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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 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 NOVEMBER 7, 2001: 1,589,948 UNITS.
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PAGE 1
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 September 30, 2001 (unaudited)
and December 31, 2000 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2001 and 2000 (unaudited) 4
Consolidated Statement of Partners' Capital for the
Nine Months ended September 30, 2001 (unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION
Items 1 to 6 Other Information 17
Signature 18
</Table>
PAGE 2
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<Table>
<Caption>
SEPTEMBER 30,
2001 DECEMBER 31,
(UNAUDITED) 2000
------------- -------------
ASSETS
Real estate:
Land $ 59,015 $ 60,236
Buildings and improvements 289,211 291,474
Tenant improvements 21,727 21,797
Construction in progress 14,671 3,755
------------- -------------
384,624 377,262
Accumulated depreciation and amortization (174,764) (170,870)
------------- -------------
Real estate, net 209,860 206,392
Cash and cash equivalents 22,440 16,457
Accounts receivable 2,703 3,211
Lease commissions, net 11,168 11,035
Loan reserves and escrows 7,275 7,109
Loan costs, net 3,436 3,879
Prepaid expenses and other assets 5,950 6,421
------------- -------------
Total assets $ 262,832 $ 254,504
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 201,985 $ 200,096
Accounts payable and accrued expenses 4,483 5,570
Prepaid rent, security deposits and other 3,021 4,192
Payable to affiliates, net 150 156
------------- -------------
Total liabilities 209,639 210,014
------------- -------------
Commitments and contingencies
Partners' capital:
Limited partners - 1,589,948 units outstanding 51,401 44,045
General partner 519 445
Accumulated other comprehensive income 1,273 --
------------- -------------
Total partners' capital 53,193 44,490
------------- -------------
Total liabilities and partners' capital $ 262,832 $ 254,504
============= =============
</Table>
See notes to consolidated financial statements.
PAGE 3
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
REVENUES:
Property operations $ 17,422 $ 16,923 $ 52,565 $ 48,905
Gain from property sales 3 -- 4,223 --
Interest 235 248 887 638
----------- ----------- ----------- -----------
Total revenues 17,660 17,171 57,675 49,543
----------- ----------- ----------- -----------
EXPENSES:
Property operations 6,799 6,876 20,320 19,379
Interest 3,791 3,940 11,909 11,116
Depreciation and amortization 3,438 3,361 10,724 9,758
General and administrative 1,072 976 3,006 3,381
Litigation costs 206 1,359 3,535 3,267
----------- ----------- ----------- -----------
Total expenses 15,306 16,512 49,494 46,901
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY LOSS
AND CUMULATIVE EFFECT OF
SFAS NO. 133 ADOPTION 2,354 659 8,181 2,642
Extraordinary loss from early extinguishments of debt (514) -- (559) --
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT
OF SFAS NO. 133 ADOPTION 1,840 659 7,622 2,642
Cumulative effect of SFAS No. 133 adoption -
valuation of interest rate cap -- -- (192) --
----------- ----------- ----------- -----------
NET INCOME $ 1,840 $ 659 $ 7,430 $ 2,642
=========== =========== =========== ===========
ALLOCATION OF NET INCOME:
Limited partners $ 1,822 $ 653 $ 7,356 $ 2,616
General partner 18 6 74 26
----------- ----------- ----------- -----------
Total $ 1,840 $ 659 $ 7,430 $ 2,642
=========== =========== =========== ===========
NET INCOME PER UNIT AND POTENTIAL UNIT:
Earnings per unit - basic
Income before extraordinary loss and cumulative
effect of SFAS No. 133 adoption $ 1.47 $ 0.41 $ 5.10 $ 1.61
Loss from early extinguishments of debt (0.32) -- (0.35) --
Cumulative effect of SFAS No. 133 adoption -- -- (0.12) --
----------- ----------- ----------- -----------
Net income $ 1.15 $ 0.41 $ 4.63 $ 1.61
=========== =========== =========== ===========
Earnings per unit - assuming dilution
Income before extraordinary loss and cumulative
effect of SFAS No. 133 adoption $ 1.42 $ 0.40 $ 4.93 $ 1.55
Loss from early extinguishments of debt (0.31) -- (0.34) --
Cumulative effect of SFAS No. 133 adoption -- -- (0.12) --
----------- ----------- ----------- -----------
Net income $ 1.11 $ 0.40 $ 4.47 $ 1.55
=========== =========== =========== ===========
WEIGHTED AVERAGE UNITS USED IN
COMPUTING NET INCOME PER UNIT AND
POTENTIAL UNIT:
Basic 1,590 1,590 1,590 1,630
=========== =========== =========== ===========
Assuming dilution 1,645 1,637 1,645 1,685
=========== =========== =========== ===========
</Table>
See notes to consolidated financial statements.
