UNITED STATES
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, 2001
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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.)
1800 Valley View Lane, Suite 300, Dallas, Texas, 75234
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(Address of Principal Executive Offices) (Zip Code)
(469) 522-4200
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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 1,514,045
- ---------------------------- -------------------------------
(Class) (Outstanding at April 27, 2001)
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
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,
2001 2000
------------ ------------
(dollars in thousands,
except per share)
Assets
Real estate held for investment............................ $ 92,200 $ 91,837
Less - accumulated depreciation............................ (6,144) (5,560)
-------- --------
86,056 86,277
Notes receivable........................................... 1,500 1,500
Investment in real estate partnerships..................... 151 141
Cash and cash equivalents.................................. 5,317 2,087
Other assets (including $2,105 in 2001 and $3,862 in
2000 from affiliates).................................... 5,209 6,514
-------- --------
$ 98,233 $ 96,519
======== ========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable................................. $ 57,273 $ 54,206
Other liabilities (including $43 in 2001 to affiliates).... 1,679 2,315
-------- --------
58,952 56,521
Commitments and contingencies
Common Stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 1,514,045 shares in 2001
and 2000................................................. 15 15
Paid-in capital............................................ 64,772 64,772
Accumulated distributions in excess of accumulated
earnings................................................. (25,506) (24,789)
-------- --------
39,281 39,998
-------- --------
$ 98,233 $ 96,519
======== ========
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,
-----------------------
2001 2000
---------- ----------
(dollars in thousands,
except per share)
Property revenue
Rents......................................... $ 3,251 $ 4,115
Property expense
Property operations (including $74 in 2001
and $137 in 2000 to affiliates and related
parties)..................................... 1,479 1,848
---------- ----------
Operating income............................. 1,772 2,267
Other income
Interest...................................... 72 7
Income (loss) of equity partnerships.......... 9 (46)
Gain on sale of real estate................... -- 903
---------- ----------
81 864
Other expense
Interest...................................... 1,517 1,415
Depreciation.................................. 585 711
Advisory fee to affiliate..................... 157 167
Net income fee to affiliate................... -- 48
General and administrative (including $93 in
2001 and $60 in 2000 to affiliates).......... 311 198
---------- ----------
2,570 2,539
---------- ----------
Net income (loss).............................. $ (717) $ 592
========== ==========
Earnings per share
Net income (loss)............................. $ (.47) $ .39
========== ==========
Weighted average Common shares used in
computing earnings per share.................. 1,514,045 1,530,413
========== ==========
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, 2001
Accumulated
Common Stock Distributions
----------------- in Excess of
Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
--------- ------ ------- ------------- -------------
(dollars in thousands)
Balance, January 1, 2001.. 1,514,045 $ 15 $64,772 $ (24,789) $ 39,998
Net (loss)................ -- -- -- (717) (717)
--------- ------ ------- ------------- -------------
Balance, March 31, 2001... 1,514,045 $ 15 $64,772 $ (25,506) $ 39,281
========= ====== ======= ============= =============
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,
--------------------
2001 2000
-------- --------
(dollars in thousands)
Cash flows from Operating Activities
Rents collected...................................... $ 3,119 $ 4,047
Payments for property operations (including $74 in
2001 and $137 in 2000 to affiliates and related
parties)........................................... (2,705) (1,840)
Interest collected................................... 72 7
Interest paid........................................ (1,124) (1,358)
Advisory fee to affiliate............................ (85) (169)
General and administrative expenses paid (including
$93 in 2001 and $60 in 2000 to affiliates).......... (317) (202)
Distributions from equity partnerships' operating
cash flow........................................... -- 25
Other................................................ -- 242
-------- --------
Net cash provided by (used in) operating
activities........................................ (1,040) 752
Cash Flows from Investing Activities
Funding of equity partnerships....................... -- (8)
Real estate improvements............................. (363) (488)
Proceeds from sale of real estate.................... -- 906
-------- --------
Net cash provided by (used in) investing
activities........................................ (363) 410
Cash Flows from Financing Activities
Payments on notes payable............................ (216) (215)
Proceeds from notes payable.......................... 2,974 --
Deferred financing costs............................. (76) --
Distributions from equity partnerships' financing
cash flow........................................... -- 739
Sale of Common Stock under dividend reinvestment
plan................................................ -- 8
Dividends to stockholders............................ -- (230)
Advances from/payments (to) advisor.................. 1,953 (455)
-------- --------
Net cash provided by (used in) financing
activities........................................ 4,635 (153)
Net increase in cash and cash equivalents............. 3,231 1,009
Cash and cash equivalents, beginning of period........ 2,087 722
-------- --------
Cash and cash equivalents, end of period.............. $ 5,317 $ 1,731
======== ========
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,
----------------------
2001 2000
-------- ---------
(dollars in thousands)
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities
Net income (loss)....................................... $ (717) $ 592
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization.......................... 585 737
Gain on sale of real estate............................ -- (903)
(Income) loss of equity partnerships................... (9) 46
Distributions from equity partnerships' operating
cash flow............................................ -- 25
(Increase) decrease in other assets.................... (1,406) 443
Increase in interest payable........................... 309 31
Increase (decrease) in other liabilities............... 198 (219)
-------- --------
Net cash provided by (used in) operating
activities......................................... $ (1,040) $ 752
======== ========
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, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. 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, 2000 (the "2000 Form 10-K").
