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 SEPTEMBER 30, 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 1,438,945
- ---------------------------- ---------------------------------
(Class) (Outstanding at October 31, 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
September 30, December 31,
2001 2000
------------ ------------
(dollars in thousands,
except per share)
Assets
Real estate held for investment................................ $ 93,040 $ 91,837
Less - accumulated depreciation................................ (7,259) (5,560)
-------- --------
85,781 86,277
Notes and interest receivable.................................. 505 1,500
Investment in real estate partnerships......................... 121 141
Cash and cash equivalents...................................... 3,914 2,087
Other assets (including $2,718 in 2000 from affiliates)........ 2,553 6,514
-------- --------
$ 92,874 $ 96,519
======== ========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable..................................... $ 54,329 $ 54,206
Other liabilities (including $842 in 2001 to affiliates)....... 3,059 2,315
-------- --------
57,388 56,521
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 1,438,945 shares in 2001
and 1,514,045 in 2000......................................... 14 15
Paid-in capital................................................ 63,459 64,772
Accumulated distributions in excess of accumulated earnings.... (27,987) (24,789)
-------- --------
35,486 39,998
-------- --------
$ 92,874 $ 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 For the Nine Months
Ended September 30, Ended September 30,
---------------------------------------------------
2001 2000 2001 2000
---------------------------------------------------
(dollars in thousands, except per share)
Property revenue
Rents................................ $ 3,219 $ 2,994 $ 9,759 $ 10,732
Property expense
Property operations (including
$243 in 2001 and $372 in 2000
to affiliates and related
parties)........................ 2,272 1,667 5,292 5,286
---------- ---------- ---------- ----------
Operating income..................... 947 1,327 4,467 5,446
Other income
Interest............................. 8 108 142 206
Equity in income/(loss) of
equity partnerships............. (30) (2) (27) (71)
Gain on sale of real estate.......... -- 3,856 -- 20,878
---------- ---------- ---------- ----------
(22) 3,962 115 21,013
Other expense
Interest.............................. 1,505 1,250 4,569 4,021
Depreciation.......................... 614 566 1,792 1,890
Advisory fee to affiliate............. 179 170 570 505
Net income fee to affiliate........... -- 234 -- 1,453
General and administrative
(including $234 in 2001 and
$210 in 2000 to affiliates and
related parties)................ 376 181 849 668
---------- ---------- ---------- ----------
2,674 2,401 7,780 8,537
---------- ---------- ---------- ----------
Net income (loss)......................... $ (1,749) $ 2,888 $ (3,198) $ 17,922
========== ========== ========== ==========
Earnings (loss) per share
Net income (loss).................... $ (1.16) $ 1.88 $ (2.11) $ 11.70
========== ========== ========== ==========
Weighted average Common shares used
in computing earnings per share...... 1,508,331 1,532,602 1,512,119 1,531,177
========== ========== ========== ==========
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 Nine Months Ended September 30, 2001
Accumulated
Distributions
Common Stock 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
Repurchase of Common Stock... (75,100) (1) (1,313) -- (1,314)
Net (loss)................... -- -- -- (3,198) (3,198)
--------- ------ --------- --------- ---------
Balance, September 30, 2001.. 1,438,945 $ 14 $ 63,459 (27,987) $ 35,486
========= ====== ========= ========= =========
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 Nine Months
Ended September 30,
--------------------
2001 2000
--------- ---------
Cash flows from Operating Activities..................... (dollars in thousands)
Rents collected........................................ $ 9,578 $ 10,798
Payments for property operations (including $243 in
2001 and $372 in 2000 to affiliates and related
parties)............................................. (4,969) (5,456)
Interest collected..................................... 126 251
Interest paid.......................................... (4,112) (3,660)
Advisory and net income fee to affiliate............... (520) (1,471)
General and administrative expenses paid (including
$234 in 2001 and $210 in 2000 to affiliates)......... (1,479) (697)
Distributions from equity partnerships' operating
cash flow............................................ 18 25
Other.................................................. 17 (321)
--------- ---------
Net cash used in operating activities............. (1,341) (531)
