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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10643
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HALLWOOD REALTY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2313955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS
SUITE 1500
DALLAS, TEXAS 75219-4298
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
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 [ ]
THE REGISTRANT IS A LIMITED PARTNERSHIP AND ISSUES UNITS REPRESENTING OWNERSHIP
OF LIMITED PARTNER INTERESTS.
NUMBER OF UNITS OUTSTANDING AT AUGUST 7, 2000: 1,589,948 UNITS.
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HALLWOOD REALTY PARTNERS, L.P.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
ITEM 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of June 30, 2000 and December
31, 1999.................................................. 3
Consolidated Statements of Income for the Three Months and
Six Months Ended June 30, 2000 and 1999................... 4
Consolidated Statement of Partners' Capital for the Six
Months Ended June 30, 2000................................ 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999.............................. 6
Notes to Consolidated Financial Statements.................. 7
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations, Liquidity and Capital
Resources................................................. 11
ITEM 3 Quantitative and Qualitative Disclosures About Market
Risk...................................................... 15
PART II -- OTHER INFORMATION
ITEMS 1 TO 6 Other Information........................................... 16
Signature................................................... 17
2
3
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
Real estate:
Land...................................................... $ 60,236 $ 58,378
Buildings and improvements................................ 291,532 282,013
Tenant improvements....................................... 22,722 17,924
--------- ---------
374,490 358,315
Accumulated depreciation and amortization................. (168,345) (165,501)
--------- ---------
Real estate, net.................................. 206,145 192,814
Cash and cash equivalents................................... 6,333 8,332
Accounts receivable......................................... 2,129 2,287
Lease commissions, net...................................... 11,014 10,653
Loan reserves and escrows................................... 4,622 7,073
Loan costs, net............................................. 3,411 3,607
Prepaid expenses and other assets........................... 4,882 5,620
--------- ---------
Total assets...................................... $ 238,536 $ 230,386
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable......................................... $ 183,253 $ 171,312
Accounts payable and accrued expenses..................... 4,843 6,013
Prepaid rent and security deposits........................ 3,343 2,578
Payable to affiliates, net................................ 325 1,787
--------- ---------
Total liabilities................................. 191,764 181,690
--------- ---------
COMMITMENTS AND CONTINGENCIES
Partners' capital:
Limited partners -- 1,589,948 and 1,672,556 units
outstanding, respectively.............................. 46,304 48,209
General partner........................................... 468 487
--------- ---------
Total partners' capital........................... 46,772 48,696
--------- ---------
Total liabilities and partners' capital........... $ 238,536 $ 230,386
========= =========
See notes to consolidated financial statements.
3
4
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- ------- -------
REVENUES:
Property operations.................................. $16,005 $14,030 $31,982 $28,368
Interest............................................. 198 222 390 443
------- ------- ------- -------
Total revenues............................... 16,203 14,252 32,372 28,811
------- ------- ------- -------
EXPENSES:
Property operations.................................. 6,046 5,568 12,503 11,404
Interest............................................. 3,615 3,387 7,176 6,766
Depreciation and amortization........................ 3,175 2,955 6,397 5,980
General and administrative........................... 1,542 730 2,405 1,655
Litigation costs..................................... 1,292 430 1,908 610
------- ------- ------- -------
Total expenses............................... 15,670 13,070 30,389 26,415
------- ------- ------- -------
NET INCOME............................................. $ 533 $ 1,182 $ 1,983 $ 2,396
======= ======= ======= =======
ALLOCATION OF NET INCOME:
Limited partners..................................... $ 527 $ 1,170 $ 1,963 $ 2,372
General partner...................................... 6 12 20 24
------- ------- ------- -------
Total........................................ $ 533 $ 1,182 $ 1,983 $ 2,396
======= ======= ======= =======
NET INCOME PER UNIT AND POTENTIAL UNIT:
Basic................................................ $ .32 $ .70 $ 1.19 $ 1.42
======= ======= ======= =======
Assuming dilution.................................... $ .31 $ .67 $ 1.15 $ 1.36
======= ======= ======= =======
WEIGHTED AVERAGE UNITS USED IN COMPUTING NET INCOME PER
UNIT AND POTENTIAL UNIT:
Basic................................................ 1,627 1,673 1,650 1,673
======= ======= ======= =======
Assuming dilution.................................... 1,682 1,740 1,709 1,740
======= ======= ======= =======
See notes to consolidated financial statements.