PAGE 4
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
Accumulated Limited
Other Partnership
Limited General Comprehensive Units
Partners Partner Income Total Outstanding
------------ ------------ ------------ ------------ ------------
PARTNERS' CAPITAL
JANUARY 1, 2001 $ 44,045 $ 445 $ -- $ 44,490 1,589,948
Reclassification of cumulative effect of
SFAS No. 133 adoption - deferred gain
from sale of interest rate swap 1,342 1,342
Amortization of deferred gain from
sale of interest rate swap (69) (69)
Net income 7,356 74 -- 7,430 --
------------ ------------ ------------ ------------ ------------
PARTNERS' CAPITAL
SEPTEMBER 30, 2001 $ 51,401 $ 519 $ 1,273 $ 53,193 1,589,948
============ ============ ============ ============ ============
</Table>
See notes to consolidated financial statements.
PAGE 5
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net income $ 7,430 $ 2,642
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 10,724 9,758
Effective rent adjustments (228) (602)
Non-qualified unit option compensation -- 601
Gain from property sales (4,223) --
Loss from early extinguishments of debt 559 --
Cumulative effect of SFAS No. 133 adoption -
valuation of interest rate cap 192 --
Changes in assets and liabilities:
Accounts receivable 508 (697)
Lease commissions (2,237) (3,706)
Prepaid expenses, loan reserves and other assets 820 1,458
Accounts payable and other liabilities (2,159) 2,784
----------- -----------
Net cash provided by operating activities 11,386 12,238
----------- -----------
INVESTING ACTIVITIES:
Property and tenant improvements (4,891) (6,942)
Property development costs (10,277) (8,731)
Property acquisition -- (7,791)
Cash proceeds from property sales, net of selling costs 8,474 --
----------- -----------
Net cash used in investing activities (6,694) (23,464)
----------- -----------
FINANCING ACTIVITIES:
Mortgage principal proceeds 10,000 38,123
Mortgage principal refinanced (2,760) (12,621)
Mortgage principal payments (3,226) (2,323)
Mortgage principal early payoff (2,125) --
Prepayment penalties (423) --
Loan fees and expenses (175) (918)
Exercise of unit options -- 213
Purchase of units -- (4,721)
----------- -----------
Net cash provided by financing activities 1,291 17,753
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 5,983 6,527
BEGINNING CASH AND CASH EQUIVALENTS 16,457 8,332
----------- -----------
ENDING CASH AND CASH EQUIVALENTS $ 22,440 $ 14,859
=========== ===========
</Table>
See notes to consolidated financial statements.
PAGE 6
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 industry. 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 September 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.
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 nine months ended September 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.
In August 2001, Statements of Financial Accounting Standards ("SFAS") No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" was
issued. The provisions of this statement are effective for HRP beginning on
January 1, 2002. HRP believes that the impact of adopting SFAS No. 144 will
be immaterial to its financial statements.