Cash Flows from Investing Activities
Funding of notes receivable............................ -- (1,500)
Collections on notes receivable........................ 1,000 --
Acquisition of real estate............................. -- (15,767)
Funding of equity partnerships......................... (25) (52)
Real estate improvements............................... (1,316) (927)
Proceeds from sale of real estate...................... -- 46,613
--------- ---------
Net cash (used in) provided by investing
activities..................................... (341) 28,367
Cash Flows from Financing Activities
Payments on notes payable.............................. (5,010) (17,968)
Proceeds from notes payable............................ 5,000 10,875
Deferred financing costs............................... (124) --
Distributions from equity partnerships' financing
cash flow............................................. -- 739
Sale of Common Stock under dividend reinvestment
plan.................................................. -- 24
Purchase of Common stock............................... (1,314) (134)
Dividends to stockholders.............................. -- (685)
Advances from/payments (to) advisor.................... 4,957 (3,254)
--------- ---------
Net cash provided by (used in) financing
activities..................................... 3,509 (10,403)
Net increase in cash and cash equivalents................ 1,827 17,433
Cash and cash equivalents, beginning of period........... 2,087 722
--------- ---------
Cash and cash equivalents, end of period................. $ 3,914 $ 18,155
========= =========
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 Nine Months
Ended September 30,
----------------------
2001 2000
---------- ----------
(dollars in thousands)
Reconciliation of net income (loss) to net cash
used in operating activities
Net income (loss)....................................... $ (3,198) $ 17,922
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization......................... 1,792 1,988
Gain on sale of real estate........................... -- (20,878)
Loss of equity partnerships........................... 27 71
Distributions from equity partnerships' operating
cash flow........................................... 18 25
(Increase) decrease in other assets................... (856) 392
Increase in interest payable.......................... 132 263
Increase (decrease) in other liabilities.............. 744 (314)
----------- ---------
Net cash used in operating activities............... (1,341) $ (531)
========== =========
Schedule of noncash investing and financing activities
Notes payable from acquisition of real estate......... $ -- $ 2,814
Notes payable assumed by buyer on sale of real
estate.............................................. -- (16,094)
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
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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 nine month period ended September 30, 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
- --------- -----------
In the nine months ended September 30, 2000, IORI sold the following properties:
Net
Sales Cash Debt Gain on
Property Location Units/Sq.Ft. Price Received Discharged Sale
- ------------------ ----------------- ------------- ------- ---------- -------------- -------
First Quarter
Apartments
La Monte Park Houston, TX 128 Units $ 5,000 $ 1,066 $ 3,829/(1)/ $ 903
Second Quarter
Apartments
Renaissance Parc Dallas, TX 294 Units 17,198 4,536 12,265/(1)/ 1,213
Office Buildings
Olympic Los Angeles, CA 46,685 Sq.Ft. 8,500 3,811 4,443 1,850
Saratoga Saratoga, CA 89,825 Sq.Ft. 25,000 17,709 6,968 13,056
Third Quarter
Apartments
East Point Mesquite, TX 126 Units 5,575 1,804 3,242 2,179
Land
Etheredge Collin County, TX 74.98 Acres 2,341 754 1,406 194
Fambrough Collin County, TX 75.07 Acres 2,338 754 1,408 194
- ------------
(1) Debt assumed by purchaser.
7
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
- --------- -----------------------
In the nine months ended September 30, 2000, IORI purchased the following
properties:
Units/ Purchase Net Cash Debt Interest Maturity
Property Location Sq.Ft./Acres Price Paid Incurred Rate Date
- ------------------ ------------------ --------------- -------- -------- ---------------- --------- -------------
Second Quarter
Apartments
Frankel
Portfolio /(1)/ Midland, TX 391 Units/(1)/ $14,034 $3,784 $ 10,875 9.13% 07/03
Land
Etheredge Collin County, TX 74.98 Acres 1,875 391 1,406/(2)/ 10.0% 04/01/(3)/
Fambrough Collin County, TX 75.07 Acres 1,877 592 1,408/(2)/ 10.0% 04/01/(3)/
Frankel Midland County, TX 1.01 Acres 41 43 -- -- --
- ---------------------------
(1) Frankel portfolio consists of five apartments: 60 unit Brighton Court, 92
units Del Mar Villas, 68 unit Enclave, 57 unit Signature Place and 114
unit Sinclair Place.