4
5
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
LIMITED
PARTNERSHIP
GENERAL LIMITED UNITS
PARTNER PARTNERS TOTAL OUTSTANDING
------- -------- ------- -----------
PARTNERS' CAPITAL, JANUARY 1, 2000.................... $487 $48,209 $48,696 1,672,556
Exercise and issuance of unit options................. 8 806 814 17,200
Purchase of units..................................... (47) (4,674) (4,721) (99,808)
Net income............................................ 20 1,963 1,983 --
---- ------- ------- ---------
PARTNERS' CAPITAL, JUNE 30, 2000...................... $468 $46,304 $46,772 1,589,948
==== ======= ======= =========
See notes to consolidated financial statements.
5
6
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------
2000 1999
-------- -------
OPERATING ACTIVITIES:
Net income................................................ $ 1,983 $ 2,396
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 6,397 5,980
Non-qualified unit option compensation................. 601 --
Effective rent adjustments............................. (476) (460)
Changes in assets and liabilities:
Receivables............................................ 158 (251)
Lease commission payments.............................. (3,063) (3,182)
Prepaid expenses, loan reserves and other assets....... 4,020 733
Accounts payable and other liabilities................. 932 (553)
-------- -------
Net cash provided by operating activities......... 10,552 4,663
-------- -------
INVESTING ACTIVITIES:
Property and tenant improvements.......................... (4,320) (2,151)
Property development cost................................. (7,714) --
Property acquisition...................................... (7,791) --
-------- -------
Net cash used in investing activities............. (19,825) (2,151)
-------- -------
FINANCING ACTIVITIES:
Mortgage principal proceeds............................... 13,385 --
Purchase of units......................................... (4,721) --
Exercise and issuance of unit options..................... 213 --
Mortgage principal payments............................... (1,444) (1,201)
Loan fees and expenses.................................... (159) (36)
-------- -------
Net cash provided by (used in) financing
activities....................................... 7,274 (1,237)
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (1,999) 1,275
BEGINNING CASH AND CASH EQUIVALENTS......................... 8,332 14,497
-------- -------
ENDING CASH AND CASH EQUIVALENTS............................ $ 6,333 $15,772
======== =======
See notes to consolidated financial statements.
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
1 ORGANIZATION AND ACCOUNTING POLICIES
Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited
partnership, operates in the commercial real estate business segment. HRP's
activities include the acquisition, ownership and operation of its commercial
real estate assets. Units representing limited partnership interests are traded
on the American Stock Exchange under the symbol "HRY". As of June 30, 2000,
there were 1,589,948 units outstanding.
Hallwood Realty, LLC ("Realty" or the "General Partner"), a Delaware
limited liability company and wholly-owned subsidiary of The Hallwood Group
Incorporated ("Hallwood"), is HRP's general partner and is responsible for asset
management of HRP and its real estate properties. Hallwood Commercial Real
Estate, LLC ("HCRE"), another wholly-owned subsidiary of Hallwood, provides
property management services for HRP's real estate properties.
The accompanying unaudited consolidated financial statements of Hallwood
Realty Partners, L.P. have been prepared in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnote disclosures required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. These financial statements should be
read in conjunction with the audited consolidated financial statements and
related disclosures thereto included in Form 10-K for the year ended December
31, 1999. HRP had no items of other comprehensive income in the periods
presented.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
certain assets, liabilities, revenues, and expenses as of and for the reporting
periods. Actual results may differ from these estimates. Operating results for
the six months ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. Certain
reclassifications have been made to prior periods to conform to the
classifications used in the current periods. The reclassifications had no effect
on the previously reported net income.