Certain balances for 2000 have been reclassified to conform to the 2001
presentation.
NOTE 2. 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 3. NOTES RECEIVABLE
- -------------------------
In September 2000, IORI funded a $1.5 million loan secured by a second lien on
165 acres of unimproved land in The Colony, Texas. In May 2001, IORI received
$1.0 million as a partial principal paydown.
NOTE 4. NOTES AND INTEREST PAYABLE
- -----------------------------------
In the first quarter of 2001, IORI refinanced the mortgage secured by the 60,060
sq. ft., Chuck Yeager Office Building in Chantilly, Virginia, in the amount of
$5.0 million. IORI received net cash of $2.9 million after paying various
lending fees and the payoff of $2.0 million in existing mortgage debt. The new
mortgage bears interest at 9.5% per annum, until February 2002, and at a
variable rate thereafter, requires monthly payments of principal and interest of
$22,126 and matures in January 2004.
NOTE 5. OPERATING SEGMENTS
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Significant differences among the accounting policies of the operating segments
as compared to the Consolidated Financial Statements principally involve the
calculation and allocation of general and administrative expenses. Management
evaluates the performance of each of the operating segments and allocates
resources to each of them based on their net operating income and cash flow.
Items of income that are not reflected in the segments are interest, income
(loss) of equity partnerships and gains on sale of real estate which totaled
$81,000 and
7
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. OPERATING SEGMENTS (Continued)
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$864,000 in the three months ended March 31, 2001 and 2000, respectively.
Expenses that are not reflected in the segments are general and administrative
expenses, non-segment interest expense and advisory and net income fees which
totaled $468,000 and $413,000 for the three months ended March 31, 2001 and
2000, respectively. Excluded from operating segment assets are assets of $12.2
million at March 31, 2001, and $4.8 million at March 31, 2000, 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
2001 Land Properties Apartments Total
------- ---------- ---------- -------
Rents........................ $ 143 $ 1,892 $ 1,216 $ 3,251
Property operating expenses 1 839 639 1,479
------- ---------- ---------- -------
Operating income............. $ 142 $ 1,053 $ 577 $ 1,772
======= ========== ========== =======
Depreciation................. $ -- $ 457 $ 128 $ 585
Interest..................... 473 675 369 1,517
Real estate improvements..... -- 364 -- 364
Assets....................... 24,892 39,170 21,994 86,056
Commercial
2000 Properties Apartments Total
---------- ---------- -------
Rents........................ $ 2,589 $ 1,526 $ 4,115
Property operating expenses.. 1,007 841 1,848
---------- ---------- -------
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
---------- -------
Sales price.................. $ 5,000 $ 5,000
Cost of sale................. 4,097 4,097
---------- -------
Gain on sale................. $ 903 $ 903
========== =======
NOTE 6. COMMITMENTS AND CONTINGENCIES
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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.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Introduction
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IORI invests in equity interests in real estate through acquisitions, leases and
partnerships and also invests in mortgage loans. 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, 2001, were $5.3 million, compared with
$2.1 million at December 31, 2000. IORI's principal sources of cash have been,
and will continue to be property operations, proceeds from property sales,
financings and refinancings and partnership distributions. Although management
anticipates that IORI will generate excess cash from operations in 2001 due to
increased rental rates and occupancy at its properties, such excess, however,
will not be sufficient to discharge all of IORI's debt obligations as they
mature. Management intends to selectively sell income producing real estate,
refinance real estate and incur additional borrowings against real estate to
meet its cash requirements.
IORI's cash from property operations (rents collected less payments for expenses
applicable to rental income) decreased to $414,000 in the first quarter of 2001,
from $2.2 million in 2000. Of this decrease, $1.2 million was due to the sale
of six properties in 2000. The decrease was partially offset by an increase of
$518,000 from the purchase of five properties in 2000.
