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, 2002
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Commission File Number 1-9240
------
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.)
1800 Valley View Lane, Suite 300, Dallas, Texas 75234
-------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(469) 522-4200
------------------------------
(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 8,042,594
- ---------------------------- ---------------------------------
(Class) (Outstanding at April 26, 2002)
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
March 31, December 31,
2002 2001
--------- ------------
(dollars in thousands,
except per share)
Assets
Real estate held for investment .......................... $ 714,706 $ 712,832
Less - accumulated depreciation .......................... (95,922) (90,661)
--------- ---------
618,784 622,171
Real estate held for sale ................................ 14,831 516
Notes and interest receivable
Performing (including $6,372 in 2002 and $1,970 in 2001
from related parties) ............................... 25,549 17,620
Nonperforming, nonaccruing ............................ 1,700 5,247
--------- ---------
27,249 22,867
Less--allowance for estimated losses ..................... (739) (818)
--------- ---------
26,510 22,049
Investment in real estate entities ....................... 15,887 14,230
Cash and cash equivalents ................................ 4,946 10,346
Other assets (including $14,297 in 2002 and
$14,170 in 2001 from affiliates and related
parties) .............................................. 39,240 39,840
--------- ---------
$ 720,198 $ 709,152
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS - Continued
March 31, December 31,
2002 2001
--------- ------------
(dollars in thousands,
except per share)
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable .................................. $ 472,486 $ 461,037
Other liabilities (including $421 in 2002 and $1,068 in
2001 to affiliates and related parties) .................. 25,674 25,966
--------- ---------
498,160 487,003
Commitments and contingencies
Minority interest ........................................... 6,673 5,381
Stockholders' equity
Preferred Stock
Series A; $.01 par value; authorized, 6,000
shares; issued and outstanding 5,829
shares (liquidation preference $583) ................... -- --
Series C; $.01 par value; authorized, issued
and outstanding 30,000 shares; (liquidation
preference $3,000) ..................................... -- --
Common Stock, $.01 par value; authorized, 10,000,000
shares; issued and outstanding 8,042,594 shares in 2002
and 2001 ................................................. 80 80
Paid-in capital ............................................. 271,761 271,761
Accumulated distributions in excess of
accumulated earnings ..................................... (56,453) (55,073)
Foreign currency translation loss ........................... (23) --
--------- ---------
215,365 216,768
--------- ---------
$ 720,198 $ 709,152
========= =========
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
Ended March 31,
-----------------------
2002 2001
---------- ----------
(dollars in thousands,
except per share)
Property revenue
Rents (including $30 from affiliates in 2002
and 2001) ................................................ $ 30,869 $ 35,265
Property expense
Property operations (including $807 in 2002
and $643 in 2001 to affiliates and related
parties) ................................................. 19,468 20,395
---------- ----------
Operating income ......................................... 11,401 14,870
Other income
Interest and other (including $74 in 2002
from related parties) .................................... 1,067 638
Equity loss of equity investees ............................. (1,276) (1,373)
Gain on sale of real estate ................................. 5,429 6,484
---------- ----------
5,220 5,749
Other expense
Interest .................................................... 9,156 11,211
Depreciation ................................................ 5,242 5,120
Advisory fee to affiliate ................................... 1,415 1,502
Net income fee to affiliate ................................. -- 26
General and administrative (including $786 in
2002 and $769 in 2001 to affiliates) ..................... 2,202 2,425
Minority interest ........................................... (59) 19
---------- ----------
17,956 20,303
---------- ----------
Net income (loss) .............................................. (1,335) 316
Preferred dividend requirement ................................. (45) (7)
---------- ----------
Net income (loss) applicable to Common shares .................. $ (1,380) $ 309
========== ==========
Basic and diluted earnings per share
Net income (loss) applicable to Common shares .................. $ (.17) $ .04
========== ==========
Weighted average Common shares used in
computing earnings per share ................................ 8,042,594 8,686,346
========== ==========
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, 2002 ............................ 8,042,594 $ 80 $ 271,761 $ (55,073) $ -- $ 216,768
Unrealized loss on foreign currency translation ..... -- -- -- -- (23) (23)
Net income ....................................... -- -- -- (1,335) -- (1,335)
---------
(1,358)
Series A Preferred Stock cash
dividend ($1.25 per share) ....................... -- -- -- (7) -- (7)
Series C Preferred Stock cash
dividends ($1.25 per share) ...................... -- -- -- (38) -- (38)
---------- -------- --------- --------- -------- ---------