HRP has reviewed Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" and does not believe its adoption will have a significant
impact on its financial position and results of operations.
2 TRANSACTIONS WITH RELATED PARTIES
Realty and HCRE are compensated for services provided to HRP and its real
estate properties and are set forth in the following table for the periods
presented (in thousands):
THREE MONTHS SIX MONTHS
ENDED ENDED
ENTITY PAID JUNE 30, JUNE 30,
OR ------------- ---------------
REIMBURSED 2000 1999 2000 1999
----------- ---- ------ ------ ------
Asset management fee..................... Realty $140 $ 126 $ 280 $ 249
Acquisition fee.......................... Realty -- -- 74 --
Reimbursement of costs(a)................ Realty 684 588 1,296 1,306
Property management fee.................. HCRE 458 405 921 815
Lease commissions........................ HCRE 589 2,418 999 2,834
Construction fees........................ HCRE 266 98 556 193
- ---------------
(a) These costs are mostly recorded as general and administrative expenses and
represent reimbursement to Realty, at cost, for partnership level salaries
and compensation, bonuses, employee and director insurance, and certain
overhead costs. HRP pays the balance of its account with Realty on a
monthly basis.
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3 STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information --
Cash interest payments were $6,816,000 (net of capitalized interest of
$373,000) and $6,511,000 in the six months ended June 30, 2000 and 1999,
respectively.
Supplemental disclosure of noncash investing and financing activities --
The Partnership had a construction payable for property development
cost at Corporate Square of $1,322,000 as of June 30, 2000 and $2,641,000
as of December 31, 1999.
4 COMPUTATION OF NET INCOME PER UNIT
Basic earnings per unit is computed by dividing net income attributable to
the limited partners' interests by the weighted average number of units
outstanding. Earnings per unit assuming dilution is computed by dividing net
income attributable to the limited partners' interests by the weighted average
number of units and potential units outstanding. Options to acquire units were
issued during 1995 and are considered to be potential units. The number of
potential units is computed using the treasury stock method which assumes that
the increase in the number of units is reduced by the number of units which
could have been repurchased by HRP with the proceeds from the exercise of these
options. The following table illustrates the amounts used to calculate the
weighted average number of units outstanding:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -------------
2000 1999 2000 1999
----- ----- ----- -----
Weighted average units outstanding -- basic............ 1,627 1,673 1,650 1,673
Weighted average units issued from options............. 77 86 81 86
Repurchase of units from unit option proceeds.......... (22) (19) (22) (19)
----- ----- ----- -----
Weighted average units outstanding -- assuming......... 1,682 1,740 1,709 1,740
===== ===== ===== =====
5 PROPERTY DEVELOPMENT
During the second quarter of 1999, HRP began construction of a 6-story
office building containing approximately 151,000 net rentable square feet. It
was constructed on 6.1 acres of land that was acquired in May 1997 within the
Corporate Square complex. A 20-year lease with the General Services
Administration for all six floors was executed in 1999 and the tenant began
taking occupancy in late June 2000, with rent beginning July 2000.
The building, tenant improvements, lease commissions and loan costs are
estimated to be approximately $19,000,000 (excluding the land). In August 1999,
HRP paid off the outstanding loan balance of $475,000 that was secured by the
land and closed on interim-construction loan financing that would fund up to
$13,762,000 of the costs. The amount outstanding under the interim-construction
loan as of June 30, 2000 was $12,383,000, of which $5,385,000 was funded in
2000. The interim-construction loan calls for interest payments only with an
interest rate of LIBOR plus 170 basis points (8.375% as of June 30, 2000). HRP
anticipates repaying the interim-construction loan at its maturity in August
2000 from proceeds of a permanent mortgage loan of approximately $21,000,000.
