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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, 2001
[ ] 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)
----------
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 JULY 27, 2001: 1,589,948 UNITS.
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Page 1
2
HALLWOOD REALTY PARTNERS, L.P.
FORM 10-Q
TABLE OF CONTENTS
<Table>
<Caption>
PART I - FINANCIAL INFORMATION
Page
----
Item 1 Financial Statements:
Consolidated Balance Sheets as of June 30, 2001 (unaudited)
and December 31, 2000 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2001 and 2000 (unaudited) 4
Consolidated Statement of Partners' Capital for the
Six Months ended June 30, 2001 (unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 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
</Table>
Page 2
3
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<Table>
<Caption>
JUNE 30, December 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Real estate:
Land $ 59,015 $ 60,236
Buildings and improvements 296,306 293,742
Tenant improvements 23,431 23,284
----------- ------------
378,752 377,262
Accumulated depreciation and amortization (172,547) (170,870)
----------- ------------
Real estate, net 206,205 206,392
Cash and cash equivalents 16,821 16,457
Accounts receivable 1,971 3,211
Lease commissions, net 11,581 11,035
Loan reserves and escrows 11,146 7,109
Loan costs, net 3,753 3,879
Prepaid expenses and other assets 5,256 6,421
----------- ------------
Total assets $ 256,733 $ 254,504
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 195,666 $ 200,096
Accounts payable and accrued expenses 6,098 5,570
Prepaid rent, security deposits and other 4,618 4,192
Payable to affiliates, net 271 156
----------- ------------
Total liabilities 206,653 210,014
----------- ------------
Commitments and contingencies
Partners' capital:
Limited partners - 1,589,948 units outstanding 49,579 44,045
General partner 501 445
----------- ------------
Total partners' capital 50,080 44,490
----------- ------------
Total liabilities and partners' capital $ 256,733 $ 254,504
=========== ============
</Table>
See notes to consolidated financial statements.
Page 3
4
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
REVENUES:
Property operations $ 17,637 $ 16,005 $ 35,143 $ 31,982
Gain from property sales 1 -- 4,220 --
Interest 287 198 652 390
---------- ---------- ---------- ----------
Total revenues 17,925 16,203 40,015 32,372
---------- ---------- ---------- ----------
EXPENSES:
Property operations 6,433 6,046 13,521 12,503
Interest 3,914 3,615 8,118 7,176
Depreciation and amortization 3,709 3,175 7,286 6,397
General and administrative 859 1,542 1,934 2,405
Litigation costs 639 1,292 3,329 1,908
---------- ---------- ---------- ----------
Total expenses 15,554 15,670 34,188 30,389
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY LOSS
AND CUMULATIVE EFFECT OF
SFAS NO. 133 ADOPTION 2,371 533 5,827 1,983
Extraordinary loss from early extinguishment of debt -- -- (45) --
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT
OF SFAS NO. 133 ADOPTION 2,371 533 5,782 1,983
Cumulative effect of SFAS No. 133 adoption -- -- (192) --
---------- ---------- ---------- ----------
NET INCOME $ 2,371 $ 533 $ 5,590 $ 1,983
========== ========== ========== ==========
ALLOCATION OF NET INCOME:
Limited partners $ 2,347 $ 527 $ 5,534 $ 1,963
General partner 24 6 56 20
---------- ---------- ---------- ----------
Total $ 2,371 $ 533 $ 5,590 $ 1,983
========== ========== ========== ==========
NET INCOME PER UNIT AND POTENTIAL UNIT:
Earnings per unit - basic
Income before extraordinary loss and cumulative
effect of SFAS No. 133 adoption $ 1.48 $ 0.32 $ 3.63 $ 1.19
Loss from early extinguishment of debt -- -- (0.03) --
Cumulative effect of SFAS No. 133 adoption -- -- (0.12) --
---------- ---------- ---------- ----------
Net income $ 1.48 $ 0.32 $ 3.48 $ 1.19
========== ========== ========== ==========
Earnings per unit - assuming dilution
Income before extraordinary loss and cumulative
effect of SFAS No. 133 adoption $ 1.43 $ 0.31 $ 3.51 $ 1.15
Loss from early extinguishment of debt -- -- (0.03) --
Cumulative effect of SFAS No. 133 adoption -- -- (0.12) --
---------- ---------- ---------- ----------
Net income $ 1.43 $ 0.31 $ 3.36 $ 1.15
========== ========== ========== ==========
WEIGHTED AVERAGE UNITS USED IN
COMPUTING NET INCOME PER UNIT AND
POTENTIAL UNIT:
Basic 1,590 1,627 1,590 1,650
========== ========== ========== ==========
Assuming dilution 1,646 1,682 1,646 1,709
========== ========== ========== ==========
</Table>
See notes to consolidated financial statements.