Balance, March 31, 2002 ............................. 8,042,594 $ 80 $ 271,761 $ (56,453) $ (23) $ 215,365
========== ======== ========= ========= ======== =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
----------------------------
2002 2001
---------- ----------
(dollars in thousands)
Cash Flows from Operating Activities
Rents collected (including $90 in 2002 and $30 in 2001
from affiliates) .................................................... $ 31,003 $ 35,341
Interest collected (including $74 in 2002 from related parties) ........ 850 216
Interest paid .......................................................... (8,994) (10,631)
Payments for property operations (including $807 in
2002 and $643 in 2001 to affiliates and related parties) ............ (19,126) (18,911)
Advisory and net income fee paid to affiliate .......................... (1,454) (2,563)
General and administrative expenses paid (including
$786 in 2002 and $769 in 2001 to affiliates and
related parties) .................................................... (2,264) (3,039)
Other .................................................................. -- 207
---------- ----------
Net cash provided by operating activities ........................ 15 620
Cash Flows from Investing Activities
Collections on notes receivable (including $2,045 in
2002 from related parties) .......................................... 4,472 17
Funding of notes receivable (including $4,448 in 2002
to related parties) ................................................. (5,351) (3,500)
Acquisition of real estate ............................................. (2,412) --
Real estate improvements ............................................... (15,476) (1,428)
Proceeds from sale of real estate ...................................... 6,779 13,099
Deposits on pending purchases and financings ........................... 35 (1,216)
Distributions from/(contributions to) equity investees ................. 323 (618)
---------- ----------
Net cash (used in) provided by investing activities .............. (11,630) 6,354
Cash Flows from Financing Activities
Payments on notes payable .............................................. (7,838) (10,277)
Proceeds from notes payable ............................................ 14,328 100
Deferred financing costs (including $27 in 2002 to
affiliates and related parties) ..................................... (133) --
Payments from advisor .................................................. 2,573 7,623
Advance to affiliates and related parties .............................. (2,670) --
Dividends to stockholders .............................................. (45) --
---------- ----------
Net cash provided by (used in) financing activities .............. 6,215 (2,554)
Net increase (decrease) in cash and cash equivalents ...................... (5,400) 4,420
Cash and cash equivalents, beginning of period ............................ 10,346 22,323
---------- ----------
Cash and cash equivalents, end of period .................................. $ 4,946 $ 26,743
========== ==========
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 Three Months
Ended March 31,
----------------------
2002 2001
-------- --------
(dollars in thousands)
Reconciliation of net income to net cash provided by
operating activities
Net income (loss) ...................................... $ (1,335) $ 309
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization ....................... 5,242 5,057
Gain on sale of real estate ......................... (5,429) (6,484)
Equity loss of equity investees ..................... 1,276 1,367
(Increase) decrease in interest receivable .......... 30 (121)
Decrease in other assets ............................ 657 2,832
(Decrease) increase in interest payable ............. (134) 8
Decrease in other liabilities ....................... (292) (2,348)
-------- --------
Net cash provided by operating activities ........ $ 15 $ 620
======== ========
Schedule of noncash investing and financing activities
Notes payable assumed on purchase of real estate ....... $ 1,389 $ --
Limited partnership interest received on sale of real
estate .............................................. -- 550
Notes receivable provided on sale of real estate ....... 4,000 --
Real estate received on exchange with related party .... 4,145 --
Real estate exchanged with related party ............... (4,145) --
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 also invests 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.
Operating results for the three month period ended March 31, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001 (the "2001 Form 10-K").
Certain balances for 2001 have been reclassified to conform to the 2002
presentation.
NOTE 2. REAL ESTATE
- --------------------
In 2002, TCI purchased the following properties:
Units/ Purchase Net Cash Debt Interest Maturity
Property Location Sq.Ft./Acres Price Paid Incurred Rate Date
- ----------------------- -------------- ------------- -------- -------- -------- -------- --------
First Quarter
Apartments
Blue Lakes Villas/(1)/ Waxahachie, TX 186 Units $1,012 $1,048 $ -- --% --
Echo Valley/(1)/ Dallas, TX 216 Units 787 788 -- -- --
Spy Glass/(1)/ Mansfield, TX 256 Units 1,280 1,042 208 7.5 08/43
Rasor/(1)(2)/ Plano, TX 200 Units 2,319 310 -- -- --
Shopping Center
Oak Tree Village/(2)/ Lubbock, TX 45,623 Sq.Ft. 1,467 196 1,389 8.48 11/07
Land
Lakeshore Villas/(2)/ Humble, TX 16.89 Acres 947 127 -- -- --
________________________
(1) Land purchased for apartment construction.
(2) Property exchanged with American Realty Investors, Inc. ("ARI"), a related
party, for the Plaza at Bachman Retail Center.