As of June 30, 2000, HRP had incurred and capitalized $15,463,000 of the
construction development costs. Additionally in 1999, HRP incurred and accrued,
in connection with the leasing of the entire project, $2,982,000 of lease
commissions, of which half was paid in 1999 and half was paid in June 2000.
8
9
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6 MORTGAGE PAYABLE
In January 2000, HRP obtained financing of $5,500,000 in connection with
the acquisition of Fountain View Business Center (three 3-story office buildings
in San Diego, California). The loan contains two notes and has a monthly payment
based on a twenty-year amortization, but matures in ten years, and has a fixed
interest rate of 8.17%.
In May 2000, HRP closed on a new mortgage loan generating $2,500,000 of
mortgage proceeds that is secured by Riverbank Plaza, which was originally
acquired in August 1999 in a cash transaction. The loan's monthly payment is
based on a twenty-year amortization, but matures in ten years, and has a fixed
interest rate of 8.29%. The loan proceeds are for general working capital
purposes.
7 CAPITAL TRANSACTIONS
As part of the resignation of Brian Troup as an officer and director of
Hallwood and HRP's general partner on December 21, 1999, Hallwood transferred
82,608 units of HRP that it owned to a trust controlled by Mr. Troup. On May 12,
2000, Mr. Troup exercised his unit options to purchase 17,200 HRP units at the
option plan's exercise price of $11.875 per unit, which generated $601,000 of
non-cash compensation. Also on May 12, 2000, HRP purchased and retired all of
Mr. Troup's above-mentioned 99,808 units at $46.825 per unit (the average of the
closing market prices of the units for the twenty trading days prior to the
purchase). As a result of these transactions, HRP's outstanding units have
decreased from 1,672,556 to 1,589,948.
8 LITIGATION
Reference is made to Note 10 to the audited consolidated financial
statements contained in Form 10-K for the year ended December 31, 1999.
Beginning in 1997, HRP has been involved in two lawsuits that were brought
by Gotham Partners, L.P. The first complaint sought access to certain books and
records of HRP, a list of the limited partners and reimbursement of the
plaintiff's expenses. On June 27, 1997, the parties entered into a Stipulation
and Order under which HRP provided to plaintiff copies of certain of the
documents requested. The second complaint alleges claims of breach of fiduciary
duties, breach of HRP's partnership agreement, and fraud in connection with
certain transactions involving HRP's units in the mid 1990's. Hallwood is
alleged to have aided and abetted the alleged breaches. The claims in the second
action remain outstanding and the parties are proceeding with discovery. Trial
is currently scheduled for January 2001.
HRP's management believes that the claims are without merit and intend to
defend against the claims vigorously, but cannot predict the outcome of the
claims or any possible effect an adverse outcome might have.
On February 15, 2000, HRP filed a lawsuit in the United States District
Court for the Southern District of New York styled Hallwood Realty Partners,
L.P. v. Gotham Partners, L.P. et al (Civ. No. 00 CV 115) alleging violations of
the Securities Exchange Act of 1934 by certain purchasers of its units,
including Gotham Partners, L.P., Gotham Partners, III, L.P., Private Management
Group, Inc., Interstate Properties, Steven Roth and EFO Realty, Inc., by virtue
of those purchasers' misrepresentations and/or omissions in connection with
filings required under the Securities Exchange Act of 1934. HRP seeks various
forms of relief, including declaratory judgments, divestiture, corrective
disclosures, a "cooling-off" period and damages, including costs and
disbursements. In late March 2000, all defendants filed motions to dismiss for
failure to state a claim and failure to plead fraud with sufficient
particularity. On May 3, 2000, these motions were denied in their entirety,
allowing the case to proceed. One defendant also filed a motion to dismiss for
lack of proper jurisdiction and venue. This motion was denied in July 2000.
HRP is from time to time involved in various legal proceedings and claims
which arise in the ordinary course of business. These matters are generally
covered by insurance. Management believes that the resolution of these matters
will not have a material adverse effect on HRP's financial position, cash flow
or operations.