Page 4
5
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
Limited
Partnership
General Limited Units
Partner Partners Total Outstanding
--------- --------- --------- ------------
PARTNERS' CAPITAL, JANUARY 1, 2001 $ 445 $ 44,045 $ 44,490 1,589,948
Net income 56 5,534 5,590 --
--------- --------- --------- ------------
PARTNERS' CAPITAL, JUNE 30, 2001 $ 501 $ 49,579 $ 50,080 1,589,948
========= ========= ========= ============
</Table>
See notes to consolidated financial statements.
Page 5
6
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
------------------------
2001 2000
---------- ----------
OPERATING ACTIVITIES:
Net income $ 5,590 $ 1,983
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,286 6,397
Non-qualified unit option compensation -- 601
Gain from property sales (4,220) --
Loss from early extinguishment of debt 45 --
Cumulative effect of SFAS No. 133 adoption 192 --
Effective rent adjustments (120) (476)
Changes in assets and liabilities:
Receivables 1,240 158
Lease commission payments (2,007) (3,063)
Prepaid expenses, loan reserves and other assets (2,624) 4,020
Accounts payable and other liabilities (486) 932
---------- ----------
Net cash provided by operating activities 4,896 10,552
---------- ----------
INVESTING ACTIVITIES:
Property and tenant improvements (3,151) (4,320)
Property development cost (5,180) (7,714)
Property acquisition -- (7,791)
Cash proceeds from property sales, net of selling costs 8,471 --
---------- ----------
Net cash provided by (used in) investing activities 140 (19,825)
---------- ----------
FINANCING ACTIVITIES:
Mortgage principal payments (2,305) (1,444)
Mortgage principal early payoff (2,125) --
Mortgage principal proceeds -- 13,385
Loan fees, expenses and prepayment penalty (242) (159)
Exercise of unit options -- 213
Purchase of units -- (4,721)
---------- ----------
Net cash provided by (used in) financing activities (4,672) 7,274
---------- ----------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 364 (1,999)
BEGINNING CASH AND CASH EQUIVALENTS 16,457 8,332
---------- ----------
ENDING CASH AND CASH EQUIVALENTS $ 16,821 $ 6,333
========== ==========
</Table>
See notes to consolidated financial statements.
Page 6
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 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, 2001, there were 1,589,948 units outstanding.
Hallwood Realty, LLC ("Realty" or the "General Partner"), a Delaware limited
liability company and indirectly 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 indirectly wholly-owned
subsidiary of Hallwood, provides property management, leasing and
construction supervision 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, 2000. HRP had no items of other
comprehensive income for 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 three and/or six months ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. Certain reclassifications have been made to prior
period's amounts to conform to the classifications used in the current
period. The reclassifications had no effect on the previously reported net
income.
2 TRANSACTIONS WITH RELATED PARTIES
Realty and HCRE are compensated for services provided to HRP and its real
estate properties, as set forth in the following table for the periods
presented (in thousands):
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
ENTITY JUNE 30, JUNE 30,
PAID OR ----------------- ----------------
REIMBURSED 2001 2000 2001 2000
---------- ------ ------ ------ ------
Asset management fee Realty $ 153 $ 140 $ 308 $ 280
Acquisition fee Realty -- -- -- 74
Disposition fee Realty -- -- 120 --
Reimbursement of costs (a) Realty 701 684 1,412 1,296
Property management fee HCRE 510 458 1,023 921
Lease commissions HCRE 759 589 1,715 999
Construction fees HCRE 431 266 562 556
</Table>
(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.