8
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
- --------------------
In 2002, TCI sold the following properties:
Sales Net Cash Debt Gain/(Loss)
Property Location Units/Sq.Ft. Price Received Discharged on Sale
- --------------------- --------------- -------------- ------- -------- ---------- -------------
First Quarter
Apartments
Primrose Bakersfield, CA 162 Units $ 5,000 $ 1,722 $ 2,920 $ 659
Office Building
Hartford Dallas, TX 174,513 Sq.Ft. 4,000 -- -- -- /(1)/
Industrial Warehouse
Central Storage Dallas, TX 216,035 Sq.Ft. 4,000 2,095 1,063 1,241
Shopping Center
Plaza at Bachman/(2)/ Dallas, TX 80,278 Sq.Ft. 4,707 -- -- --
______________________
(1) Excludes a $920,000 deferred gain from seller financing. See NOTE 3. "NOTES
AND INTEREST RECEIVABLE."
(2) Property was exchanged with ARI, a related party, for the Oak Tree Village
Shopping Center and two parcels of land; the Rasor land parcel and
Lakeshore Villas land parcel.
In the first quarter of 2001, TCI sold the following properties:
Units/Sq.Ft. Sales Net Cash Debt Gain/(Loss)
Property Location Acres Price Received Discharged on Sale
- --------------------- --------------- -------------- ------- -------- ---------- -------------
Apartments
Forest Ridge Denton, TX 56 Units $ 2,000 $ 682 $ 1,151 $ 1,014
Heritage Tulsa, OK 136 Units 2,286 206 1,948 1,575
Park at Colonade San Antonio, TX 211 Units 5,800 927 4,066 1,052 /(1)/
Industrial Warehouse
Zodiac Dallas, TX 35,435 Sq.Ft. 762 183 564 167
Land
McKinney 36 McKinney, TX 1.822 Acres 476 476 -- 355
Round Mountain Austin, TX 110.0 Acres 2,560 2,455 -- 1,047
______________________
(1) Excludes a $550,000 gain from a limited partnership interest in the sold
property.
At March 31, 2002, TCI had the following properties under construction:
Additional Construction
Amount Amount Loan
Property Location Units/Rooms Expended to Expend Funding
- --------------------- --------------- -------------- -------- ---------- ------------
Apartments
Blue Lake Villas Waxahachie, TX 186 Units $ 3,126 $ 9,464 $ 10,736
Echo Valley Dallas, TX 216 Units 981 13,238 12,509
Falcon Lakes Arlington, TX 284 Units 1,695 14,050 13,469
Limestone Ranch Lewisville, TX 252 Units 12,081 2,540 13,000
Rasor Glen Plano, TX 200 Units 2,418 13,164 12,600
River Oaks Wiley, TX 180 Units 2,235 9,756 10,023
9
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
- --------------------
Additional Construction
Amount Amount Loan
Property Location Units/Rooms Expended to Expend Funding
- ---------------------- --------------- ----------- --------- ---------- ------------
Apartments - Continued
Sendero Ridge San Antonio, TX 384 Units $ 6,577 $ 22,084 $ 24,420
Spyglass Mansfield, TX 256 Units 2,698 15,305 16,017
Tivoli Dallas, TX 190 Units 4,755 8,679 11,000
Verandas at City View Fort Worth, TX 314 Units 2,895 20,055 19,000
Waters Edge IV Gulfport, MS 80 Units 3,226 857 --
Hotel
Akademia Wroclaw, Poland 165 Rooms 15,325 3,410 14,240
NOTE 3. NOTES AND INTEREST RECEIVABLE
- --------------------------------------
In January 2002, TCI purchased 100% of the outstanding common shares of ART Two
Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary of ARI, a related
party, for $4.4 million cash. Two Hickory owns the 96,217 sq. ft. Two Hickory
Center Office Building in Farmers Branch, Texas. ARI has guaranteed that the
asset shall produce at least a 12% annual return of the purchase price for a
period of three years from the purchase date. If the asset fails to produce the
12% annual return, ARI shall pay TCI any shortfall. In addition, if the asset
fails to produce the 12% return for a calendar year and ARI fails to pay the
shortfall, TCI may require ARI to repurchase the shares of Two Hickory for the
purchase price. Because ARI has guaranteed the 12% return and TCI has the option
of requiring ARI to repurchase the entities, management has classified this
related party transaction as a note receivable from ARI.
Also in January 2002, a mortgage loan with a principal balance of $608,000 was
paid off, including accrued but unpaid interest. With the payoff of the note,
TCI recognized a previously deferred gain on the sale of the property of
$608,000.
In August 2001, TCI agreed to fund up to $5.6 million under a revolving line of
credit secured by an office building in Dallas, Texas. In February 2002, TCI
funded an additional $600,000. At March 31, 2002, TCI had funded a total of $2.3
million of the note.