(2) Seller financing.
(3) Property was sold September 2000.
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
- ------- ------------------
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
8
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. OPERATING SEGMENTS (Continued)
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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 a loss of $22,000 and income of
$115,000 for the three and nine months ended September 30, 2001, and income of
$4.0 million and $21.0 million in the three and nine months ended September 30,
2000. Expenses that are not reflected in the segments are general and
administrative expenses, advisory fees and net income fees which totaled
$555,000 and $1.4 million for the three and nine months ended September 30,
2001, and $585,000 and $2.6 million for the three and nine months ended
September 30, 2000. Excluded from operating segment assets are assets of $6.1
million at September 30, 2001, and $24.5 million at September 30, 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
and nine months ended September 30, and each segment's assets at September 30.
Three Months Ended Commercial
September 30, 2001 Properties Apartments Land Total
- -------------------------- ---------- ---------- ------- -------
Rents........................ $ 2,013 $ 1,206 $ -- $ 3,219
Property operating
expenses................... 997 718 557 2,272
------- ------- ------- -------
Operating income............. $ 1,016 $ 488 $ (557) $ 947
======= ======= ======= =======
Depreciation................. $ 485 $ 129 $ -- $ 614
Interest..................... 659 321 525 1,505
Real estate improvements..... 168 -- 329 497
Assets....................... 41,626 21,738 22,417 85,781
Nine Months Ended Commercial
September 30, 2001 Properties Apartments Land Total
- -------------------------- ---------- ---------- ------- -------
Rents........................ $ 5,895 $ 3,721 $ 143 $ 9,759
Property operating
expenses................... 2,729 1,994 569 5,292
------- ------- ------- -------
Operating income............. $ 3,166 $ 1,727 $ (426) $ 4,467
======= ======= ======= =======
Depreciation................. $ 1,407 $ 385 $ -- $ 1,792
Interest..................... 2,023 1,066 1,480 4,569
Real estate improvements..... 987 -- 329 1,316
Assets....................... 41,626 21,738 22,417 85,781
9
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. OPERATING SEGMENTS (Continued)
- ------- ------------------
Three Months Ended Commercial
September 30, 2000 Properties Apartments Land Total
- -------------------------- ---------- ---------- ------ -------
Rents..................... $ 1,569 $ 1,425 $ $ 2,994
Property operating
expenses................ 873 794 -- 1,667
------- ------- ------ -------
Operating income.......... $ 696 $ 631 $ $ 1,327
======= ======= ====== =======
Depreciation.............. $ 409 $ 157 $ -- $ 566
Interest.................. 682 457 111 1,250
Real estate improvements.. 432 -- -- 432
Assets.................... 38,682 22,242 44 60,968
Property sales: Apartments Land Total
---------- ------ -------
Sales price............... $ 5,575 $4,679 $10,254
Cost of sale.............. 3,396 4,291 7,687
------- ------ -------
Gain on sale.............. $ 2,179 $ 388 $ 2,567*
======= ====== =======
Nine Months Ended Commercial
September 30, 2000 Properties Apartments Land Total
- -------------------------- ---------- ---------- ------ --------
Rents..................... $ 6,435 $ 4,297 $ -- $10,732
Property operating
expenses................ 2,857 2,429 -- 5,286
------- ------- ------ -------
Operating income.......... $ 3,578 $ 1,868 $ -- $ 5,446
======= ======= ====== =======
Depreciation.............. $ 1,410 $ 480 $ -- $ 1,890
Interest.................. 2,449 1,391 181 4,021
Real estate improvements.. 915 12 -- 927
Assets.................... 38,682 22,242 44 60,968
Commercial
Property sales: Properties Apartments Land Total
---------- ---------- ------ --------
Sales price............... $33,500 $27,773 $4,679 $65,952
Cost of sale.............. 18,594 23,478 4,291 46,363
------- ------- ------ -------
Gain on sale.............. $14,906 $ 4,295 $ 388 $19,589*
======= ======= ====== =======
- --------------------------
* Excludes recognition of a $1.3 million deferred gain on the sale of a
property by an affiliate that had purchased the property from IORI.