9
10
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9 SUBSEQUENT EVENT
On July 27, 2000, HRP sold its interest rate swap agreement for $1,597,000.
HRP had entered into an interest rate swap agreement to reduce its exposure to
changes in interest rates, which was designated as a hedge against variable
interest exposure relating to a $25,000,000 mortgage loan, secured by Allfirst
Building, which matures April 30, 2006. This interest rate swap agreement, which
was settled monthly, effectively fixed the loan's interest rate at 6.78%, as
opposed to the mortgage loan interest rate of LIBOR plus 1.30% (or 7.94% as of
June 30, 2000). The proceeds are designated for general working capital
purposes.
Also on July 27, 2000 and in connection with the sale of the swap
agreement, HRP purchased an interest rate cap for Allfirst Building's mortgage
loan for $288,000, which will cap HRP's exposure to changes in interest rates at
10%.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Results of Operations
Second Quarter of 2000 Compared to the Second Quarter of 1999
Revenue from property operations increased $1,975,000, or 14.1%, for the
second quarter of 2000, compared to the 1999 second quarter. The following table
illustrates the components of the change, in thousands:
Rental income, net......................................... $1,470
Other property income...................................... 505
------
Net increase..................................... $1,975
======
Overall, net rental income increased due to higher rental rates and the
addition of three real estate properties to HRP's portfolio between the
comparable periods, partially offset by a decline in average occupancy between
the comparable periods from 93.2% to 88.2%.
Interest income decreased by $24,000 as a result of reduced earnings on
overnight investments due to lower average cash balances available for
investment between the periods.
Property operating expenses increased $478,000, or 8.6%, for the second
quarter of 2000, compared to the same period in 1999. The increase is comprised
primarily of the following components:
- Operating cost increases of $256,000 with respect to the addition of
three new real estate properties between the periods.
- Repairs and maintenance costs increased $159,000 for comparable
properties between periods primarily due to increases at Executive Park,
Montrose Office Center, and Raintree Industrial Park for landscaping and
heating/air conditioning repairs, as well as certain roof, interior, and
building repairs.
- Management fees increased $39,000 for comparable properties between
periods due to an increase in net rental income.
- Combined, all other operating costs increased $24,000, or less than 1%,
between the periods.
Interest expense increased $228,000, or 6.7%, for the second quarter of
2000 as compared to the same period in 1999, as a result of an increase in
mortgage interest of $172,000 due to a higher average mortgage balance, in the
aggregate, between the periods, and to a lesser extent, as a result of an
increase in loan cost amortization of $56,000.
Depreciation and amortization expense increased $220,000, or 7.4%,
primarily due to an increase in building cost depreciation as a result of the
addition of three real estate properties to HRP's portfolio between the periods.
General and administrative expenses increased $812,000, or 111.2%, for the
second quarter of 2000, as compared to the same period in 1999, primarily as a
result of $601,000 of non-cash compensation generated from the exercise of unit
options in May 2000 (see Note 7 to the consolidated financial statements). All
other costs increased $211,000 due to higher travel, miscellaneous legal and
professional fees, and state franchise taxes.
Litigation costs were $1,292,000 and $430,000 for the second quarter of
2000 and 1999, respectively, and are related to the lawsuits described in Note 8
to the consolidated financial statements.
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First Six Months of 2000 Compared to the First Six Months of 1999
Revenue from property operations increased $3,614,000, or 12.7%, for the
first six months of 2000, compared to the first six months of 1999. The
following table illustrates the components of the change, in thousands:
Rental income, net......................................... $3,163
Other property income...................................... 451
------
Net increase..................................... $3,614
======
Overall, net rental income increased due to higher rental rates and the
addition of three real estate properties to HRP's portfolio between the
comparable periods, partially offset by a decline in average occupancy between
the comparable periods from 92.8% to 90.2%.
Interest income decreased by $53,000 as a result of reduced earnings on
overnight investments due to lower average cash balances available for
investment between the periods.