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 ENDED NINE MONTHS ENDED
ENTITY SEPTEMBER 30, SEPTEMBER 30,
PAID OR ------------------------- -------------------------
REIMBURSED 2001 2000 2001 2000
----------- ----------- ----------- ----------- -----------
Asset management fee Realty $ 153 $ 149 $ 461 $ 429
Acquisition fee Realty -- -- -- 74
Disposition fee Realty -- -- 120 --
Reimbursement of costs (a) Realty 710 610 2,122 1,906
Property management fee HCRE 504 487 1,527 1,408
Lease commissions HCRE 168 426 1,883 1,425
Construction fees HCRE 348 121 910 677
</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.
PAGE 7
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2 TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
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.
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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Weighted average units outstanding - basic 1,590 1,590 1,590 1,630
Weighted average units issued from options 69 69 69 77
Repurchase of units from unit option proceeds (14) (22) (14) (22)
----------- ----------- ----------- -----------
Weighted average units outstanding - assuming dilution 1,645 1,637 1,645 1,685
=========== =========== =========== ===========
</Table>
4 STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information -
Cash interest payments were $12,139,000 (net of capitalized interest
of $248,000) and $10,408,000 (net of capitalized interest of $522,000)
in the nine months ended September 30, 2001 and 2000, respectively.
Supplemental disclosure of noncash investing and financing activities -
As of September 30, 2001, HRP had a construction payable for property
development costs at Executive Park of $1,168,000.
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 mid to
late 2002, with some 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 the project is substantially leased,
at which time permanent loan financing will be secured. As of September 30,
2001, HRP had incurred and capitalized $11,445,000 of construction
development costs.
PAGE 8
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 2001, 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 $4,916,000 of net proceeds to HRP and a net gain of $1,922,000.
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 $2,777,000 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 4.88% and 8.12% as of September 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
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 September 30, 2001, the
estimated fair value of the interest rate cap was $30,000.
Additionally, as the result of the adoption of SFAS No. 133, HRP
reclassified the remaining unamortized gain equal to $1,342,000 from the
sale of its interest rate swap agreement from liabilities to accumulated
other comprehensive income. These proceeds, which were received in July
2000, will continue to be amortized over the life of Allfirst Building's
mortgage payable into interest expense.
On August 7, 2001, HRP refinanced a mortgage loan secured by a portion of
Corporate Square with a new lender. The interest rate was reduced to 7.7%
from 8.625% and the maturity date was extended six years to August 2011.
The monthly principal payments amortize the loan over 22.5 years. The loan
proceeds of $10,000,000 were used to pay the outstanding mortgage principal
balance of $2,760,000 with the former lender, to pay a prepayment of
$409,000, to pay transaction costs of $142,000, and for general working
capital. The prepayment penalty along with the writeoff of $105,000 of
unamortized loan costs associated with the retired loan were expensed and
are included in the Consolidated Statements of Income as an extraordinary
item.
Other than Allfirst Building's mortgage, all other mortgages have fixed
interest rates.
PAGE 9
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
8 COMPREHENSIVE INCOME
The components of other comprehensive income for the three and nine months
ended September 30, 2001 and 2002 are shown as follows (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $ 1,840 $ 659 $ 7,430 $ 2,642
Reclassification of cumulative effect of SFAS No
133 adoption - deferred gain from sale of
interest rate swap 1,342 -- 1,342 --
Other Comprehensive Income -
Amortization of deferred gain
from sale of interest rate swap (69) -- (69) --
----------- ----------- ----------- -----------
Comprehensive income $ 3,113 $ 659 $ 8,703 $ 2,642
=========== =========== =========== ===========
</Table>
9 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.
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.
PAGE 10
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
9 LITIGATION - CONTINUED
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. IN AUGUST 2001, PLAINTIFF AND
CERTAIN DEFENDANTS APPEALED THE COURT OF CHANCERY'S JUDGMENT TO THE
DELAWARE SUPREME COURT. THOSE APPEALS ARE PENDING. IN OCTOBER 2001, HRP
RECEIVED THE $3,417,423 JUDGMENT TOGETHER WITH $2,987,576 OF PRE-JUDGMENT
AND POST-JUDGMENT INTEREST, SUBJECT TO AN ARRANGEMENT THAT IT BE RETURNED
IN FULL OR PART IF THE JUDGMENT IS MODIFIED OR REVERSED ON APPEAL. AS OF
SEPTEMBER 30, 2001, THE JUDGMENT AND INTEREST ARE NOT RECORDED IN HRP'S
FINANCIAL STATEMENTS.