In January 2001, HRP acquired a construction development consulting contract
from Hallwood regarding a project in Tulsa, Oklahoma with an unrelated third
party. In connection therewith, HRP reimbursed Hallwood for its actual costs
incurred of $281,000.
Page 7
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
3 COMPUTATION OF NET INCOME PER UNIT
Basic net income per unit is computed by dividing net income attributable to
the limited partners' interests by the weighted average number of units
outstanding. Net income 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:
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Weighted average units outstanding - basic 1,590 1,627 1,590 1,650
Weighted average units issued from options 69 77 69 81
Repurchase of units from unit option proceeds (13) (22) (13) (22)
-------- -------- -------- --------
Weighted average units outstanding - assuming dilution 1,646 1,682 1,646 1,709
======== ======== ======== ========
</Table>
4 STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information -
Cash interest payments were $7,815,000 and $6,816,000 (net of
capitalized interest of $373,000) in the six months ended June 30, 2001
and 2000, respectively.
Supplemental disclosure of noncash investing and financing activities -
As of June 30, 2001, HRP had a construction payable for property
development costs at Executive Park of $1,555,000.
5 PROPERTY DEVELOPMENT
In early 2001, HRP demolished a 1-story office building at its Executive
Park property in Atlanta, Georgia that contained 18,000 net rentable square
feet. In order to do so, HRP had to obtain a release of the building from
Executive Park's mortgage lien by substituting for such collateral $608,000
of United States Treasury Bonds, which have various maturity dates through
December 2007. In February 2001, HRP began constructing a 5-story office
building containing 122,000 net rentable square feet. The estimated
construction and development costs for the building and tenant improvements
are approximately $21,000,000 (excluding the existing land cost). HRP is
anticipating the leasing of substantially all of the building by late 2001
or early 2002, with occupancy to begin after building completion in early
2002. Currently it is anticipated that financing of the development costs
will be from existing cash funds until project completion, at which time
permanent loan financing will be secured. As of June 30, 2001, HRP had
incurred and capitalized $6,735,000 of construction development costs.
Page 8
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
6 PROPERTY SALES
In January 2001, HRP sold one of the warehouse buildings at Seattle Business
Parks that contained 63,000 net rentable square feet on 3.9 acres for a
gross selling price of $3,287,000. The carrying value of the assets was
$885,000. The sale resulted in $3,033,000 of net proceeds, which were added
to HRP's working capital, and a net gain of $2,148,000.
Also in January 2001, HRP sold one building at Fairlane Commerce Park that
contained less than 2,000 net rentable square feet on 0.5 acres for a gross
selling price of $575,000. The carrying value of the assets was $372,000.
The sale resulted in $525,000 of net proceeds, which were added to HRP's
working capital, and a net gain of $153,000.
In late March, HRP sold Joy Road Distribution Center that contained 442,000
net rentable square feet on 21 acres for a gross selling price of
$5,326,000. The carrying value of the assets was $2,994,000. The sale
resulted in $4,913,000 of net proceeds to HRP and a net gain of $1,919,000.
The net sale proceeds were used to pay the outstanding mortgage principal
balance of $2,125,000, to pay a prepayment penalty of $14,000 to the lender,
and to add $2,771,000 to general working capital. The prepayment penalty
along with the writeoff of $31,000 of unamortized loan costs associated with
the retired loan were expensed and are included in the Consolidated
Statements of Income as an extraordinary item.
7 MORTGAGES PAYABLE
On July 27, 2000, HRP purchased an interest rate cap for Allfirst Building's
mortgage loan for $288,000, which limits HRP's exposure to changing interest
rates to a maximum of 10%. This interest rate cap, which has a notional
amount of $25,000,000, has terms consistent with the Allfirst Building's
mortgage loan. Allfirst Building's cash interest rate was 5.36% and 8.12% as
of June 30, 2001 and December 31, 2000, respectively.
The interest rate cap is a derivative and designated as a cash flow hedge.