Property operating expenses increased $1,099,000, or 9.6%, for the first
six months of 2000, compared to the same period in 1999. The increase is
comprised primarily of the following components:
- Operating cost increases of $506,000 with respect to the addition of
three new real estate properties between the periods.
- Professional fees increased $281,000 primarily due to costs for research
and analysis of potential property development projects.
- Repairs and maintenance costs increased $257,000 for comparable
properties between periods primarily due to increases at Executive Park
and Montrose Office Center for landscaping and heating/air conditioning
repairs, as well as certain roof, interior, and electrical repairs.
- Management fees increased $90,000 for comparable properties between
periods due to an increase in net rental income.
- Combined, all other operating costs decreased $35,000, or less than 1%,
between the periods.
Interest expense increased $410,000, or 6.1%, for the first six months of
2000 as compared to the same period in 1999, as a result of an increase in
mortgage interest of $297,000 due to a higher average mortgage balance, in the
aggregate, between the periods, and to a lesser extent, as a result of an
increase in loan cost amortization of $113,000.
Depreciation and amortization expense increased $417,000, or 7.0%,
primarily due to an increase in building cost depreciation as a result of the
addition of three real estate properties to HRP's portfolio between the periods.
General and administrative expenses increased $750,000, or 45.3%, for the
first six months of 2000, as compared to the same period in 1999, primarily as a
result of $601,000 of non-cash compensation generated from the exercise of unit
options in May 2000, (see Note 7 to the consolidated financial statements). All
other costs increased $149,000 due to higher occupancy, travel, and
miscellaneous legal and professional fees.
Litigation costs were $1,908,000 and $610,000 for the first six months of
2000 and 1999, respectively, and are related to the lawsuits described in Note 8
to the consolidated financial statements.
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Liquidity and Capital Resources
HRP operates in the commercial real estate business segment. HRP's
activities include the acquisition, ownership and operation of its commercial
real estate assets. While it is the General Partner's intention to operate HRP's
existing real estate investments and to acquire and operate additional real
estate investments,
Realty also continually evaluates each of HRP's real estate investments in light
of current economic trends and operations to determine if any should be
considered for disposal.
As of June 30, 2000, HRP owned fifteen real estate properties located in
six states containing 5,594,000 net rentable square feet. HRP seeks to maximize
the value of its real estate by making capital and tenant improvements, by
executing marketing programs to attract and retain tenants, and by controlling
or reducing, where possible, operating expenses.
HRP's cash position decreased $1,999,000 during the first six months of
2000 from $8,332,000 as of December 31, 1999 to $6,333,000 as of June 30, 2000.
The sources of cash during the period were $10,552,000 of cash provided by
operating activities; $13,385,000 of mortgage loan proceeds; and $213,000 from
the exercise and issuance of unit options. The uses of cash during the period
were $7,791,000 of property acquisition costs; $7,714,000 of property
development costs; $4,320,000 of property and tenant improvements; $4,721,000 of
costs to purchase units; $1,444,000 of mortgage principal payments; and $159,000
of loan fees and expenses.
For the foreseeable future, HRP anticipates that mortgage principal
payments, tenant and capital improvements, lease commissions and litigation
costs will be funded by net cash from operations. The primary sources of capital
to fund any future acquisitions will be proceeds from the sale or financing of
one or more of its real estate properties.
In addition to the commitments described below with regards to the
development project at Corporate Square, HRP has estimated that its budget for
the remainder of 2000 includes tenant and capital improvements of $4,600,000 and
lease commissions of about $700,000.
Each quarter Realty reviews HRP's capacity to make cash distributions. HRP
has not made any cash distributions since February, 1992.
PROPERTY DEVELOPMENT
During the second quarter of 1999, HRP began construction of a 6-story
office building containing approximately 151,000 net rentable square feet. It
was constructed on 6.1 acres of land that was acquired in May 1997 within the
Corporate Square complex. A 20-year lease with the General Services
Administration for all six floors was executed in 1999 and the tenant began
taking occupancy in late June 2000, with rent beginning July 2000.