General and administrative expenses paid increased to $317,000 in the first
quarter of 2001, from $202,000 paid in 2000. The increase was due to increases
in consulting fees.
During the first quarter of 2001, IORI paid $85,000 to its advisor compared to
$169,000 in the first quarter of 2000.
In the fourth quarter of 2000, IORI discontinued the payment of quarterly
dividends. In the first quarter of 2000, IORI paid dividends of $.15 per share
or a total of $230,000, and it sold 1,592 shares of Common Stock through the
dividend reinvestment program for a total of $8,000.
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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations
- ---------------------
For the first quarter of 2001, IORI had a net loss of $717,000, as compared to
net income of $592,000 for the first quarter of 2000, which included a gain of
sale of real estate of $903,000. Fluctuations in components of revenue and
expense between the 2000 and 2001 periods are discussed below.
Rents in the first quarter of 2001, decreased to $3.3 million from $4.1 million
in 2000. A decrease of $2.0 million was due to the sale of six properties in
2000. This decrease was offset by an increase of $834,000 from five properties
purchased in 2000, and an additional $400,000 from increased rental rates and
decreased vacancies at IORI's commercial properties. Rents for the remainder of
2001 are expected to decline as IORI selectively sells properties.
Property operations expense decreased to $1.5 million in the first quarter of
2001, from $1.8 million in 2000. A decrease of $771,000 was due to the sale of
six properties in 2000. This decrease was offset by an increase of $314,000
from five properties purchased in 2000. Property operations expenses are
expected to decline as IORI selectively sells properties.
Interest income increased to $72,000 in the first quarter of 2001, from $7,000
in 2000. The increase was due to a $1.5 million loan funded in September 2000.
Interest income in the remaining quarters of 2001 is expected to approximate
that in the first quarter.
Interest expense increased to $1.5 million in the first quarter of 2001 from
$1.4 million in 2000. An increase of $720,000 was due to five properties
purchased in 2000 and an increase of $23,000 from a property refinanced in 2001.
These increases were offset, in part, by a decrease of $645,000 from the sale of
six properties in 2000. Interest expense is expected to decrease as IORI
selectively sells properties.
Depreciation expense decreased to $585,000 in the first quarter of 2001, from
$711,000 in 2000. The decrease was due to six properties sold during 2000
partially offset by the purchase of five properties in 2000. Depreciation is
expected to decline as IORI selectively sells properties.
Advisory fee expense of $157,000 in the first quarter of 2001, approximated the
$167,000 in 2000. 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 $311,000 in the first quarter of
2001, from $198,000 in 2000. The increase is due to an increase in legal and
consulting fees. General and administrative expense for the remaining quarters
of 2001 are expected to approximate that of the first quarter.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Tax Matters
- -----------
As more fully discussed in IORI's 2000 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.
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.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
- -----------------------------------------------------------------------
At March 31, 2001, IORI'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
------- ------------- ------------
Wholly-owned debt:
Variable rate................... $25,236 9.81% $ 252
======= ============
Total increase in IORI's annual
net loss........................ $ 252
============
Per share........................ $ .17
============
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Olive Litigation. In February 1990, IORI, together with National Income Realty
Trust, Continental Mortgage and Equity Trust ("CMET") 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. 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 IORI's Board retain a management/compensation
consultant or consultants to evaluate the fairness of the BCM advisory contract
and any contract of its affiliates with IORI, CMET and TCI, including, but not
limited to, the fairness to IORI, CMET and TCI 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. 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. 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 October 2000, plaintiffs' counsel asserted that the stock option agreement to
purchase TCI shares, which was entered into by IORI and an affiliate of IORI,
American Realty Investors, Inc. ("ARI"), in October 2000 with Gotham Partners,
breached a provision of the Modification. As a result of this assertion, IORI
assigned all of its rights to purchase the TCI shares under this stock option
agreement to ARI.
The Board believes that all provisions of the Settlement, the Modification and
Olive Amendment terminated on April 28, 1999. However, in September 2000, the
Court ruled that certain provisions of the Modification continue to be effective
after the termination date. This ruling has been appealed to the United States
Court of Appeals for the Ninth Circuit by IORI and TCI.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
None.
(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 14, 2001 By: /s/ Karl L. Blaha
------------------------ ----------------------------------
Karl L. Blaha
President
Date: May 14, 2001 By: /s/ Mark W. Branigan
------------------------ ----------------------------------
Mark W. Branigan
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14