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 JUNE 30, 2000
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Commission File Number 1-9240
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TRANSCONTINENTAL REALTY INVESTORS, INC.
--------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 94-6565852
- --------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
- --------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(214) 692-4700
------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.01 par value 8,633,845
- ---------------------------- --------------------------------
(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 Transcontinental Realty Investors, Inc. ("TCI"), all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of TCI's
consolidated financial position, consolidated results of operations and
consolidated cash flows at the dates and for the periods indicated, have been
included.
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
---------------- ----------------
(dollars in thousands,
except per share)
Assets
------
Notes and interest receivable
Performing (including $12,045 from affiliates in
2000).............................................. $ 23,087 $ 11,691
Nonperforming....................................... -- 382
---------------- ----------------
23,087 12,073
Less - allowance for estimated losses................ (537) (543)
---------------- ----------------
22,550 11,530
Foreclosed real estate held for sale................. 1,790 1,790
Real estate held for investment, net of
accumulated depreciation ($89,643 in 2000 and
$84,986 in 1999)................................... 631,751 599,746
Investment in real estate entities................... 4,332 2,310
Investment in marketable equity securities of
affiliate, at market.............................. 7,798 13,954
Cash and cash equivalents............................ 8,601 41,266
Other assets (including $10,243 in 2000 and $14,945
in 1999 from affiliates).......................... 35,552 43,599
---------------- ----------------
$712,374 $ 714,195
================ ================
The accompanying notes are an integral part of these
Consolidated Financial Statements.
2
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
-------------- ------------
(dollars in thousands,
except per share)
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable............................. $ 511,410 $ 503,406
Other liabilities (including $491 in 2000 and
$2,356 in 1999 to affiliates)....................... 20,944 31,677
------------ ------------
532,354 535,083
Stockholders' equity
Preferred Stock
Series A; $.01 par value; authorized, 6,000 shares;
issued and outstanding 5,829 shares
(liquidation preference $583)....................... - -
Common Stock, $.01 par value, authorized, 10,000,000
shares; issued and outstanding, 8,629,599 shares
in 2000 and 8,626,611 in 1999....................... 86 86
Paid-in capital........................................ 278,173 278,119
Accumulated distributions in excess of
accumulated earnings................................ (92,801) (99,811)
Unrealized gain/(loss) on marketable equity
securities.......................................... (5,438) 718
------------ ------------
180,020 179,112
------------ ------------
$ 712,374 $ 714,195
============ ============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
TRANSCONTINENTAL REALTY INVESTORS, INC.
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 share)
Property revenue
Rents........................................... $ 34,559 $ 20,073 $ 68,600 $ 39,166
Property expense
Property operations............................. 18,321 10,158 36,717 20,478
------------ ------------ ------------ ------------
Operating income.............................. 16,238 9,915 31,883 18,688
Other income
Interest and other.............................. 588 38 992 140
Equity in income/(loss) of
equity investees.............................. (299) 479 (292) 504
Gain on sale of real estate..................... 8,856 8,283 17,807 10,151
------------ ------------ ------------ ------------
9,145 8,800 18,507 10,795
Other expense
Interest........................................ 11,914 6,203 23,106 12,433
Depreciation.................................... 4,199 2,962 9,452 5,846
Advisory fee to affiliate....................... 1,380 740 2,562 1,455
Net income fee to affiliate.................... 400 641 752 659
General and administrative...................... 1,715 571 4,387 1,203
------------ ------------- ------------ ------------
19,608 11,117 40,259 21,596
------------ ------------- ------------ ------------
Net income....................................... 5,775 7,598 10,131 7,887
Preferred dividend requirement. (7) (7) (14) (14)
------------ ------------- ------------ -------------
Net income applicable to
Common shares.................................. $ 5,768 $ 7,591 $ 10,117 $ 7,873
============ ============= ============ =============
Earnings per share
Net income applicable to
Common shares................................. $ .67 $ 1.96 $ 1.17 $ 2.03
============= ============= ============ =============
Weighted average Common shares
used in computing earnings
per share..................................... 8,629,504 3,879,946 8,628,496 3,879,209
============= ============= ============ =============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Distributions Accumulated
--------------------- in Excess of Other
Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Earnings Income Equity
---------- -------- ----------- ------------- ------------- -------------
(dollars in thousands, except per share)
Balance, January 1, 2000.... 8,626,611 $ 86 $ 278,119 (99,811) $ 718 $ 179,112
Comprehensive income
Unrealized loss on
marketable equity
securities of
affiliate................. -- -- -- -- (6,156) (6,156)
Net income................. -- -- -- 10,131 -- 10,131
-------------
3,975
Sale of Common Stock under
dividend reinvestment
plan....................... 3,768 -- 54 -- -- 54
Fractional shares........... (780) -- -- -- -- --
Common dividends ($.36 per
share)..................... -- -- -- (3,107) -- (3,107)
Preferred dividends ($2.50
per share)................. -- -- -- (14) -- (14)
---------- -------- ----------- ------------- ------------- -------------
Balance, June 30, 2000...... 8,629,599 $ 86 $ 278,173 (92,801) (5,438) $ 180,020
========== ======== =========== ============= ============= =============
The accompanying notes are an integral part of these
Consolidated Financial Statements.