In February 2002, TCI sold a $2.0 million senior participation interest in a
loan secured by a second lien on a retail center in Montgomery County, Texas to
Income Opportunity Realty Investors, Inc. ("IORI"), a related party. TCI and
IORI will receive 43% and 57%, respectively, of the remaining principal and
interest payments. Also in February 2002, TCI extended the loan until April
2002, receiving $23,000 as an extension fee. In April 2002, TCI extended the
loan until July 2002, receiving $6,500 as an extension fee.
Also in February 2002, TCI funded an additional $231,000 line of credit to
Sendera Ranch, under a loan secured by 1,714.16 acres of unimproved land in
Tarrant County, Texas. In March 2002, TCI received a $2.4
10
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)
- --------------------------------------
million payment from Sendera Ranch. TCI received $1.8 million as a principal
paydown, $277,000 as accrued interest, and $323,000 as a partnership
distribution.
In March 2002, TCI sold the 174,513 sq.ft. Hartford Office Building in Dallas,
Texas, for $4.0 million and provided the $4.0 million purchase price as seller
financing and an additional $1.4 million line of credit for leasehold
improvements in the form of a mortgage note. The note bears interest at a
variable interest rate, currently 6.0% per annum, requires monthly interest only
payments of $14,667 and matures in March 2007.
In April 2002, TCI purchased 100% of the following entities: ART One Hickory
Corporation ("One Hickory"), Garden Confederate Point, LP ("Confederate Point"),
Garden Foxwood, LP ("Foxwood"), and Garden Woodsong, LP ("Woodsong"), all
wholly-owned subsidiaries of ARI, a related party, for $10.0 million. One
Hickory owns the 120,615 sq. ft. One Hickory Center Office Building in Farmers
Branch, Texas, Confederate Point owns the 206 unit Confederate Apartments in
Jacksonville, FL, Foxwood owns the 220 unit Foxwood Apartments in Memphis,
Tennessee, and Woodsong owns the 190 unit Woodsong Apartments in Smyrna,
Georgia. ARI has guaranteed that these assets shall produce at least a 12%
return annually of the purchase price for a period of three years from the
purchase date. If the assets fail to produce the 12% return, ARL shall pay TCI
any shortfall. In addition, if the assets fail to produce the 12% return for a
calendar year and ARI fails to pay the shortfall, TCI may require ARI to
repurchase the entities for the purchase price. Because ARI has guaranteed the
12% return and TCI has the option of requiring ARI to repurchase the entities,
management has classified this related party transaction as a note receivable
from ARI.
NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES
- -------------------------------------------
Prior to the first quarter of 2002, TCI accounted for its investments in
Tri-City, Nakash and Jor-Trans on the equity method. In the first quarter of
2002, TCI began accounting for its investment in Tri-City, Nakash and Jor-Trans
using a consolidated basis.
Real estate entities. TCI's investment in real estate entities at March 31,
2002, included equity securities of two publicly traded real estate entities,
IORI and ARI, related parties, and interests in real estate joint venture
partnerships. Basic Capital Management, Inc. ("BCM"), TCI's advisor, serves as
advisor to IORI and ARI.
TCI accounts for its investment in IORI and ARI and the joint venture
partnerships using the equity method.
11
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES (Continued)
- -------------------------------------------
TCI's investment in real estate entities, accounted for using the equity method,
at March 31, 2002 was as follows:
Percentage Carrying Equivalent
of TCI's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee March 31, 2002 March 31, 2002 March 31, 2002 March 31, 2002
- ------------ -------------- -------------- -------------- --------------
IORI ....... 24.0% $ 4,809 $ 9,782 $ 6,275
ARI ........ 6.5% 10,249 5,685 5,266
---------- ---------- --------
15,058 $ 15,467 $ 11,541
========== ========
Other ...... 829
----------
$ 15,887
==========
Management continues to believe that the market value of each of IORI and ARI
undervalues their assets and, therefore, TCI may continue to increase its
ownership in these entities.
Set forth below is summarized results of operations of equity investees for the
first quarter of 2002 and 2001.
2002 2001
-------- --------
Revenues ................................................ $ 41,527 $ 45,000
Equity in income of partnerships ........................ (429) 4
Property operating expenses ............................. (35,631) (39,295)
Depreciation ............................................ (4,096) (4,714)
Interest expense ........................................ (19,854) (19,587)
-------- --------
(Loss) before gains on sale of real estate .............. (18,483) (18,592)
Gain on sale of real estate ............................. 25,586 20,215
-------- --------
Net income .............................................. $ 7,103 $ 1,623
======== ========
TCI's share of equity investees' loss before gains on the sale of real estate
was $1.3 million for the first quarter of 2002, and its share of equity
investees' gains on sale of real estate was $2.9 million for the first quarter
of 2002.