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 11
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
THIRD QUARTER OF 2001 COMPARED TO THE THIRD QUARTER OF 2000
REVENUE FROM PROPERTY OPERATIONS increased $499,000, or 2.9%, for the third
quarter of 2001, compared to the 2000 third quarter. The following table
illustrates the components of the change, in thousands:
<Table>
Rental income, net $ 359
Other property income 140
------
Net increase $ 499
======
</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 88.5% to 91.5%.
INTEREST INCOME decreased by $13,000, or 5.2%, as a result of lower interest
rates, partially offset by a higher average cash balance available for
investment during the 2001 period.
PROPERTY OPERATING EXPENSES decreased $77,000, or 1.1%, for the third quarter of
2001, compared to the same period in 2000. The decrease 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 were $101,000
greater in the 2001 period.
o Combined, all other operating costs decreased $178,000, or about 2.6%,
between the periods.
INTEREST EXPENSE decreased $149,000, or 3.8%, for the third quarter of 2001 as
compared to the same period in 2000, as a result of the capitalization of
$248,000 of interest for construction of the development project at Executive
Park (as described in Note 5 to the consolidated financial statements),
partially offset by an increase in mortgage interest of $72,000 (due to a higher
average mortgage balance) and an increase in loan cost amortization and other
interest costs of $27,000.
DEPRECIATION AND AMORTIZATION EXPENSE increased $77,000, or 2.3%, primarily due
to cost additions incurred from the development and completion of a building at
Corporate Square in July 2000.
GENERAL AND ADMINISTRATIVE EXPENSES increased $96,000, or 9.8%, for the third
quarter of 2001, as compared to the same period in 2000, due to increases in
current year personnel costs and certain overhead costs.
LITIGATION COSTS were $206,000 and $1,359,000 for the third quarter of 2001 and
2000, respectively, and are related to the lawsuits described in Note 9 to the
consolidated financial statements.
LOSS ON EARLY EXTINGUISHMENT OF DEBT of $514,000 in the third quarter of 2001 is
from the early payoff and subsequent refinancing of a loan secured by a portion
of Corporate Square and is comprised of a prepayment penalty of $409,000 and the
writeoff of $105,000 of unamortized loan costs associated with the retired loan.
PAGE 12
HALLWOOD REALTY PARTNERS, L.P.
RESULTS OF OPERATIONS - CONTINUED
FIRST NINE MONTHS OF 2001 COMPARED TO THE FIRST NINE MONTHS OF 2000
REVENUE FROM PROPERTY OPERATIONS increased $3,660,000, or 7.5%, for the first
nine months of 2001, compared to the first nine months of 2000. The following
table illustrates the components of the change, in thousands:
<Table>
Rental income, net $ 2,836
Other property income 824
---------
Net increase $ 3,660
=========
</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 89.6% to 91.6%.
GAIN FROM PROPERTY SALES of $4,223,000 in the first nine 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 $2,148,000; 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 $1,922,000.
INTEREST INCOME increased by $249,000, or 39.0%, as a result of increased
earnings on overnight investments due to a higher average cash balance available
for investment during the 2001 period, partially offset by lower interest rates.
PROPERTY OPERATING EXPENSES increased $941,000, or 4.9%, for the first nine
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
$498,000 towards the increase.
o Real estate taxes increased $264,000 for comparable properties due to
higher property tax values at certain properties and refunds included
in the 2000 period.
o Utilities increased $125,000 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 Management fees increased $74,000 for comparable properties due to the
increase in rental income.
o Professional fees decreased $260,000 for comparable properties
primarily due to costs for research and analysis of potential property
development projects incurred in the 2000 period.
o Combined, all other operating costs increased $240,000, or about 1.2%,
between the periods.