5
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
----------------------
2000 1999
---------- ----------
(dollars in thousands)
Cash Flows from Operating Activities
Rents collected.....................................$ 67,321 $ 3 8,911
Interest collected.................................. 104 137
Interest paid....................................... (22,093) (12,026)
Payments for property operations.................... (38,853) (20,777)
Advisory and net income fee paid to affiliate....... (4,295) (718)
General and administrative expenses paid............ (5,234) (1,470)
Distributions from operating cash flow of equity
investees........................................ 191 403
Other............................................... 201 259
---------- ----------
Net cash provided by (used in) operating
activities...................................... (2,658) 4,719
Cash Flows from Investing Activities
Acquisition of real estate.......................... (21,053) (22,556)
Real estate improvements............................ (6,249) (9,889)
Proceeds from sale of real estate................... 3,911 24,864
Refunds of deposits on pending purchases and
financings....................................... 1,726 1,870
Collections on notes receivable..................... 1,047 33
Funding of notes receivable......................... (12,000) --
Distributions of equity investees' investing
cash flow, net................................... 1,296 1,996
---------- ----------
Net cash (used in) investing activities............ (31,322) (3,682)
Cash Flows from Financing Activities
Payments on notes payable........................... (42,356) (27,092)
Proceeds from notes payable......................... 45,424 40,051
Deferred borrowing costs............................ (971) (759)
Payments (to)/from advisor.......................... 5,585 (1,405)
Advance to affiliate................................ (3,300) --
Dividends to stockholders........................... (3,121) (1,161)
Sale of Common Stock under dividend reinvestment
plan............................................. 54 18
---------- ----------
Net cash provided by financing activities.......... 1,315 9,652
Net increase (decrease) in cash and cash
equivalents....................................... (32,665) 10,689
Cash and cash equivalents, beginning of period....... 41,266 10,505
---------- ----------
Cash and cash equivalents, end of period.............$ 8,601 $ 21,194
========== ==========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
6
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Six Months
Ended June 30,
----------------------
2000 1999
----------- ---------
(dollars in thousands)
Reconciliation of net income to net cash
provided by operating activities
Net income.............................................. $ 10,131 $ 7,887
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization.......................... 10,713 6,305
Gain on sale of real estate............................ (17,807) (10,151)
Equity in (income)/loss of equity investees............ 292 (504)
Distributions from operating cash flow of equity
investees............................................ 191 403
(Increase) in interest receivable...................... (420) -
(Increase) decrease in other assets.................... (5) 273
(Decrease) in interest payable......................... (247) (55)
Increase (decrease) in other liabilities............... (5,506) 561
---------- ---------
Net cash provided by (used in) operating
activities......................................... $ (2,658) $ 4,719
========== =========
Schedule of noncash investing and financing
activities
Notes payable assumed on purchase of real estate........ $ 14,015 $ 2,970
Notes payable assumed by buyer on sale of real
estate................................................ (8,652) -
Unrealized loss on marketable equity securities of
affiliate............................................. (6,156) -
The accompanying notes are an integral part of these
Consolidated Financial Statements.