NOTE 5. OTHER ASSETS
- ---------------------
Related Party. From time-to-time, TCI and its affiliates and related parties
have made advances to each other, which generally have not had specific
repayment terms and have been reflected in TCI's financial statements as other
assets. At March 31, 2002, TCI had receivables of $9.1 million, $1.9 million and
$3.3 million from BCM, GS Realty Services, Inc. and ARI, respectively.
12
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. NOTES AND INTEREST PAYABLE
- -----------------------------------
In 2002, TCI refinanced the following property:
Debt Debt Net Cash Interest Maturity
Property Location Sq.Ft. Incurred Discharged Received Rate Date
- ------------------------- ------------------- ----------------- -------- ---------- -------- -------- --------
First Quarter
Industrial Warehouse
Addison Hanger/(1)/ Addison, TX 23,650 Sq.Ft. $ 2,687 $1,580 $ 942 6.75%/(2)/ 02/07
_________________
(1) The mortgage is cross-collateralized with the 29,000 sq. ft. Addison Hanger
II in Addison, Texas.
(2) Variable interest rate.
In the second quarter of 2002, TCI sold 12 residential properties to Metra
Capital, LLC ("Metra"). These properties include: the 75 unit Apple Lane
Apartments in Lawrence, Kansas, the 195 unit Arbor Point Apartments in Odessa,
Texas, the 264 unit Fairway View Estates Apartments in El Paso, Texas, the 152
unit Fairways Apartments in Longview, Texas, the 166 unit Fountain Lake
Apartments in Texas City, Texas, the 172 unit Fountains of Waterford Apartments
in Midland, Texas, the 122 unit Harper's Ferry Apartments in Lafayette,
Louisiana, the 108 unit Oak Park IV Apartments in Clute, Texas, the 131 unit
Quail Oaks Apartments in Balch Springs, Texas, the 300 unit Sunchase Apartments
in Odessa, Texas, the 180 unit Timbers Apartments in Tyler, Texas, and the 112
unit Willow Creek Apartments in El Paso, Texas. Two of the members of Metra are
Third Millennium Partners, LLC and Innovo Realty, Inc., a subsidiary of Innovo
Group, Inc. ("Innovo"). Joseph Mizrachi, a director for ARI, a related party,
has a beneficial interest in Third Millennium Partners, LLC and owns 15.5% of
the outstanding common stock of Innovo. Due to TCI's relationship with ARI and
Mr. Mizrachi, management has determined to treat this sale as a refinancing
transaction. TCI will continue to report the assets and the new debt incurred by
Metra on its financial statements. The sales price for the properties totaled
$37.6 million. TCI received net cash of $10.5 million after paying off the
existing debt of $18.0 million and various closing costs, including $376,000 in
brokerage commissions to Third Millenium Partners, LLC. The new debt of $30.3
million bears interest at 7.57% per annum, requires monthly interest only
payments of $212,000 and matures in May 2012. TCI also received $5.7 million of
8% non-recourse, non-convertible Series A Preferred Stock ("Preferred Shares")
of Innovo.
The dividend on the Preferred Shares will be funded entirely and solely through
member distributions from cash flows generated by the operation and subsequent
sale of the sold properties. In the event the cash flows for the properties are
insufficient to cover the 8% annual dividend, Innovo will have no obligation to
cover any shortfall.
The Preferred Shares have a mandatory redemption feature, and are redeemable
from the cash proceeds received by Innovo from the operation
13
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. NOTES AND INTEREST PAYABLE (Continued)
- -----------------------------------
and sale of the properties. All member distributions that are in excess of
current and accrued 8% dividends, must be used by Innovo to redeem the Preferred
Shares.
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 each
based on its operating income and cash flow. Items of income not reflected in
the segments are interest, equity in partnerships and gains on sales of real
estate from equity investees which totaled $3.3 million and $539,000 for the
first quarter of 2002 and 2001, respectively. Expenses not reflected in the
segments are general and administrative expenses, minority interest, advisory
fees, and net income fees which totaled $3.6 million and $4.0 million for the
first quarter of 2002 and 2001, respectively. Also excluded from segment assets
are assets of $86.6 million at March 31, 2002, and $92.3 million at March 31,
2001, which are not identifiable with an operating segment. There are no
intersegment revenues and expenses.
Presented below is the operating income of each operating segment for the first
quarter of 2002 and 2001, and each segment's assets at March 31.