INTEREST EXPENSE increased $793,000, or 7.1%, for the first nine months of 2001
as compared to the same period in 2000, as a result of an increase in mortgage
interest of $1,036,000 (due to a higher average mortgage balance) and an
increase in loan cost amortization and other interest costs of $5,000, partially
offset by the capitalization of $248,000 of interest for construction of the
development project at Executive Park (as described in Note 5 to the
consolidated financial statements).
DEPRECIATION AND AMORTIZATION EXPENSE increased $966,000, or 9.9%, primarily due
to increases in tenant improvement depreciation of $336,000, building
depreciation of $264,000, and lease commission amortization of $215,000.
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 $375,000, or 11.1%, for the first
nine 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 $3,535,000 and $3,267,000 for the first nine months of
2001 and 2000, respectively, and are related to the lawsuits described in Note 9
to the consolidated financial statements.
LOSS ON EARLY EXTINGUISHMENTS OF DEBT of $559,000 in the 2001 period is from the
early payoff of the loan secured by Joy Road Distribution Center and the
refinancing of a loan secured by a portion of Corporate Square and is comprised
of prepayment penalties of $423,000 and the writeoff of $136,000 of unamortized
loan costs associated with the retired loans.
PAGE 13
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 September 30, 2000, HRP owned fourteen real estate properties located in
six states containing 5,072,000 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 $5,983,000 during the first nine months of 2001 to
$22,440,000 as of September 30, 2001. The sources of cash during the period were
$11,386,000 of cash provided by operating activities, $10,000,000 of mortgage
principal proceeds, and $8,474,000 of net cash proceeds from property sales. The
uses of cash were $4,891,000 for property and tenant improvements, $10,277,000
for property development costs, $3,226,000 for scheduled mortgage principal
payments, $2,760,000 of mortgage principal repayments from mortgage proceeds,
$2,125,000 for the early payoff of mortgage principal, $423,000 for mortgage
prepayment penalties, and $175,000 for loan fees and expenses.
Since August 2000, HRP has had available a $2,000,000 revolving line of credit.
The line of credit was renewed and matures July 29, 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
September 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 currently has estimated commitments for tenant and capital improvements of
approximately $7,200,000 for projects either in progress or for projects
identified to be done. Additionally, HRP estimates that it may spend about
$700,000 for the remainder of 2001 and early 2002 for 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
$201,985,000 as of September 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 $769,000 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 mid to late 2002, with some 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 the
project is substantially leased, at which time permanent loan financing will be
secured. As of September 30, 2001, HRP had incurred and capitalized $11,445,000
of construction development costs.
PAGE 14
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 2001, 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 $4,916,000
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 $2,777,000 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.
On August 7, 2001, HRP refinanced a mortgage loan secured by a portion of
Corporate Square with a new lender. The interest rate was reduced to 7.7% from
8.625% and the maturity date was extended six years to August 2011. The monthly
principal payments amortize the loan over 22.5 years. The loan proceeds of
$10,000,000 were used to pay the outstanding mortgage principal balance of
$2,760,000 with the former lender, to pay a prepayment of $409,000, to pay
transaction costs of $142,000, and for general working capital. The prepayment
penalty along with the writeoff of $105,000 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 nine
months ended September 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.
PAGE 15
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 4.88% and 8.12% as of September 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 September 30, 2001, the estimated
fair value of the interest rate cap was $30,000.
Additionally, as the result of the adoption of SFAS No. 133, HRP reclassified
the remaining unamortized gain equal to $1,342,000 from the sale of its interest
rate swap agreement from liabilities to accumulated other comprehensive income.
These proceeds, which were received in July 2000, will continue to be amortized
over the life of Allfirst Building's mortgage payable into interest expense.
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.
PAGE 16
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 9 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>
PAGE 17
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: November 8, 2001 By: /s/ JEFFREY D. GENT
------------------------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and Accounting Officer)
PAGE 18