7
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
- ------------------------------
TCI is a Nevada corporation and successor to a California business trust which
was organized on September 6, 1983. TCI invests in real estate through direct
ownership, leases and partnerships. TCI has also invested in mortgage loans on
real estate.
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Dollar amounts in tables are in thousands, except per share
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 included in TCI's Annual Report on Form 10-K for the year
ended December 31, 1999 (the "1999 Form 10-K").
NOTE 2. ACQUISITION OF CONTINENTAL MORTGAGE AND EQUITY TRUST
- -------------------------------------------------------------
On September 25, 1998, TCI and Continental Mortgage and Equity Trust ("CMET")
jointly announced the agreement of their respective Boards of Directors for TCI
to acquire CMET through merger. At special meetings held on September 28, 1999,
the stockholders of both companies approved the merger transaction. The merger
was completed on November 30, 1999. Pursuant to the merger agreement, TCI
acquired all of the outstanding CMET shares of beneficial interest in a tax free
exchange of shares, issuing 1.181 shares of its Common Stock for each
outstanding CMET share. TCI accounted for the merger as a purchase.
The consolidation of TCI's accounts with those of CMET resulted in an increase
in TCI's net real estate of $258.8 million. This amount was allocated to the
individual real estate assets based on their relative individual fair market
values.
Pro forma operating results for the first half of 1999, as if TCI had acquired
CMET on January 1, 1999, would have been:
Revenues............................. $ 73,323
Property operating expenses.......... (39,584)
Interest............................. (23,233)
Depreciation......................... (9,933)
Advisory fee......................... (2,699)
Net income fee....................... (901)
General and administrative expenses.. (2,565)
--------
(Loss) from operations............... (5,592)
Equity in income of investees........ 615
Gain on sale of real estate.......... 15,834
--------
Net income........................... $ 10,857
========
8
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. REAL ESTATE
- ----------------------
In 2000, TCI purchased the following properties:
Net
Units/ Purchase Cash Debt Interest Maturity
Property Location Acres/Sq.Ft. Price Paid Incurred Rate Date
- --------------------- ------------------ ------------- -------- ------- -------- -------- --------
First Quarter
Apartments
Quail Creek Lawrence, KS 95 Units $ 3,250 $ 1,088 $ 2,254 7.44% 07/03
Apple Lane Lawrence, KS 75 Units 1,575 595 1,005 8.63 05/07
Land
Netzer Collin County, TX 20 Acres 400 418 -- -- --
Lamar/Parmer Austin, TX 17.07 Acres 1,500 517 1,030 10.00 12/00
Manhattan Farmers Branch, TX 108.9 Acres 10,743 6,144 5,000 14.00 02/01
DF Fund Collin County, TX 79.5 Acres 2,545 1,047 1,545 10.00 03/01
Second Quarter
Apartments
Autumn Chase Midland, TX 64 Units 1,338 458 936 9.45 * 04/05
Primrose Bakersfield, CA 162 Units 4,100 1,189 3,000 9.25 * 03/07
Paramount Terrace Amarillo, TX 181 Units 3,250 561 2,865 9.38 09/01
Office Building
9033 Wilshire Blvd. Los Angeles, CA 44,253 Sq.Ft. 9,225 2,536 6,861 8.07 08/09
Bay Plaza II Tampa, FL 78,882 Sq.Ft. 4,825 4,786 -- -- --
Land
Limestone Canyon II Austin, TX 9.96 Acres 504 424 -- -- --
- --------------------
* Variable interest rate.
In 2000, TCI sold the following properties:
Net
Units/ Sales Cash Debt Gain on
Property Location Rooms/Sq.Ft. Price Received Discharged Sale
- ---------------------- ---------------- ------------- ------- -------- ---------- -------
First Quarter
Apartments
Hunters Bend San Antonio, TX 96 Units $ 1,683 $ 418 $ 1,127 * $ 572
Westgate of Laurel Laurel, MD 218 Units 11,290 2,599 7,525 * 3,575
Second Quarter
Apartments
Apple Creek Dallas, TX 216 Units 4,300 2,155 1,723 3,240
Villas at Fairpark Los Angeles, CA 49 Units 3,435 792 2,386 1,188
Hotel
Chateau Charles Lake Charles, LA 245 Rooms 1,000 928 -- 633
Third Quarter
Warehouse
Brookfield Corporate
Center Chantilly, VA 63,504 Sq.Ft. 4,850 1,729 2,838 1,369
- --------------------
* Debt assumed by purchaser.