Hedge effectiveness is measured based on using the intrinsic value of the
interest rate cap. All changes in the fair value of the time value of the
cap are recorded directly to earnings. With the January 1, 2001 adoption of
Statements of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities", HRP recorded the
cumulative effect of the adoption as a reduction to income of $192,000, or
the amount of the difference between the carrying value as of January 1,
2001 of $267,000 and the then estimated fair value of $75,000, all of which
represented change in time value. On a quarterly basis during 2001, HRP has
recorded changes in the estimated fair value of the cap in interest expense.
As of June 30, 2001, the estimated fair value of the interest rate cap was
$126,000.
Other than Allfirst Building's mortgage, all other mortgages have fixed
interest rates.
8 LITIGATION
Beginning in 1997, HRP has been a defendant in two lawsuits that were
brought by Gotham Partners, L.P. in the Delaware Court of Chancery.
The first suit was filed on February 27, 1997 in the Court of Chancery for
New Castle County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty
Partners, L.P. and Hallwood Realty Corporation (C.A. No. 15578), and it
sought access to certain books and records of HRP and was subsequently
settled, allowing certain access. On April 9, 2001 the case was dismissed.
Page 9
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
8 LITIGATION - (CONTINUED)
The second action was filed on June 20, 1997 in a separate complaint in the
Court of Chancery for New Castle County, Delaware, styled Gotham Partners,
L.P. v. Hallwood Realty Partners, L.P., et al. (C.A. No. 15754). This action
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. On June 21, 2000, after completing fact discovery, all
parties moved for summary judgment on several issues. In September and
October, 2000, the Delaware court issued three separate written opinions
resolving the summary judgment motions. In the opinions, the court ruled
that trial would be required as to all issues, except that (i) Gotham was
found to have standing to pursue its derivative claims; (ii) defendants were
entitled to judgment dismissing the fraud claim; (iii) the general partner
was entitled to judgment dismissing the breach of fiduciary duty claims
brought against it; and (iv) the general partner's outside directors were
entitled to judgment dismissing all claims brought against them.
A five-day trial was held in January 2001. On July 18, 2001, the Delaware
Court of Chancery rendered its opinion. In its decision, the court
determined that an option plan and a sale of units to Hallwood in connection
with a reverse unit split implemented by HRP in 1995 were in compliance with
HRP's partnership agreement. The court also found that the sale of units to
Hallwood in connection with a 1995 odd-lot offer by HRP did not comply with
certain procedures required by the HRP partnership agreement. The court
ruled that the defendants other than HRP pay a judgment in the amount of
$3,417,423, plus pre-judgment interest from August 1995 to HRP. The amount
represents what the court determined was an underpayment by Hallwood. The
court's judgment is not final until all rehearings and appeals have been
exhausted.
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 1115) 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. The complaint further alleged that defendants, by acquiring
more than 15% of the outstanding HRP units, have triggered certain rights
under its Unit Purchase Rights Agreement, for which HRP was seeking
declaratory relief. HRP sought various forms of relief, including
declaratory judgments, divestiture, corrective disclosures, a "cooling-off"
period and damages, including costs and disbursements. On November 16, 2000,
the court granted HRP's motion to add as defendants Gotham Holdings II,
L.L.C., Hallwood Investors, L.P., Liberty Realty Partners, L.P. and
EFO/Liberty, Inc. and to remove EFO Realty, Inc. as a defendant.
Discovery was completed in December 2000 and trial was held in February
2001. On February 23, 2001, the court rendered a decision in favor of the
defendants and on February 28, 2001, the court ordered the complaint
dismissed. HRP filed a Notice of Appeal on March 29, 2001 with respect to
the February 28, 2001 dismissal of the complaint. Both parties have filed
briefs with the Second Circuit, but the oral argument has not yet been
scheduled.
HRP is from time to time involved in various other 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.