NOTE 6. COMMITMENTS AND CONTINGENCIES
- ------- -----------------------------
Liquidity. 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
10
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. COMMITMENTS AND CONTINGENCIES (Continued)
- ------- -----------------------------
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.
Litigation. IORI is involved in various lawsuits arising in the ordinary course
of business. Except for the Olive litigation, 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. See PART II. OTHER INFORMATION,
ITEM 1. "LEGAL PROCEEDINGS."
----------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Introduction
- ------------
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 September 30, 2001, were $3.9 million, compared
with $2.1 million at December 31, 2000. IORI's principal sources of cash have
been, and will continue to be, from 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 flow from property operations (rents collected less payments for
expenses applicable to rental income) decreased to $4.6 million in the nine
months ended September 30, 2001, from $5.3 million in 2000. Of this decrease,
$1.0 million was due to the sale of three apartments and
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
$1.0 million was due to the sale of two commercial properties in 2000. The
decrease also was due to an increase in property expenses of $438,000 at IORI's
commercial properties. This decrease was offset by an increase of $682,000 due
to the purchase of five apartments in 2000 and increased rents collected of
$140,000 for IORI's apartments and $875,000 for IORI's commercial properties.
Interest paid increased to $4.1 million for the nine months ended September 30,
2001, from $3.7 million paid in 2000. Of this increase, $420,000 was due to the
purchase of five apartments in 2000 and $1.2 million was due to the purchase of
one parcel of unimproved land in 2000. The increase also was due to a $124,000
increase from a loan refinancing for a commercial property in 2001. This
increase was offset by a decrease of $755,000 from the sale of three apartments
in 2000, $442,000 from the sale of two commercial properties in 2000, and
$180,000 from the sale of two unimproved land parcels in 2000.
During the nine months ended September 30, 2001, IORI paid $520,000 to its
advisor compared to $1.5 million in the nine months ended September 30, 2000.
Fees paid to the advisor are based on gross assets and 7.5% of net income. The
decrease in advisory and net income fees was due to IORI's net loss during 2001.
General and administrative expenses paid increased to $1.5 million in the nine
months ended September 30, 2001, from $697,000 paid in 2000. The increase was
due to increases in professional fees, taxes, and cost reimbursements to the
advisor.
In the fourth quarter of 2000, IORI discontinued the payment of quarterly
dividends. In the nine months ended September 30, 2000, IORI paid dividends of
$.45 per share or a total of $685,000, and it sold 4,112 shares of Common Stock
through the dividend reinvestment program for a total of $24,000.
In December 1989, the Board of Directors approved a share repurchase program,
authorizing the repurchase of a total of 200,000 shares of IORI's Common Stock.
In June 2000, the Board increased this authorization to 300,000 shares. In 2000,
19,500 shares of Common Stock were repurchased for a total of $134,000. Through
September 30, 2001, a total of 218,804 shares had been repurchased at a cost of
$1.9 million. In September 2001, the Board approved separately a private block
purchase of 75,100 shares of IORI Common Stock for a total of $1.3 million.
12
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 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.
Recent Accounting Pronouncements
- --------------------------------
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets." SFAS No. 144
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore discontinued operations will
no longer be measured at net realizable value or include amounts for operating
losses that have not yet occurred. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and,
generally, is to be applied prospectively.