9
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. NOTES AND INTEREST RECEIVABLE
- ---------------------------------------
In June 2000, a $3.0 million loan was funded to Basic Capital Management, Inc.
("BCM"), TCI's advisor. The loan was secured by 108,802 shares of common stock
of Income Opportunity Realty Investors, Inc. ("IORI"). IORI is also advised by
BCM. The loan bore interest at 15.0% per annum and matured in October 2000. All
principal and interest were due at maturity. The loan and all accrued but unpaid
interest was paid off in August 2000.
In June 2000, a $9.0 million loan was funded to American Realty Trust, Inc.
("ART"), an affiliate of BCM. The loan is secured by 409,934 shares of IORI. The
loan bears interest at 15.0% per annum and matures in October 2000. All
principal and interest are due at maturity.
At December 31, 1999, mortgage note receivables with a combined principal
balance of $4.6 million and a carrying value of $356,000, secured by first and
second liens on a closed hotel in Lake Charles, Louisiana were in default. Title
to the collateral property was obtained in February 2000 through foreclosure. No
loss was incurred on foreclosure as the estimated fair value of the property,
less estimated costs of sale, exceeded the carrying value of the mortgage notes
receivable. The property was sold in June 2000, for a gain of $633,000. See
NOTE 3. "REAL ESTATE."
In December 1999, TCI provided $8.5 million of purchase money financing in
conjunction with the sale of 253 acres of unimproved land in McKinney and Collin
County, Texas. The note receivable bears interest at 8.5% per annum, required a
$1.0 million principal paydown in February 2000, which was received, required
payment of accrued interest in June 2000, which was received, and the payment of
all principal and remaining accrued interest at maturity in September 2000. In
conjunction with the principal paydown, TCI recognized a previously deferred
gain on the sale of $4.8 million.
NOTE 5. NOTES AND INTEREST PAYABLE
- ------------------------------------
In 2000, TCI financed/refinanced the following properties:
Net
Debt Debt Cash Interest Maturity
Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date
- ---------------------- ------------ -------------- -------- ---------- -------- -------- --------
First Quarter
Apartments
Crescent Place Houston, TX 120 Units $ 2,165 $ 1,722 $ 370 7.04%* 03/30
Madison @ Bear Creek Houston, TX 180 Units 3,500 2,625 730 7.04 * 03/30
Office Buildings
Westgrove Air Plaza Addison, TX 78,326 Sq.Ft. 2,087 1,180 742 9.02 * 01/05
Venture Center Atlanta, GA 38,772 Sq.Ft. 2,700 1,113 1,592 8.75 03/10
Second Quarter
Apartments
Country Crossing Tampa, FL 227 Units 3,825 2,645 985 9.65 * 06/03
Fontenelle Hills Bellevue, NE 338 Units 2,010 -- 1,967 8.51 06/10
Office Building
Technology Trading Sterling, VA 197,659 Sq.Ft. 6,300 3,881 2,065 8.26 * 05/05
Warehouses
5360 Tulane Atlanta, GA 67,850 Sq.Ft. 375 208 134 9.65* 04/03
Space Center San Antonio, TX 101,500 Sq.Ft. 1,125 691 402 9.65* 04/03
10
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. NOTES AND INTEREST PAYABLE (Continued)
- ------------------------------------
- ----------------
* Variable interest rate.
NOTE 6. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
- -------------------------------------------------------
Revenue, fees and cost reimbursements from/to BCM and its affiliates for the six
months ended:
June 30,
2000
--------
Fees
Advisory................................... $ 2,562
Net income................................. 752
Property acquisition....................... 1,626
Real estate brokerage...................... 618
Mortgage brokerage and equity refinancing.. 241
Property and construction management and
leasing commissions*..................... 2,078
--------
$ 7,877
========
Cost reimbursements............................. $ 1,344
========
Hotel lease revenue............................. $ 996
========
- ------------------
* Net of property management fees paid to subcontractors, other than Regis
Realty, Inc., which is owned by an affiliate of BCM.