Commercial
Quarter Ended March 31, 2002 Land Properties Apartments Hotels Total
- ------------------------------ ---------- ------------ ------------------------------------
Rents .......................... $ 161 $ 16,424 $ 13,396 $ 888 $ 30,869
Property operating expenses .... 470 9,676 8,462 860 19,468
-------- ----------- ---------- -------- ---------
Operating income (loss) ........ (309) 6,748 4,934 28 11,401
Depreciation ................... -- 3,581 1,359 302 5,242
Interest ....................... 493 4,658 3,693 312 9,156
Real estate improvements ....... 40 1,537 10,309 3,590 15,476
Assets ......................... 63,308 298,813 237,371 34,123 633,615
Commercial
Property Sales Properties Apartments Total
------------ ------------ ------------
Sales price ............................... $ 12,707 $ 5,000 $ 17,707
Cost of sales ............................. (11,466) (4,341) (15,807)
----------- ---------- ---------
Gain on sale .............................. $ 1,241 $ 659 $ 1,900 /(1)/
=========== ========== =========
___________________
(1) Excludes TCI's share of gains on sale of real estate recognized by an
equity investee of $2.9 million and a previously deferred gain on the
sale of the Madison at Bear Creek Apartments of $608,000.
14
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. OPERATING SEGMENTS (Continued)
- --------------------------
Commercial
Quarter Ended March 31, 2001 Land Properties Apartments Hotels Total
- ------------------------------- ---- ---------- ---------- ------ -----
Rents .......................... $ 136 $ 17,767 $ 16,032 $ 1,330 $ 35,265
Property operating expenses .... 382 9,386 9,429 1,198 20,395
-------- -------- -------- -------- --------
Operating income (loss) ........ (246) 8,381 6,603 132 14,870
Depreciation ................... -- 3,287 1,581 252 5,120
Interest ....................... 324 5,994 4,532 361 11,211
Real estate improvements ....... -- 1,251 34 143 1,428
Assets ......................... 57,966 345,071 204,991 19,821 627,849
Commercial
Property Sales Land Properties Apartments Total
---- ---------- ---------- -----
Sales price .................... $ 3,036 $ 762 $ 10,086 $ 13,884
Cost of sales .................. 1,634 595 6,445 8,674
-------- -------- -------- --------
Gain on sale ................... $ 1,402 $ 167 $ 3,641 $ 5,210 (1)
======== ======== ======== ========
________________
(1) Excludes TCI's share of gains on sale of real estate recognized by an equity
investee of $1.3 million.
NOTE 8. COMMITMENTS AND CONTINGENCIES
- -------------------------------------
Liquidity. Although management anticipates that TCI will generate excess cash
from operations in 2002, due to increased rental rates and occupancy at its
properties, such excess, however, will not be sufficient to discharge all of
TCI'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.
Commitments. In January 2001, TCI exercised its option under the loan documents
to extend the maturity date of three loans with a principal balance of $30.6
million secured by three office buildings in New Orleans, Louisiana. The lender
has disputed TCI's right to extend the loans. This dispute is subject to
litigation pending in the United States District Court for the Eastern District
of Louisiana.
Litigation. TCI is involved in various lawsuits arising in the ordinary course
of business. Except for the Olive Litigation (see PART II. OTHER INFORMATION,
ITEM 1. "LEGAL PROCEEDINGS), 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.
NOTE 9. INCOME TAXES
- --------------------
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
TCI had a loss for federal income tax purposes in the first quarter of 2002 and
2001; therefore, it recorded no provision for income taxes.
15
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
also invests in mortgage loans. TCI is the successor to a business trust
organized on September 6, 1983, and commenced operations on January 31, 1984.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totaled $4.9 million at March 31, 2002, compared with
$10.3 million at December 31, 2001. 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 TCI's cash requirements, including debt
service obligations and expenditures for property maintenance and improvements.
Net cash provided by operating activities was $15,000 for the first quarter of
2002, compared to $620,000 for the first quarter of 2001. 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) decreased to $11.9 million in the first quarter of
2002, from the $16.4 million in 2001. Decreases in cash flow from property
operations of $2.0 million were from the sale of 16 apartments in 2002 and 2001,
$3.1 million was from the sale of nine commercial properties in 2002 and 2001,
and $97,000 was from decreased room revenues at TCI's hotels. These decreases
were offset by increases in cash flow of $578,000 and $94,000 from the purchase
of five existing apartments in 2001 and one commercial property in 2002.
Management believes that this trend of decreased cash flow from property
operations may continue depending on TCI's selling of income producing
properties to meet its cash requirements.
Interest collected increased to $850,000 in the first quarter of 2002, from
$216,000 in 2001. The increase was primarily due to TCI funding seven loans in
2001.
Interest paid decreased to $9.0 million in the first quarter of 2002, from $10.6
million in the first quarter of 2001. Of the decreases, $2.1 million was from
the sale of 24 properties in 2002 and 2001 subject to debt, and $503,000 was
from lower variable interest rates and principal paydowns in 2002 and 2001.