Results of Operations
- ---------------------
For the three and nine months ended September 30, 2001, IORI had a net loss of
$1.7 million and $3.2 million, as compared to net income of $2.9 million and
$17.9 million for the corresponding periods in 2000, which included gains on
real estate totaling $3.9 million and $20.9 million. Fluctuations in components
of revenue and expense between the 2000 and 2001 periods are discussed below.
Rents for the three months ended September 30, 2001, increased to $3.2 million,
as compared to $3.0 million in the corresponding period in 2000. Of this
increase, $410,000 and $42,000 was due to increased rental rates and occupancies
at IORI's commercial properties and apartments, respectively. These increases
were offset by a decrease of $210,000 due to the sale of one apartment in the
third quarter of 2000. Rents for the nine months ended September 30, 2001,
decreased to $9.8 million, as compared to $10.7 million in the corresponding
period in
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- ---------------------
2000. Of this decrease, $1.6 million was due to the sale of two commercial
properties and $2.0 million was due to the sale of three apartments in 2000.
This decrease was offset by increases of $1.4 million due to the purchase of
five apartment properties in 2000 and $1.1 million and $150,000 was due to
increased rental rates and occupancies at IORI's commercial and apartment
properties, respectively. Rental income for the remaining quarter of 2001 is
expected to decrease as IORI selectively sells properties.
Property operations expense increased in the three months ended September 30,
2001, to $2.3 million, as compared to $1.7 million in the corresponding period
in 2000. Of this increase, $27,000 was due to increases in utility expenses at
IORI's apartments, $152,000 was due to increases in leasing, administrative, and
utility expenses at IORI's commercial properties and $557,000 was due to an
increase in property tax expense for IORI's land. These increases were offset
by a decrease of $103,500 due to the sale of two commercial properties in 2000.
Property operations expense of $5.3 million in the nine months ended September
30, 2001, approximated the $5.3 million in the corresponding period in 2000.
Operating expense for the remaining quarter of 2001 is expected to decrease as
IORI selectively sells properties.
Interest income in the three and nine months ended September 30, 2001, was
$8,000 and $142,000, as compared to $108,000 and $206,000 in the corresponding
periods in 2000. The decrease was due to a $1.0 million paydown received in May
2001 on IORI's only note receivable. Interest income for the remainder of 2001
is expected to approximate that of the first three quarters of 2001.
Equity in income of partnerships in the three and nine months ended September
30, 2001, were losses of $30,000 and $27,000, as compared to losses of $2,000
and $71,000 in the corresponding periods in 2000. The nine month decrease was
primarily due to a decrease in operating expenses at Eton Square Office
Building.
Interest expense for the three months ended September 30, 2001, increased to
$1.5 million from $1.3 million in the corresponding period in 2000. Of this
increase $526,000 was due to the purchase of one unimproved land parcel in 2000
and $56,000 was due to one loan refinanced in 2001. These increases were offset
by decreases of $80,000 and $51,000 due to lower variable interest rates at
IORI's commercial properties and apartments. Decreases of $87,000 were due to
the sale of one apartment and $111,000 was due to the sale of two unimproved
land
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- ---------------------
parcels in the third quarter of 2000. Interest expense for the nine months
ended September 30, 2001, increased to $4.6 million from $4.0 million in the
corresponding period in 2000. Of this increase, $420,000 and $1.5 million was
due to the purchase of five apartments and one unimproved land parcel in 2000,
and $124,000 was due to one loan refinanced in 2001. These increases were
offset by decreases of $412,000 due to the sale of two commercial properties;
$755,000 due to the sale of three apartments; and $181,000 due to the sale of
two unimproved land parcels in 2000. The remaining decrease of $96,000 was due
to lower variable interest rates at IORI's commercial properties and decreased
principal balances. Interest expense for the remaining quarter of 2001 is
expected to decrease as IORI selectively sells properties.