NOTE 7. 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 administrative expenses. Management evaluates the
performance of each of the operating segments and allocates resources to them
based on their net operating income and cash flow. Expenses that are not
reflected in the segments are $4.4 million of administrative expenses for the
six months ended June 30, 2000, and $1.2 million for the six months ended June
30, 1999. Also excluded from operating segments assets are assets of $78.8
million at June 30, 2000, and $41.4 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.
11
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. OPERATING SEGMENTS (Continued)
- ---------------------------
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
Land Properties Apartments Hotels Total
------- ---------- ---------- ------- --------
2000
Rents........................ $ 338 $ 29,307 $ 37,959 $ 996 $ 68,600
Property operating expenses.. 274 14,511 21,794 138 36,717
------- -------- -------- ------- --------
Segment operating income..... $ 64 $ 14,796 $ 16,165 $ 858 $ 31,883
======= ======== ======== ======= ========
Depreciation................. $ -- $ 5,060 $ 3,898 $ 494 $ 9,452
Interest..................... 1,975 9,786 10,548 773 23,082
Real estate improvements..... <10> 4,410 1,098 751 6,249
Assets....................... 64,122 286,602 263,177 19,640 633,541
Property Sales
Apartments Hotels Total
---------- ------- --------
Sales price.................. $ 20,708 $ 1,000 $ 21,708
Cost of sales................ (12,134) (367) (12,501)
-------- ------- --------
Gain on sale................. $ 8,574 $ 633 $ 9,207*
======== ======= ========
- --------------------
* Excludes a $4.8 million gain previously deferred on the sale of land and TCI's
share of gains recognized by an equity affiliate of $3.8 million.
Commercial
Land Properties Apartments Hotels Total
------- ---------- ---------- ------- --------
1999
Rents........................ $ 472 $ 15,935 $ 19,299 $ 3,460 $ 39,166
Property operating expenses.. 345 6,360 11,297 2,476 20,478
------- -------- -------- ------- --------
Operating income............. $ 127 $ 9,575 $ 8,002 $ 984 $ 18,688
======= ======== ======== ======= ========
Depreciation................. $ -- $ 3,139 $ 2,408 $ 299 $ 5,846
Interest on debt............. 702 5,258 5,739 734 12,433
Real estate improvements..... -- 3,131 6,092 666 9,889
Assets....................... 35,795 145,100 161,580 18,243 360,718
Property Sales
Commercial
Properties Apartments Total
---------- ---------- --------
Sales price.................. $ 19,300 $ 6,700 $ 26,000
Cost of sales................ 11,017 4,832 15,849
-------- -------- --------
Gain on sale... $ 8,283 $ 1,868 $ 10,151
======== ======== ========
NOTE 8. COMMITMENTS AND CONTINGENCIES
- ----------------------------------------
TCI 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 TCI's financial condition, results of operations or
liquidity.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Introduction
- ------------
TCI invests in real estate through acquisitions, leases and partnerships. TCI
has also invested in mortgage loans, including first, wraparound and junior
mortgage loans. TCI is the successor to a business trust organized on September
6, 1983, and commenced operations on January 31, 1984.
On September 25, 1998, TCI and CMET jointly announced the agreement of their
respective Boards of Directors for TCI to acquire CMET through merger. At
special meetings held on September 28, 1999, the stockholders of both companies
approved the merger transactions. The merger was completed on November 30,
1999. Pursuant to the merger agreement, TCI acquired all of the outstanding
CMET shares of beneficial interest in a tax-free exchange of shares, issuing
1.181 shares of its Common Stock for each outstanding CMET share. TCI accounted
for the merger as a purchase. See NOTE 2. "ACQUISITION OF CONTINENTAL MORTGAGE
AND EQUITY TRUST."
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totaled $8.6 million at June 30, 2000, compared with
$41.3 million at December 31, 1999. TCI's principal sources of cash have been
and will continue to be from property operations, proceeds from property sales,
the collection of mortgage notes receivable and borrowings. Management
anticipates that TCI's cash on hand, as well as cash generated from property
operations, the sale of properties and the refinancing of certain of TCI's
mortgage debt will be sufficient to meet all of TCI's cash requirements,
including debt service obligations and expenditures for property maintenance and
improvements.
