceeds from sale of real estate.................. 906 -
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Net cash provided by (used in) investing
activities....................................... 410 (867)
Cash Flows from Financing Activities
Payments on notes payable............................ (215) (236)
Deferred financing costs........................... - (37)
Distributions from equity partnerships' financing
cash flow......................................... 739 --
Sale of Common Stock under dividend reinvestment
plan.............................................. 8 --
Dividends to stockholders.......................... (230) (225)
Advances from/payments (to) advisor................ (455) 486
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Net cash (used in) financing activities............. (153) (12)
Net increase in cash and cash equivalents............. 1,009 102
Cash and cash equivalents, beginning of period........ 722 103
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Cash and cash equivalents, end of period.............. $ 1,731 $ 205
======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Three Months
Ended March 31,
-------------------------
2000 1999
----------- ---------
(dollars in thousands)
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss).................................... $ 592 $ (221)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization...................... 737 698
Gain on sale of real estate........................ (903) --
Equity in (income)/loss of partnerships............ 46 (52)
Distributions from equity partnership's operating
cash flow......................................... 25 93
Decrease in other assets............................ 443 875
Increase (decrease) in interest payable............. 31 (14)
(Decrease) in other liabilities..................... (219) (398)
-------- --------
Net cash provided by operating activities............ $ 752 $ 981
======== ========
Schedule of noncash investing and financing
activities
Notes payable assumed by buyer on sale of
real estate...................................... $ (3,829) $ --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
INCOME OPPORTUNITY REALTY INVESTORS, INC.
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 March 31, 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 IORI's Annual Report on Form 10-K for
the year ended December 31, 1999 (the "1999 Form 10-K").
Certain balances for 1999 have been reclassified to conform to the 2000
presentation.
NOTE 2. INVESTMENT IN EQUITY METHOD REAL ESTATE ENTITIES
- --------------------------------------------------------
IORI owns a 36.3% general partner interest in Tri-City Limited Partnership
("Tri-City"), which owns the 70,275 sq. ft. Chelsea Square Shopping Center in
Houston, Texas. In February 2000, Tri-City obtained mortgage financing of $2.1
million secured by the previously unencumbered shopping center. Tri-City
received net cash of $2.0 million after the funding of required escrows and the
payment of various closing costs. The mortgage bears interest at a fixed rate of
10.24% per annum until February 2001 and thereafter at a variable rate, requires
monthly payments of principal and interest of $20,601 and matures in February
2005. IORI received a distribution of $739,000 of the net cash.
NOTE 3. REAL ESTATE
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In March 2000, IORI sold the 128 unit La Monte Park Apartments in Houston,
Texas, for $5.0 million, receiving net cash of $1.1 million after the payment of
various closing costs. The purchaser assumed the $3.8 million mortgage secured
by the property. A gain of $903,000 was recognized on the sale.
NOTE 4. OPERATING SEGMENTS
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Significant differences among the accounting policies of IORI's 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 net operating income and cash
flow. Expenses that are not reflected in the segments are $198,000 and
$156,000 of general and administrative expenses for the three months ended March
31, 2000 and 1999, respectively. Excluded from operating segment assets are
assets of $4.8 million at March 31, 2000, and $4.2 million at March 31, 1999,
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. OPERATING SEGMENTS (Continued)
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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 three
months ended March 31, and each segment's assets at March 31.
Commercial
2000 Properties Apartments Total
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Rents........................ $ 2,589 $ 1,526 $ 4,115
Property operations.......... 1,007 841 1,848
---------- ---------- -------
Segment operating income..... $ 1,582 $ 685 $ 2,267
========== ========== =======
Depreciation................. $ 545 $ 166 $ 711
Interest..................... 919 496 1,415
Real estate improvements..... 488 -- 488
Assets....................... 56,238 26,076 82,314
Property sales: Apartments Total
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Sales price................................. $ 5,000 $ 5,000
Cost of sale................................ 4,097 4,097
---------- -------
Gain on sale................................ $ 903 $ 903
========== =======
Commercial
1999 Properties Apartments Total
---------- ---------- --------
Rents....................... $ 2,422 $ 1,306 $ 3,728
Property operations......... 1,064 608 1,672
---------- ---------- -------
Segment operating income.... $ 1,358 $ 698 $ 2,056
========== ========== =======
Depreciation................ $ 490 $ 153 $ 643
Interest.................... 928 443 1,371
Real estate improvements.... 866 -- 866
Assets...................... 59,169 24,745 83,914
NOTE 5. COMMITMENTS AND CONTINGENCIES
- ----------------------------------------
IORI is involved in various lawsuits arising in the ordinary course of business.