The building, tenant improvements, lease commissions and loan costs are
estimated to be approximately $19,000,000 (excluding the land). In August 1999,
HRP paid off the outstanding loan balance of $475,000 that was secured by the
land and closed on interim-construction loan financing that would fund up to
$13,762,000 of the costs. The amount outstanding under the interim-construction
loan as of June 30, 2000 was $12,383,000, of which $5,385,000 was funded in
2000. The interim-construction loan calls for interest payments only with an
interest rate of LIBOR plus 170 basis points (8.375% as of June 30, 2000). HRP
anticipates repaying the interim-construction loan at its maturity in August
2000 from proceeds of a permanent mortgage loan of approximately $21,000,000.
As of June 30, 2000, HRP had incurred and capitalized $15,463,000 of the
construction development costs. Additionally in 1999, HRP incurred and accrued,
in connection with the leasing of the entire project, $2,982,000 of lease
commissions, of which half was paid in 1999 and half was paid in June 2000.
ACQUISITION
On January 26, 2000, HRP acquired three 3-story office buildings in San
Diego, California (Fountain View Business Center) containing approximately
89,000 net rentable square feet on 4.3 acres of land. The property was 95%
occupied at the date of acquisition. The acquisition cost was approximately
$7,800,000. HRP obtained financing for $5,500,000 of the purchase price with a
new loan with two notes. The loan's monthly payment is based on a twenty-year
amortization, but matures in ten years, and has a fixed interest rate of 8.17%.
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UNIT PURCHASE
As part of the resignation of Brian Troup as an officer and director of
Hallwood and HRP's general partner on December 21, 1999, Hallwood transferred
82,608 units of HRP that it owned to a trust controlled by Mr. Troup. On May 12,
2000, Mr. Troup exercised his unit options to purchase 17,200 HRP units at the
option plan's exercise price of $11.875 per unit, which generated $601,000 of
non-cash compensation. Also on May 12, 2000, HRP purchased and retired all of
Mr. Troup's above-mentioned 99,808 units at $46.825 per unit (the average of the
closing market prices of the units for the twenty trading days prior to the
purchase). As a result of these transactions, HRP's outstanding units have
decreased from 1,672,556 to 1,589,948.
MORTGAGES
In May 2000, HRP closed on a new mortgage loan generating $2,500,000 of
mortgage proceeds that is secured by Riverbank Plaza, which was originally
acquired in August 1999 in a cash transaction. The loan's monthly payment is
based on a twenty-year amortization, but matures in ten years, and has a fixed
interest rate of 8.29%. The loan proceeds are for general working capital
purposes.
Substantially all of the buildings in thirteen of HRP's real estate
properties were encumbered by and pledged as collateral under non-recourse
mortgages aggregating $183,253,000 as of June 30, 2000. Except for the
construction loan discussed previously, HRP has no other mortgage loans maturing
or requiring balloon principal payments until the year 2003. Based upon loan
amortizations in effect, HRP is required to pay approximately $1,549,000 of
principal payments during the remainder of 2000.
On July 27, 2000, HRP sold its interest rate swap agreement for $1,597,000.
HRP had entered into an interest rate swap agreement to reduce its exposure to
changes in interest rates, which was designated as a hedge against variable
interest exposure relating to a $25,000,000 mortgage loan, secured by Allfirst
Building, which matures April 30, 2006. This interest rate swap agreement, which
was settled monthly, effectively fixed the loan's interest rate at 6.78%, as
opposed to the mortgage loan interest rate of LIBOR plus 1.30% (or 7.94% as of
June 30, 2000). The proceeds are designated for general working capital
purposes. Also on July 27, 2000 and in connection with the sale of the swap
agreement, HRP purchased an interest rate cap for Allfirst Building's mortgage
loan for $288,000, which will cap HRP's exposure to changes in interest rates at
10%.