Net cash from operating activities decreased to use of $2.7 million for the six
months ended June 30, 2000, from $4.7 million being provided by operations for
the six months ended June 30, 1999. The primary factors affecting TCI's cash
from operations are discussed in the following paragraphs.
Cash from property operations (rents collected less payments for expenses
applicable to rental income) increased to $28.5 million in the six months ended
June 30, 2000, from $18.1 million in 1999. Of this increase, $1.6 million was
due to the purchase of 14 income producing properties during 1999 and 2000 and
$14.3 million was due to the properties obtained in the merger with CMET. These
increases were partially offset by a decrease of $3.3 million due to the sale of
13 income producing properties in 1999 and the first six months of 2000.
Interest collected of $104,000 in the six months ended June 30, 2000,
approximated the $137,000 in 1999.
Interest paid increased to $22.1 million in the six months ended June 30, 2000,
from $12.0 million in 1999. Of this increase, $9.6 million
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
was due to the properties obtained in the merger with CMET, $1.8 million was due
to the acquisition of 18 properties subject to debt during 1999 and 2000 and
$525,000 was due to refinancings of properties where the debt balance was
increased. These increases were partially offset by a decrease of $1.8 million
due to the sale of 10 properties subject to debt in 1999 and the first six
months of 2000.
Advisory and net income fees paid increased to $4.3 million in the six months
ended June 30, 2000, from $718,000 in the six months ended June 30, 1999. The
increase was primarily due to the increase in assets due to the merger with
CMET, and not being entitled to a refund of any of its 1999 advisory fee. In
the first quarter of 1999, TCI had received a $458,000 refund of advisory fees
for 1998. Under its advisory agreement, all or a portion of the annual advisory
fee must be refunded by the advisor if the operating expenses of TCI exceed
certain limits specified in the advisory agreement.
General and administrative expenses paid increased to $5.2 million in the six
months ended June 30, 2000, from $1.5 million in 1999. This increase was mainly
due to an increase in legal fees, audit and other professional fees, franchise
taxes and cost reimbursements to the advisor, primarily due to the merger.
In the first six months of 2000, TCI sold four apartments and one hotel for a
total of $21.7 million, receiving net cash of $6.9 million, after the payoff of
existing debt and the payment of various closing costs. The purchasers assumed
$8.7 million in mortgage debt. Also in the first six months of 2000, TCI
purchased five apartments, two office buildings and five parcels of unimproved
land for a total of $43.3 million, paying $19.8 million in cash, including
various closing costs, and either obtaining new mortgage financing or assuming
existing mortgage debt of $24.5 million. Further in the first six months of
2000, TCI refinanced three apartments, three office buildings and two warehouses
and obtained second lien financing on an apartment for a total of $24.1
million, receiving net cash of $9.0 million after paying off $14.1 million in
mortgage debt and the payment of various closing costs.
In the third quarter of 2000, TCI sold one warehouse for $4.9 million, receiving
$1.7 million in cash after the payoff of existing debt and the payment of
various closing costs. A gain will be recognized on the sale.
In the first six months of 2000, TCI paid dividends to Common stockholders of
$.36 per share, or a total of $3.1 million, and $2.50 per share or a total of
$14,000 to Preferred stockholders. 3,768 shares of Common Stock were sold
through the dividend reinvestment program, for a total of $54,000.
The Board of Directors has approved the repurchase of a total of 1.4 million
shares of TCI's Common Stock. Through June 30, 2000, a total of 409,765 shares
had been repurchased at a total cost of $3.3 million. No shares have been
repurchased under this program since May 1998.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
Management reviews the carrying values of TCI'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 exist, a provision for loss is recorded by a charge against earnings. The
mortgage note receivable review includes an evaluation of the collateral
property securing each 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 manager of the property; and (7) a review of properties in
the surrounding area.