Management is of the opinion that the outcome of these lawsuits will have no
material impact on IORI's financial condition, results of operations or
liquidity.
NOTE 6. SUBSEQUENT EVENTS
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In April 2000, IORI purchased, in separate transactions, Etheridge and Fambrough
land, 75.1 acre and 75.0 acre parcels of unimproved land in Collin County,
Texas, for $1.9 million each. IORI paid $545,000 in cash and obtained seller
financing of the remaining $1.4 million of each of the purchase prices. The
seller financing bears interest at 10.0% per annum, requires quarterly interest
only payments, principal paydowns of $125,000 each in October 2000 and January
2001 and matures in April 2001.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
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Introduction
- ------------
IORI invests in equity interests in real estate through direct equity ownership
and partnerships and has invested in mortgage loans on real estate. IORI is the
successor to a California business trust organized on December 14, 1984, which
commenced operations on April 10, 1985.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents at March 31, 2000, were $1.7 million, compared with
$722,000 at December 31, 1999. IORI's principal sources of cash have been, and
will continue to be property operations, proceeds from property sales,
financings and refinancings, partnership distributions and, to the extent
necessary, advances from its advisor.
IORI's cash from property operations (rents collected less payments for expenses
applicable to rental income) increased to $2.2 million in the three months ended
March 31, 2000, from $1.8 million in 1999. The increase was primarily due to
the acquisition of the Meridian Apartments in 1999 as well as an increase in
rental rates and a decrease in vacancies at IORI's apartment and commercial
properties.
General and administrative expenses paid of $202,000 in the three months ended
March 31, 2000, approximated the $170,000 in 1999.
Distributions from equity partnership's operating cash flow were $25,000 for the
three months ended March 31, 2000, compared to $93,000 in 1999.
Under its advisory agreement, all or a portion of the annual advisory fee must
be refunded by the advisor if the operating expenses of IORI exceed certain
limits specified in the advisory agreement. IORI did not receive the refund of
$289,000 of its 1999 advisory fee until April 2000. In 1999, IORI received the
refund of $167,000 of its 1998 advisory fee in March 1999.
Other cash from operating activities decreased to $242,000 for the three months
ended March 31, 2000, from $431,000 in 1999.
In the first quarter of 2000, IORI received distributions from an equity
partnerships' financing cash flow of $739,000.
In the first quarter of 2000, IORI paid dividends of $.15 per share or a total
of $230,000, and 1,592 shares of Common Stock were sold through the dividend
reinvestment program for a total of $8,000.
In March 2000, IORI sold the 128 unit La Monte Park Apartments in Houston,
Texas, for $5.0 million, receiving net cash of $1.1 million after the payment of
various closing costs. The purchaser assumed the $3.8 million mortgage secured
by the property.
In April 2000, IORI purchased, in separate transactions, Etheridge and Fambrough
land, 75.1 acre and 75.0 acre parcels of unimproved land in
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
Collin County, Texas, for $1.9 million each. IORI paid $545,000 in cash and
obtained seller financing of the remaining $1.4 million of each of the purchase
prices.
Management reviews the carrying values of IORI's properties 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. If impairment is found to exist, a
provision for loss is recorded by a charge against earnings. The property
review generally includes selective property inspections, discussions with the
manager of the property visits to selected properties in the area and a review
of the following: (1) the property's current rents compared to market rents,
(2) the property's expenses, (3) the property's maintenance requirements, and
(4) the property's cash flows.
Results of Operations
- ---------------------
For the three months ended March 31, 2000, IORI had net income of $592,000,
including gains on the sale of real estate of $903,000, as compared to a net
loss of $221,000 for the three months ended March 31, 1999. Fluctuations in
components of revenue and expense between the 1999 and 2000 periods are
discussed below.
Rents in the three months ended March 31, 2000, increased to $4.1 million from
$3.7 million in 1999. The increase in rents was primarily due to the
acquisition of the Meridian Apartments in 1999, as well as an increase in rental
rates and a decrease in vacancies at IORI's other apartment and commercial
properties. Rents for the remainder of 2000 are expected to decline as IORI
selectively sells properties.
Property operations expense of $1.8 million in the three months ended March 31,
2000, approximated the $1.7 million in 1999. Property operations expenses are
expected to decline as IORI selectively sells properties.
Interest income was constant at $7,000 in the three months ended March 31, 2000,
and 1999. Interest income for the remainder of 2000 is expected to be
insignificant.