Depreciation expense for the three months ended September 30, 2001, increased to
$614,000 from $566,000 in the corresponding period in 2000. This increase was
due to $76,000 of tenant improvements at IORI's commercial properties offset by
decreases of $28,000 due to the sale of one apartment in the third quarter of
2000. Depreciation expenses for the nine months ended September 30, 2001,
decreased to $1.8 million from $1.9 million in the corresponding period in 2000.
Of this decrease, $204,000 was due to the sale of two commercial properties and
$232,000 was due to the sale of three apartments in 2000. These decreases were
offset by an increase of $200,000 due to tenant improvements at IORI's
commercial properties and an increase of $140,000 due to the purchase of five
apartments in 2000. Depreciation for the fourth quarter of 2001 is expected to
decrease as IORI selectively sells properties.
Advisory fee expense in the three and nine months ended September 30, 2001, was
$179,000 and $570,000, as compared to $170,000 and $505,000 in the corresponding
periods in 2000. The advisory fee is based on IORI's gross assets. Advisory
fees for the remainder of 2001 are expected to decrease as IORI selectively
sells properties.
Net income fee was $234,000 and $1.5 million in the three and nine months ended
September 30, 2000. The net income fee is payable to IORI's advisor based on
7.5% of IORI's net income.
General and administrative expense was $376,000 and $849,000 for the three and
nine months ended September 30, 2001, as compared to $181,000 and $668,000 in
the corresponding periods in 2000. The three and nine month increase was
primarily due to an increase in professional fees, taxes, and advisor cost
reimbursements. General and administrative expense for the fourth quarter of
2001 is expected to approximate that of the first three quarters of 2001.
15
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.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
- ------- --------------------------------------------------------------
At September 30, 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.............. $25,040 8.56% $250
======== ====
Total increase in IORI's annual
net loss................... $250
====
Per share........................ $.17
====
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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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.
17
ITEM 1. LEGAL PROCEEDINGS (Continued)
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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. 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. See ITEM 5. "OTHER
INFORMATION" for information on a preliminary agreement to settle the pending
issues in this case.
ITEM 5. OTHER INFORMATION
- ------- -----------------
On October 23, 2001, IORI, Transcontinental Realty Investors, Inc. ("TCI") and
American Realty Investors, Inc. ("ARI") jointly announced a preliminary
agreement with the plaintiff's legal counsel of the derivative action entitled
Olive et al. V. National Income Realty Trust, et al. for complete settlement of
all disputes in the lawsuit. Under the proposal, ARI would acquire all of the
outstanding shares of IORI and TCI not currently owned by ARI for a cash payment
or shares of ARI preferred stock. ARI will pay $19.00 cash per IORI share and
$17.50 cash per TCI share for the stock held by non-affiliated stockholders. ARI
would issue one share of Series H Preferred Stock with a liquidation value of
$21.50 per share for each share of IORI Common Stock for stockholders who elect
to receive ARI preferred stock in lieu of cash. ARI would issue one share of
Series G Preferred Stock with a liquidation value of $20.00 per share for each
share of TCI Common Stock for stockholders who elect to receive ARI preferred
stock in lieu of cash. The preferred shares will be convertible into ARI Common
Stock during a six month period commencing on the first anniversary of the
effective
18
ITEM 5. OTHER INFORMATION (Continued)
- ------- -----------------
date of the transaction. Upon the acquisition of the IORI and TCI shares, IORI
and TCI would become wholly-owned subsidiaries of ARI. The transaction is
subject to the negotiation of a definitive merger agreement, approval of the
court and a vote of the shareholders of all three entities. IORI has the same
board as TCI and the same advisor as TCI and ARI.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated September 27, 2001, was filed with
respect to Item 5. "Other Events and Regulation FD Disclosures," which
reports the purchase of 75,100 shares of IORI Common Stock.
19
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: November 9, 2001 By: /s/ Karl L. Blaha
---------------------- ----------------------------------
Karl L. Blaha
President
Date: November 9, 2001 By: /s/ Brent Horak
---------------------- ----------------------------------
Brent Horak
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20