These decreases were offset by increases of $853,000 from the purchase of nine
properties in 2002 and 2001 subject to debt, and $130,000 from the refinancing
of one land property in 2001.
Advisory and net income fees paid decreased to $1.5 million in the first quarter
of 2002, from $2.6 million in the first quarter of 2001. The decrease was due to
TCI having a net loss in the fourth quarter of 2001.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS (Continued)
-------------
Liquidity and Capital Resources (Continued)
- -------------------------------
General and administrative expenses paid decreased to $2.3 million in first
quarter of 2002, from $3.0 million in the first quarter of 2001. This decrease
was mainly due to a decrease in legal fees and consulting fees.
In the first quarter 2002, TCI sold one apartment, one warehouse, one shopping
center and one office building for a total of $17.7 million, receiving net cash
of $3.8 million after the payoff of existing debt and the payment of various
closing costs.
Also in the first quarter of 2002, TCI financed an industrial warehouse for $2.7
million, receiving $942,000 in cash after the payment of various closing costs.
Further in the first quarter of 2002, TCI purchased four apartments, one
shopping center and one parcel of unimproved land for a total of $7.8 million,
paying $3.5 million in cash, including various closing costs, and assumed
existing mortgage debt of $1.4 million. TCI also expended $13.3 million on
property construction in the quarter, of which $10.9 million was funded by debt.
As of March 31, 2002, TCI has expended a total of $58.0 million on property
construction, of which $30.0 million was funded by debt. For the remainder of
2002, TCI expects to expend an additional $132.6 million on property
construction projects, of which $127.0 million will be funded by debt.
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 a net loss of $1.3 million in the first quarter of 2002, including gains
on sale of real estate totaling $5.4 million, compared to net income of $316,000
in the corresponding period in 2001, including gains on sale of real estate
totaling $6.5 million. Fluctuations in this and other components of revenues and
expense between the 2002 and 2001 periods are discussed below.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS (Continued)
-------------
Results of Operations (Continued)
- ---------------------
Rents in the first quarter of 2002, decreased to $30.9 million compared to $35.3
million in 2001. Of this decrease, $4.8 million was due to the sale of 16
apartments in 2002 and 2001 and $2.2 million was due to the sale of nine
commercial properties in 2002 and 2001 and $326,000 was due to lower occupancies
at TCI's hotels. These decreases were offset by increases of $1.9 million due to
the purchase of five apartments in 2002 and 2001 and $31,000 was due to the
purchase of one commercial property in 2002. Rental rates and occupancies
increased by $208,000 for TCI's apartments and by $795,000 for TCI's commercial
properties. Rents in the remaining quarters of 2002 may decrease as TCI sells
income producing properties.
Property operations expense decreased in the first quarter of 2002, to $19.5
million from $20.4 million compared to the corresponding period in 2001. Of this
decrease, $2.7 million was due to the sale of 16 apartments in 2002 and 2001,
$449,000 was due to the sale of nine commercial properties and hotel operating
expenses decreased by $351,000. These decreases were offset by increases of $1.5
million due to the purchase of five apartments in 2002 and 2001 and $15,000 due
to the purchase of one commercial property in 2002. Apartment operating expenses
increased by $242,000 due to increased leasing costs and utilities and an
increase of $800,000 was due to increased leasing, utility and maintenance costs
at TCI's commercial properties.
Interest and other income increased to $1.1 million in the first quarter of
2002, compared to $638,000 in 2001. The increase was primarily due to TCI
funding seven loans in 2001 and one loan in 2002. Interest income for the
remaining quarters of 2002 is expected to increase from the additional loans
funded in 2001 and 2002.
Equity losses of investees decreased to $1.3 million in the first quarter of
2002, from $1.4 million in the first quarter of 2001. The decreases in losses
from equity investees are primarily attributed to decreased operating losses for
IORI and ARI.
In the first quarter of 2002, gains on sale of real estate totaling $5.4 million
were recognized, $659,000 on the sale of the Primrose Apartments, $1.2 million
on the sale of the Central Storage Warehouse, a $608,000 deferred gain on the
sale of the Madison at Bear Creek Apartments and $2.9 million on gains on sale
of real estate from equity investees.