Results of Operations
- ---------------------
TCI had net income of $5.8 million and $10.1 million in the three and six months
ended June 30, 2000, including gains on sale of real estate totaling $8.9
million and $17.8 million, compared to net income of $7.6 million and $7.9
million in the corresponding periods in 1999, including gains on sale of real
estate totaling $8.3 million and $10.2 million. Fluctuations in this and other
components of revenues and expense between the 2000 and 1999 periods are
discussed below.
Rents in the three and six months ended June 30, 2000, increased to $34.6
million and $68.6 million compared to $20.1 million and $39.2 million in 1999.
Increases of $2.2 million and $3.5 million were due to the purchase of seven
income producing properties in 2000 and seven income producing properties in
1999, increases of $16.4 million and $32.3 million were due to the properties
obtained in the merger with CMET and increases of $851,000 and $1.2 million were
due to the completion of construction of apartments. These increases were
partially offset by decreases of $2.9 million and $5.9 million due to the sale
of five income producing properties in 2000 and eight income producing
properties in 1999.
Property operations expense in the three and six months ended June 30, 2000
increased to $18.3 million and $36.7 million from $10.2 million and $20.5
million in 1999. Of these increases, $1.0 million and $1.8 million were due to
the purchase of seven income producing properties in 2000 and seven income
producing properties in 1999, $9.2 million and $17.9 million were due to the
properties obtained in the merger with CMET and $405,000 and $570,000 were due
to the completion of construction of apartments. These increases were partially
offset by decreases of $1.2 million and $2.5 million due to the sale of five
income producing properties during 2000 and eight income producing properties in
1999.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- ---------------------
Rents and property operating expenses are both expected to increase in 2000 due
to properties obtained in the merger with CMET, and also from anticipated
increases in apartment rental rates, increased commercial property occupancy and
from a full year of operations of the properties acquired during 1999 and in the
first six months of 2000. See NOTE 2. "ACQUISITION OF CONTINENTAL MORTGAGE AND
EQUITY TRUST."
Interest and other income increased to $588,000 and $992,000 in the three
and six months ended June 30, 2000, compared to $38,000 and $140,000 in 1999.
Of these increases, $15,000 and $30,000 were due to the two mortgage notes
receivable obtained in the merger with CMET, $45,000 is due to TCI funding two
loans in the second quarter of 2000 and $213,000 and $421,000 were due to TCI
having provided purchase money financing in conjunction with two property sales
in 1999. Interest income for the remaining quarters of 2000 is expected to
approximate that of the first six months of 2000.
In the three and six months ended June 30, 2000, gains on sale of real estate
totaling $8.9 million and $17.8 million were recognized, $572,000 on the sale of
Hunters Bend Apartments, $3.6 million on the sale of Westgate of Laurel
Apartments, $3.2 million on the sale of Apple Creek Apartments, $1.2 million on
the sale of Villas at Fairpark Apartments, $633,000 on the sale of Chateau
Charles Hotel, a $4.8 million previously deferred gain on the sale of McKinney
land and TCI's share of gains recognized by an equity affiliate of $3.8 million.
In the three and six months ended June 30, 1999, gains on sale of real estate
totaling $8.3 million and $10.2 million were recognized, $1.9 million on the
sale of Mariner's Pointe Apartments and $8.3 million on the sale of 74 New
Montgomery Office Building.
Interest expense increased to $11.9 million and $23.1 million in the three and
six months ended June 30, 2000, from $6.2 million and $12.4 million in 1999. Of
these increases, $4.8 million and $9.6 million were due to the properties
obtained in the merger with CMET, $1.2 million and $1.8 million were due to the
debt incurred or assumed on 18 properties acquired in 1999 and the first six
months of 2000, and $221,000 and $525,000 were due to refinancings where the
debt balance was increased. These increases were partially offset by decreases
of $889,000 and $1.8 million, due to the sale of four income producing
properties in 2000 and six income producing properties subject to debt in 1999.
Interest expense for the remainder of 2000 is expected to increase due to
anticipated property refinancings and the properties purchased on leveraged
basis in the first six months of 2000.
Depreciation increased to $4.2 million and $9.5 million in the three and six
months ended June 30, 2000, from $3.0 million and $5.8 million in 1999. Of these
increases, $269,000 and $525,000 were due to the acquisition of 14 income
producing properties in 1999 and the first six months of 2000 and $1.9 million
and $3.7 million were due to the
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- ---------------------
properties obtained in the merger with CMET. These increases were partially
offset by decreases of $474,000 and $1.0 million due to the sale of five income
producing properties in 2000 and eight income producing properties in 1999.