Page 10
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HALLWOOD REALTY PARTNERS, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
RESULTS OF OPERATIONS
SECOND QUARTER OF 2001 COMPARED TO THE SECOND QUARTER OF 2000
REVENUE FROM PROPERTY OPERATIONS increased $1,632,000, or 10.2%, for the second
quarter of 2001, compared to the 2000 second quarter. The following table
illustrates the components of the change, in thousands:
<Table>
Rental income, net $ 1,180
Other property income 452
-------
Net increase $ 1,632
=======
</Table>
Net rental income increased due to revenues generated from the addition and
completion of one development property at Corporate Square in mid-2000, overall
higher rental rates at most of HRP's real estate properties, and an increase in
average occupancy between the comparable periods from 88.2% to 92.9%.
INTEREST INCOME increased by $89,000, or 44.9%, as a result of increased
earnings on overnight investments due to a higher average cash balance available
for investment during the 2001 period.
PROPERTY OPERATING EXPENSES increased $387,000, or 6.4%, for the second quarter
of 2001, compared to the same period in 2000. The increase is comprised
primarily of the following components:
o Operating costs with respect to the addition of the one
development property at Corporate Square completed in mid-2000
contributed $186,000 towards the increase.
o Real estate taxes increased $151,000 for comparable properties
due to higher property tax values at certain properties and
refunds included in the 2000 second quarter.
o Combined, all other operating costs increased $50,000, or less
than 1%, between the periods.
INTEREST EXPENSE increased $299,000, or 8.3%, for the second quarter of 2001 as
compared to the same period in 2000, as a result of an increase in mortgage
interest of $380,000 (due to a higher average mortgage balance, in the
aggregate, between the periods) partially offset by a decrease in net other
costs, including loan cost amortization and other interest costs, of $81,000.
DEPRECIATION AND AMORTIZATION EXPENSE increased $534,000, or 16.8%, primarily
due to increases in tenant improvement depreciation of $222,000, building
depreciation of $111,000, and lease commission amortization of $155,000.
Contributors to the increases include cost additions incurred from the
development and completion of a building at Corporate Square in July 2000 and
the completion of building and tenant improvements to Riverbank Plaza in April
2000.
GENERAL AND ADMINISTRATIVE EXPENSES decreased $683,000, or 44.3%, for the second
quarter of 2001, as compared to the same period in 2000, due to $601,000 of
non-qualified unit option compensation in the 2000 period and a decrease in
professional fees between periods, partially offset by increases in current year
personnel costs and certain overhead costs.
LITIGATION COSTS were $639,000 and $1,292,000 for the second quarter of 2001 and
2000, respectively, and are related to the lawsuits described in Note 8 to the
consolidated financial statements.
Page 11
12
HALLWOOD REALTY PARTNERS, L.P.
RESULTS OF OPERATIONS - CONTINUED
FIRST SIX MONTHS OF 2001 COMPARED TO THE FIRST SIX MONTHS OF 2000
REVENUE FROM PROPERTY OPERATIONS increased $3,161,000, or 9.9%, for the first
six months of 2001, compared to the first six months of 2000. The following
table illustrates the components of the change, in thousands:
<Table>
Rental income, net $ 2,477
Other property income 684
-------
Net increase $ 3,161
=======
</Table>
Net rental income increased due to revenues generated from the addition and
completion of one development property at Corporate Square in mid-2000, overall
higher rental rates at most of HRP's real estate properties, and an increase in
average occupancy between the comparable periods from 90.2% to 91.6%.
GAIN FROM PROPERTY SALES of $4,220,000 in the first six months of 2001 is
comprised of the January sale of one building at Seattle Business Parks for a
gross selling price of $3,287,000, resulting in a gain of $2,150,000; the
January sale of one building at Fairlane Commerce Park for a gross selling price
of $575,000, resulting in a gain of $153,000; and the March sale of Joy Road
Distribution Center for a gross selling price of $5,326,000, resulting in a gain
of $1,917,000.
INTEREST INCOME increased by $262,000, or 67.2%, as a result of increased
earnings on overnight investments due to a higher average cash balance available
for investment during the 2001 period.