In the first quarter of 2001, gains on sale of real estate totaling $6.5 million
were recognized, $1.6 million on the sale of the Heritage Apartments, $167,000
on the sale of Zodiac Warehouse, $355,000 on the sale of a tract of the McKinney
36 land parcel, $1.0 million on the sale of Forest Ridge Apartments, $1.1
million on the sale of Park at Colonade Apartments, $1.0 million on the sale of
a tract of the Round Mountain land parcel and $1.3 million on gains on sale of
real estate from an equity investee.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- ---------------------
Interest expense decreased to $9.2 million in the first quarter of 2002, from
$11.2 million in 2001. Of this decrease, $1.4 million was due to the sale of 16
apartments in 2002 and 2001, $769,000 was due to the sale of five commercial
properties in 2002 and 2001, and decreases of $20,000 were due to principal
paydowns in 2001. Of the remaining decreases, $341,000 was due to lower variable
interest rates at TCI's apartments, $478,000 was due to lower variable interest
rates at TCI's commercial properties, and $49,000 was due to lower variable
interest rates at TCI's hotels. These decreases were offset by increases of
$823,000 due to the purchase of five apartments in 2002 and 2001, and $194,000
due to the financing of one property in 2001. Interest expense for the remaining
quarters of 2002 are expected to decrease as TCI selectively sells properties.
Depreciation expense increased to $5.2 million in the first quarter of 2002,
from $5.1 million in 2001. Of these increases, $273,000 was due to the purchase
of five apartments in 2002 and 2001, and $548,000 was due to building and tenant
improvements at TCI's commercial properties. These increases were offset by
decreases of $450,000 due to the sale of 16 apartments and $283,000 due to the
sale of five commercial properties in 2002 and 2001. Depreciation expense for
the remaining quarters of 2002 is expected to decrease as TCI selectively sells
properties.
Advisory fee decreased to $1.4 million in the first quarter of 2002, from $1.5
million in 2001. The decrease was due to a decrease in TCI's gross assets from
2001, the basis for such fee. Advisory fees for the remaining quarters of 2002
are expected to decrease with decreases in TCI's gross assets.
Net income fee to affiliate was $26,000 in the first quarter of 2001. The net
income fee is payable to TCI's advisor based on 7.5% of TCI's net income.
General and administrative expenses decreased to $2.2 million in the first
quarter of 2002, from $2.4 million in 2001. These decreases were mainly due to a
decrease in legal fees and other professional fees.
Tax Matters
- -----------
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
TCI had a loss for federal income tax purposes in the first quarter of 2002 and
2001; therefore, it recorded no provision for income taxes.
Inflation
- ---------
The effects of inflation on TCI's operations are not quantifiable. Revenues from
property operations tend to fluctuate proportionately with
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Inflation (Continued)
- ---------
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 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, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- --------------------------------------------------------------------
At March 31, 2002, 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
------- ------------- ------------
Notes payable:
Variable rate ................. $ 149,099 6.28% $ 1,491
========= =======
Total decrease in TCI's
annual net income ............. $ 1,491
=======
Per share ....................... $ .18
=======
________________________________________
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
In February 1990, TCI, together with Continental Mortgage and Equity Trust
("CMET"), IORI and National Income Realty Trust, three real estate entities
with, at the time, the same officers, 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
20
ITEM 1. LEGAL PROCEEDINGS (Continued)
- --------------------------
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 TCI'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 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. 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 June 2000, plaintiffs' counsel asserted that loans made by TCI to BCM and
American Realty Trust, Inc. breached the provisions for the Modification. The
Board believes that the provisions of the Settlement, the Modification and Olive
Amendment terminated on April 28, 1999. However, the Court has ruled that
certain provisions continue to be effective after the termination date. This
ruling was appealed by TCI and IORI.
On October 23, 2001, TCI, IORI and American Realty Investors, Inc. ("ARI")
jointly announced a preliminary agreement with the plaintiff's legal counsel for
complete settlement of all disputes in the lawsuit. In February 2002, the court
granted final approval of the proposed settlement. Under the proposal, the
pending appeal has been dismissed and ARI will 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 $17.50 cash per TCI share and $19.00 cash
per IORI share for the stock held by non-affiliated stockholders. 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. ARI would issue
21
ITEM 1. LEGAL PROCEEDINGS (Continued)
- --------------------------
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. Each share of Series G Preferred Stock will
be convertible into 2.5 shares of ARI Common Stock during a 75-day period that
commences fifteen days after the date of the first ARI Form 10-Q filing that
occurs after the closing of the merger transaction. Upon the acquisition of IORI
and TCI shares, TCI and IORI would become wholly-owned subsidiaries of ARI. The
transaction is subject to the negotiation of a definitive merger agreement and a
vote of the shareholders of all three entities. TCI has the same board as IORI
and the same advisor as IORI 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 April 10, 2002, was filed with
respect to Item 5. "Other Events and Regulation FD Disclosures," which
reports the Amendment to the Second Amendment to the Modification of
Stipulation of Settlement in Olive, et al. v. National Income Realty
Trust et al.
22
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: May 15, 2002 By: /s/ Ronald E. Kimbrough
-------------------------- --------------------------
Ronald E. Kimbrough
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer and
Acting Principal Executive
Officer)
23