INFLATION
Inflation did not have a significant impact on HRP in 1999 and is not
anticipated to have a material impact in 2000.
FORWARD-LOOKING STATEMENTS
In the interest of providing investors with certain information regarding
HRP's future plans and operations, certain statements set forth in this Form
10-Q relate to management's future plans and objectives. Such statements are
forward-looking statements. Although any forward-looking statements contained in
this Form 10-Q or otherwise expressed by or on behalf of HRP are, to the
knowledge and in the judgment of the officers and directors of the General
Partner, expected to prove true and come to pass, management is not able to
predict the future with absolute certainty. Although HRP believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements will prove to be accurate.
Forward-looking statements involve known and unknown risks and
uncertainties, which may cause HRP's actual performance and financial results in
future periods to differ materially from any projection, estimate or forecasted
result. These risks and uncertainties include, among other things, interest
rates, occupancy rates, lease rental rates, outcome of litigation, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of HRP; other risks and uncertainties may be described, from
time to time, in HRP's periodic reports and filings with the Securities and
Exchange Commission.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to HRP's market risks during the three
months ended June 30, 2000.
QUALITATIVE INFORMATION
HRP's primary risk management strategy is to manage its exposure to adverse
changes in interest rates by issuing fixed rate debt, where possible. HRP
attempts to manage the exposure to adverse changes in the fair value of its
fixed rate debt by issuing fixed rate debt when business and market conditions
are favorable. There is inherent rollover risk for borrowings as they mature and
are renewed at the then current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future interest rates
and HRP's future financing requirements. HRP does not hold or issue derivative
financial instruments for trading purposes. As part of HRP's financing activity,
a derivative security was used for the sole purpose of fixing the interest rate
of HRP's only variable rate debt instrument.
SPECIFIC AND QUANTITATIVE INFORMATION
HRP's derivative instrument, which is matched directly against an
outstanding borrowing is a "pay fixed/ receive variable" interest rate swap with
a highly rated counterparty in which the interest payments are calculated on a
notional amount. The notional amount does not represent amounts exchanged by the
parties and thus are not a measure of exposure to HRP through its use of the
derivative. HRP is exposed to credit-related gains or losses in the event of
non-performance by the counterparty to this financial instrument; however, HRP
does not expect the counterparty to fail to meet its obligations. The interest
rate swap is described as follows:
VARIABLE RATE AS OF JUNE 30, 2000
-----------------------------------
FAIR VALUE
NOTIONAL AMOUNT MATURITY DATE FIXED RATE% % BASED ON OF SWAP
- --------------- -------------- ----------- ------- ---------- ------------
$25,000,000................. April 30, 2006 6.78% 7.94% 30 day $1,597,000
LIBOR
- ---------------
Note: HRP sold its interest rate swap agreement on July 27, 2000 for $1,597,000,
as described in Note 9 to the consolidated financial statements.
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PART II -- OTHER INFORMATION
ITEM
- ----
1 Legal Proceedings
Reference is made to Item 8 -- Note 10 of Form 10-K for the
year ended December 31, 1999 and Note 8 of this Form
10-Q......................................................
2 Changes in Securities and Use of Proceeds................... None.
3 Defaults upon Senior Securities............................. None.
4 Submission of Matters to a Vote of Security Holders......... None.
5 Other Information........................................... None.
6 Exhibits and Reports on Form 8-K
(a) Exhibits
27 -- Financial Data Schedule......................... Page 18
(b) Reports on Form 8-K.................................... None.
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SIGNATURE
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.
HALLWOOD REALTY PARTNERS, L.P.
(Registrant)
By: HALLWOOD REALTY, LLC
General Partner
By: /s/ JEFFREY D. GENT
----------------------------------
Jeffrey D. Gent
Vice President -- Finance
(Principal Financial and
Accounting Officer)
Date: August 7, 2000
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 -- Financial Data Schedule