Depreciation is expected to continue to increase during the remainder of 2000
due to a full year of depreciation of properties acquired or completed in 1999
and the income producing properties purchased in the first six months of 2000.
Advisory fee increased to $1.4 million and $2.6 million in the three and six
months ended June 30, 2000, from $740,000 and $1.5 million in 1999. These
increases were due to an increase in TCI's gross assets, the basis for such fee.
Advisory fees are expected to continue to increase with increases in TCI's gross
assets, including the assets obtained in the merger with CMET.
Net income fee was $400,000 and $752,000 in the three and six months ended June
30, 2000, as compared to $641,000 and $659,000 in 1999. The net income fee is
payable to TCI's advisor based on 7.5% of TCI's net income.
General and administrative expenses increased to $1.7 million and $4.4 million
in the three and six months ended June 30, 2000, from $571,000 and $1.2 million
in 1999. These increases were mainly due to an increase in legal fees, audit
and other professional fees, franchise taxes and cost reimbursements to the
advisor primarily due to the merger with CMET.
Tax Matters
- -----------
As more fully discussed in TCI's 1999 Form 10-K, TCI has elected and, in the
opinion of management, qualified to be taxed as a Real Estate Investment Trust
("REIT"), as defined under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended. To continue to qualify for federal taxation as a REIT, TCI
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. As a REIT, TCI is also required to distribute at
least 95% of its REIT taxable income, plus 95% of its net income from
foreclosure property on an annual basis to stockholders.
Inflation
- ---------
The effects of inflation on TCI'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 sales values of properties and the ultimate gain to be realized from
property sales. To the extent that inflation affects interest rates, TCI's
earnings from short-term investments, the cost of new financings as well as the
cost of variable interest rate debt will be affected.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Environmental Matters
- ---------------------
Under various federal, state and local environmental laws, ordinances and
regulations, TCI 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.
Management is not aware of any environmental liability relating to the above
matters that would have a material adverse effect on TCI'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
TCI's suppliers and tenants have not been affected in a manner that is not yet
apparent. As a result, management will continue to monitor TCI's year 2000
compliance and the year 2000 compliance of TCI's suppliers and tenants.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- -------------------------------------------------------------------
At June 30, 2000, TCI'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 share)
Notes payable:
Variable rate................. $ 34,724 9.34% $ 347
Total decrease in TCI's annual
net income.................... $ 347
=============
Per share....................... $ .04
=============
---------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
Olive Litigation. In February 1990, TCI, together with CMET, IORI and National
Income Realty Trust, three real estate entities with, at the time, the same
officers,
18
ITEM 1. LEGAL PROCEEDINGS (Continued)
- -------------------------
directors or trustees and advisor as TCI, 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. The Settlement was modified in
1994 (the "Modification").
On January 27, 1997, the parties entered into an Amendment to the Modification
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 TCI's Board of Directors retain a
management/compensation consultant or consultants to evaluate the fairness of
TCI's advisory contract with Basic Capital Management, Inc. ("BCM") and any
contract of its affiliates with TCI, CMET and IORI, including, but not 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 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, after the merger of CMET with TCI, 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.
In addition, plaintiffs' counsel has asserted that the loans made by TCI to BCM
and American Realty Trust, Inc. breached the provisions of the Modification.
The Board believes that the provisions of the Settlement, the Modification and
Olive Amendment terminated on April 28, 1999. However, plaintiffs' counsel has
asserted that certain provisions continue to be effective after the termination
date. This matter is pending before the Court.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit
Number Description
- ------- ---------------------------------------------------------
27.0 Financial Data Schedule, filed herewith.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
- -----------------------------------------
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated June 15, 2000, was filed with respect
to ITEM 5. "OTHER EVENTS," which reports the resignation of two directors.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSCONTINENTAL REALTY
INVESTORS, INC.
Date: 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)
21
TRANSCONTINENTAL REALTY INVESTORS, INC.
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 23
22