PROPERTY OPERATING EXPENSES increased $1,018,000, or 8.1%, for the first six
months of 2001, compared to the same period in 2000. The increase is comprised
primarily of the following components:
o Operating costs with respect to the addition of the one
development property at Corporate Square completed in mid-2000
contributed $397,000 towards the increase.
o Real estate taxes increased $281,000 for comparable properties
due to higher property tax values at certain properties and
refunds included in the 2000 first and second quarters.
o Utilities increased $341,000 for comparable properties due to
higher rates for heating, and to a lesser extent, usage increases
due to a colder winter in 2001 compared to the 2000 period.
o Combined, all other operating costs decreased $1,000, or less
than 1%, between the periods.
INTEREST EXPENSE increased $942,000, or 13.1%, for the first six months of 2001
as compared to the same period in 2000, as a result of an increase in mortgage
interest of $964,000 (due to a higher average mortgage balance, in the
aggregate, between the periods) partially offset by a decrease in net other
costs, including loan cost amortization and other interest costs, of $22,000.
DEPRECIATION AND AMORTIZATION EXPENSE increased $889,000, or 13.9%, primarily
due to increases in tenant improvement depreciation of $330,000, building
depreciation of $248,000, and lease commission amortization of $208,000.
Contributors to the increases include cost additions incurred from the
development and completion of a building at Corporate Square in July 2000 and
the completion of building and tenant improvements to Riverbank Plaza in April
2000.
GENERAL AND ADMINISTRATIVE EXPENSES decreased $471,000, or 19.6%, for the first
six months of 2001, as compared to the same period in 2000, due to $601,000 of
non-qualified unit option compensation in the 2000 period, partially offset by
current year increases in personnel costs and certain overhead costs.
LITIGATION COSTS were $3,329,000 and $1,908,000 for the first six months of 2001
and 2000, respectively, and are related to the lawsuits described in Note 8 to
the consolidated financial statements.
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HALLWOOD REALTY PARTNERS, L.P.
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 fourteen real estate properties located in six
states containing 5,073,000 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 increased $364,000 during the first six months of 2001 to
$16,821,000 as of June 30, 2001. The sources of cash during the period were
$4,896,000 of cash provided by operating activities and $8,471,000 of net cash
proceeds from property sales. The uses of cash were $3,151,000 for property and
tenant improvements, $5,180,000 for property development costs, $2,305,000 for
scheduled mortgage principal payments, $2,125,000 for the early payoff of
mortgage principal, $228,000 for loan fees and expenses, and $14,000 for a
mortgage prepayment penalty.
Since August 2000, HRP has had available a $2,000,000 revolving line of credit.
The line of credit was renewed and matures July 31, 2002. The line of credit has
a variable interest rate of either prime plus 0.50% or LIBOR plus 3.0% and
requires monthly interest payments, but no principal amortization. As of June
30, 2001, HRP had not borrowed against this facility.
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 or developments will be proceeds from the sale, financing or
refinancing of one or more of its real estate properties.
In addition to the commitment described below with regards to Executive Park,
HRP has estimated commitments for tenant and capital improvements of
approximately $6,400,000 for projects either in progress or for projects
budgeted for 2001. Additionally, HRP estimates that it will spend about $950,000
for the remainder of 2001 on lease commissions.
Substantially all of the buildings in HRP's real estate properties were
encumbered by and pledged as collateral under non-recourse mortgages
aggregating $195,666,000 as of June 30, 2001. HRP has no mortgage loans maturing
or requiring balloon principal payments until 2005. Based upon loan
amortizations in effect, HRP is required to pay approximately $1,937,000 of
principal payments during the remainder of 2001.
Each quarter Realty reviews HRP's capacity to make cash distributions. HRP has
not made any cash distributions since February, 1992.
PROPERTY DEVELOPMENT -
In early 2001, HRP demolished a 1-story office building at its Executive Park
property in Atlanta, Georgia that contained 18,000 net rentable square feet. In
order to do so, HRP had to obtain a release of the building from Executive
Park's mortgage lien by substituting for such collateral $608,000 of United
States Treasury Bonds, which have various maturity dates through December 2007.