Interest expense was constant at $1.4 million in the three months ended March
31, 2000 and 1999. Interest expense for the remaining quarters of 2000 is
expected to decline as IORI selectively sells properties.
Depreciation expense increased to $711,000 in the three months ended March 31,
2000, from $643,000 in 1999. The increase was due to increased depreciation of
capital and tenant improvements at IORI's commercial properties as well as the
acquisition of the Meridian Apartments in 1999. Depreciation expense is
expected to decline as IORI selectively sells properties.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- ---------------------
Advisory fee expense of $167,000 in the three months ended March 31, 2000,
approximated $166,000 in 1999. IORI's gross assets are the basis for such fee.
Advisory fee expense is expected to decline as IORI selectively sells
properties.
General and administrative expense increased to $198,000 in the three months
ended March 31, 2000, from $156,000 in 1999. The increase is due to an increase
in legal and accounting and reporting fees as well as an increase in insurance
expense. General and administrative expense for the remaining quarters of 2000
is expected to approximate that of the first quarter of 2000.
Tax Matters
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As more fully discussed in IORI's 1999 Form 10-K, IORI 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, IORI 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 IORI's operations are not quantifiable. Revenues
from apartment operations tend to fluctuate proportionately with inflationary
increases and decreases in housing costs. Fluctuations in the rate of inflation
also affect the sales value of properties and the ultimate gain to be realized
from property sales. To the extent that inflation affects interest rates,
earnings from short-term investments and 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, IORI 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 for personal injury associated with such materials.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Environmental Matters (Continued)
- ---------------------
Management is not aware of any environmental liability relating to the above
matters that would have a material adverse effect on IORI'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 has been experienced, no assurance can be provided
that IORI's suppliers and tenants have not been affected in a manner that is not
yet apparent. As a result, management will continue to monitor IORI's year 2000
compliance and the year 2000 compliance of IORI's suppliers and tenants.
-------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
Olive Litigation. In February 1990, IORI, together with Continental Mortgage
and Equity Trust ("CMET"), National Income Realty Trust and Transcontinental
Realty Investors, Inc. ("TCI"), three real estate entities with, at the time,
the same officers, directors or trustees and advisor as IORI, entered into a
settlement (the "Settlement") of a class and derivative action entitled Olive et
al. v. National Income Realty Trust et al. relating to the operation and
management of each of the entities (the "Olive Litigation"). On April 23, 1990,
the Court granted final approval of the terms of the Settlement.
On January 27, 1997, the parties entered into an Amendment to the Settlement
effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided
for the settlement of additional matters raised by plaintiffs' counsel in 1996.
The Court issued an order approving the Olive Amendment on July 3, 1997.
The Olive Amendment provided that IORI's Board of Directors retain a
management/compensation consultant or consultants to evaluate the fairness of
IORI's advisory contract with Basic Capital Management, Inc. and any contract of
its affiliates with TCI, CMET and IORI, including, but no limited to, the
fairness to TCI, CMET and IORI of such contracts relative to other means of
administration. In 1998, the Board engaged a management/compensation consultant
to perform the evaluation which was completed in September 1998.
In 1999, plaintiffs' counsel asserted that the Board did not comply with the
provision requiring such engagement and requested that the Court
12
ITEM 1. LEGAL PROCEEDINGS (Continued)
- -------------------------
exercise its retained jurisdiction to determine whether there was a breach of
this provision of the Olive Amendment. Although several status conferences have
been held on this matter, there has been no Court order resolving whether there
was any breach of the Olive Amendment.
In January 2000, the Board engaged another management/compensation consultant to
perform the required evaluation again. This evaluation was completed in April
2000 and was provided to plaintiffs' counsel. The Board believes that any
alleged breach of the Olive Amendment has been fully remedied by the Board's
engagement of the second consultant.
The provisions of the Settlement and Olive Amendment terminated on April 28,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits:
Exhibit
Number Description
- ------- ---------------------------------------------------------
27.0 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K as follows:
None.
13
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 INVESTORS,
INC.
Date: May 15, 2000 By: /s/ Karl L. Blaha
------------------------ ----------------------------------
Karl L. Blaha
President
Date: May 15, 2000 By: /s/ Thomas A. Holland
------------------------ ----------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
INCOME OPPORTUNITY REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Three Months Ended March 31, 2000
Exhibit Page
Number Description Number
- ------- ------------------------------------------------ ------
27.0 Financial Data Schedule.
15