In February 2001, HRP began constructing a 5-story office building containing
122,000 net rentable square feet. The estimated construction and development
costs for the building and tenant improvements are approximately $21,000,000
(excluding the existing land cost). HRP is anticipating the leasing of
substantially all of the building by late 2001 or early 2002, with occupancy to
begin after building completion in early 2002. Currently it is anticipated that
financing of the development costs will be from existing cash funds until
project completion, at which time permanent loan financing will be secured. As
of June 30, 2001, HRP had incurred and capitalized $6,735,000 of construction
development costs.
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HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) -
PROPERTY AND MORTGAGE TRANSACTIONS -
In January 2001, HRP sold one of the warehouse buildings at Seattle Business
Parks that contained 63,000 net rentable square feet on 3.9 acres for a gross
selling price of $3,287,000. The carrying value of the assets was $885,000. The
sale resulted in $3,033,000 of net proceeds, which were added to HRP's working
capital, and a net gain of $2,148,000.
Also in January 2001, HRP sold one building at Fairlane Commerce Park that
contained less than 2,000 net rentable square feet on 0.5 acres for a gross
selling price of $575,000. The carrying value of the assets was $372,000. The
sale resulted in $525,000 of net proceeds, which were added to HRP's working
capital, and a net gain of $153,000.
In late March, HRP sold Joy Road Distribution Center that contained 442,000 net
rentable square feet on 21 acres for a gross selling price of $5,326,000. The
carrying value of the assets was $2,994,000. The sale resulted in $4,913,000 of
net proceeds to HRP and a net gain of $1,919,000. The net sale proceeds were
used to pay the outstanding mortgage principal balance of $2,125,000, to pay a
prepayment penalty of $14,000 to the lender, and to add $2,774,000 to general
working capital. The prepayment penalty along with the writeoff of $31,000 of
unamortized loan costs associated with the retired loan were expensed and are
included in the Consolidated Statements of Income as an extraordinary item.
INFLATION -
Inflation did not have a significant impact on HRP in 2000 and for the six
months ended June 30, 2001. Additionally, inflation is not anticipated to have a
material impact on HRP for the rest of 2001.
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, objectives and expectations. 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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HALLWOOD REALTY PARTNERS, L.P.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On July 27, 2000, HRP purchased an interest rate cap for Allfirst Building's
mortgage loan for $288,000, which limits HRP's exposure to changing interest
rates to a maximum of 10%. This interest rate cap, which has a notional amount
of $25,000,000, has terms consistent with the Allfirst Building's mortgage loan.
Allfirst Building's cash interest rate was 5.36% and 8.12% as of June 30, 2001
and December 31, 2000, respectively.
The interest rate cap is a derivative and designated as a cash flow hedge. Hedge
effectiveness is measured based on using the intrinsic value of the interest
rate cap. All changes in the fair value of the time value of the cap are
recorded directly to earnings. With the January 1, 2001 adoption of Statements
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities", HRP recorded the cumulative effect of the
adoption as a reduction to income of $192,000, or the amount of the difference
between the carrying value as of January 1, 2001 of $267,000 and the then
estimated fair value of $75,000, all of which represented change in time value.
On a quarterly basis during 2001, HRP has recorded changes in the estimated fair
value of the cap in interest expense. As of June 30, 2001, the estimated fair
value of the interest rate cap was $126,000.
Other than Allfirst Building's mortgage, all other mortgages have fixed interest
rates. Accordingly, changes in LIBOR or the prime rate do not significantly
impact the amount of interest paid by HRP. Assuming a 1% change in LIBOR,
interest paid by HRP would increase or decrease by approximately $250,000 on an
annual basis.
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HALLWOOD REALTY PARTNERS, L.P.
PART II - OTHER INFORMATION
<Table>
<Caption>
Item
----
1 Legal Proceedings
Reference is made to Item 8 - Note 10 of Form 10-K for
the year ended December 31, 2000 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 None.
(b) Reports on Form 8-K None.
</Table>
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HALLWOOD REALTY PARTNERS, L.P.
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
Date: August 1, 2001 By: /s/ JEFFREY D. GENT
-------------- ------------------------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and Accounting
Officer)
Page 17