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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 MARCH 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10643
---------------------
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 MAY 9, 2002: 1,589,948 UNITS.
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HALLWOOD REALTY PARTNERS, L.P.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<Table>
<Caption>
Page
----
Item 1 Financial Statements:
Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001 3
Consolidated Statements of Income for the
Three Months Ended March 31, 2002 and 2001 (unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 2002 and 2001 (unaudited) 5
Consolidated Statement of Partners' Capital for the
Three Months ended March 31, 2002 (unaudited) 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
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 14
PART II - OTHER INFORMATION
Items 1 to 6 Other Information 15
Signature 16
</Table>
Page 2
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<Table>
<Caption>
MARCH 31, December 31,
2002 2001
---------- ------------
(UNAUDITED)
ASSETS
Real estate:
Land $ 59,015 $ 59,015
Buildings and improvements 290,755 290,674
Tenant improvements 22,809 22,301
Construction in progress 20,065 18,303
---------- ------------
392,644 390,293
Accumulated depreciation and amortization (179,195) (176,719)
---------- ------------
Real estate, net 213,449 213,574
Cash and cash equivalents 24,741 24,913
Accounts receivable 3,354 2,315
Lease commissions, net 10,421 10,868
Loan reserves and escrows 8,818 8,359
Loan costs, net 3,109 3,258
Prepaid expenses and other assets 6,562 6,588
---------- ------------
Total assets $ 270,454 $ 269,875
========== ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 200,188 $ 201,224
Accounts payable and accrued expenses 4,803 5,147
Prepaid rent, security deposits and other 2,574 3,061
Deferred litigation proceeds 6,405 6,405
Payable to affiliates, net 58 16
---------- ------------
Total liabilities 214,028 215,853
---------- ------------
Commitments and contingencies
Partners' capital:
Limited partners - 1,589,948 units outstanding 54,739 52,290
General partner 553 528
Accumulated other comprehensive income 1,134 1,204
---------- ------------
Total partners' capital 56,426 54,022
---------- ------------
Total liabilities and partners' capital $ 270,454 $ 269,875
========== ============
</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
MARCH 31,
---------------------
2002 2001
-------- --------
REVENUES:
Property operations $ 17,375 $ 17,506
Gain from property sales -- 4,219
Interest 133 365
-------- --------
Total revenues 17,508 22,090
-------- --------
EXPENSES:
Property operations 6,684 7,088
Interest 3,450 4,204
Depreciation and amortization 3,727 3,577
General and administrative 956 1,075
Litigation costs 217 2,690
-------- --------
Total expenses 15,034 18,634
-------- --------
INCOME BEFORE EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF SFAS NO. 133 ADOPTION 2,474 3,456
Extraordinary loss from early extinguishment of debt -- (45)
-------- --------
INCOME BEFORE CUMULATIVE EFFECT
OF SFAS NO. 133 ADOPTION 2,474 3,411
Cumulative effect of SFAS No. 133 adoption -- (192)
-------- --------
NET INCOME $ 2,474 $ 3,219
======== ========
ALLOCATION OF NET INCOME:
Limited partners $ 2,449 $ 3,187
General partner 25 32
-------- --------
Total $ 2,474 $ 3,219
======== ========
NET INCOME PER UNIT AND POTENTIAL UNIT:
Earnings per unit - basic
Income before extraordinary loss and cumulative
effect of SFAS No. 133 adoption $ 1.54 $ 2.15
Loss from early extinguishment of debt -- (0.03)
Cumulative effect of SFAS No. 133 adoption -- (0.12)
-------- --------
Net income $ 1.54 $ 2.00
======== ========
Earnings per unit - assuming dilution
Income before extraordinary loss and cumulative
effect of SFAS No. 133 adoption $ 1.49 $ 2.08
Loss from early extinguishment of debt -- (0.03)
Cumulative effect of SFAS No. 133 adoption -- (0.11)
-------- --------
Net income $ 1.49 $ 1.94
======== ========
WEIGHTED AVERAGE UNITS USED IN COMPUTING
NET INCOME PER UNIT AND POTENTIAL UNIT:
Basic 1,590 1,590
======== ========
Assuming dilution 1,647 1,645
======== ========
</Table>
See notes to consolidated financial statements.
Page 4
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
-------- --------
NET INCOME $ 2,474 $ 3,219
Reclassification of cumulative effect of
SFAS No. 133 adoption - deferred gain
from sale of interest rate swap -- 1,481
Amortization of deferred gain
from sale of interest rate swap (70) (70)
-------- --------
COMPREHENSIVE INCOME $ 2,404 $ 4,630
======== ========
</Table>
See notes to consolidated financial statements.
Page 5
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
ACCUMULATED LIMITED
OTHER PARTNERSHIP
GENERAL LIMITED COMPREHENSIVE UNITS
PARTNER PARTNERS INCOME TOTAL OUTSTANDING
------- -------- ------------- ------- -----------
PARTNERS' CAPITAL, JANUARY 1, 2002 $ 528 $ 52,290 $ 1,204 $54,022 1,589,948
Amortization of deferred gain from
sale of interest rate swap -- -- (70) (70) --
Net income 25 2,449 -- 2,474 --
------- -------- ------- ------- ----------
PARTNERS' CAPITAL, MARCH 31, 2002 $ 553 $ 54,739 $ 1,134 $56,426 1,589,948
======= ======== ======= ======= ==========
</Table>
See notes to consolidated financial statements.
Page 6
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income $ 2,474 $ 3,219
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,727 3,577
Gain from property sales -- (4,219)
Loss from early extinguishment of debt -- 45
Cumulative effect of SFAS No. 133 adoption -- 192
Effective rent adjustments (123) (44)
Changes in assets and liabilities:
Receivables (1,039) 899
Lease commission payments (317) (1,064)
Prepaid expenses, loan reserves and other assets (161) (1,183)
Accounts payable and other liabilities (1,764) (606)
-------- --------
Net cash provided by operating activities 2,797 816
-------- --------
INVESTING ACTIVITIES:
Property and tenant improvements (1,026) (906)
Property development cost (907) (714)
Cash proceeds from property sales, net of selling costs -- 8,470
-------- --------
Net cash provided by (used in) investing activities (1,933) 6,850
-------- --------
FINANCING ACTIVITIES:
Mortgage principal payments (1,036) (1,500)
Mortgage principal early payoff -- (2,125)
Loan fees, expenses and prepayment penalty -- (7)
-------- --------
Net cash used in financing activities (1,036) (3,632)
-------- --------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (172) 4,034
BEGINNING CASH AND CASH EQUIVALENTS 24,913 16,457
-------- --------
ENDING CASH AND CASH EQUIVALENTS $ 24,741 $ 20,491
======== ========
</Table>
See notes to consolidated financial statements.
Page 7
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(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 March 31, 2002, 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, including
decision-making responsibility for financing, refinancing, acquiring and
disposing of properties. In addition, Realty provides general operating and
administrative services to HRP. 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, 2001.
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 months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. The provisions of this statement are
effective beginning on January 1, 2002. HRP believes that the impact of
adopting SFAS No. 144 will be limited to the requirement that the results of
operations of disposed properties, for current and historical presentation,
be classified as discontinued operations. This will result in the
reclassification of historical operations for property dispositions that
occur in current periods.
2 TRANSACTIONS WITH RELATED PARTIES
Realty and HCRE are compensated for services provided to HRP and its real
estate properties and Realty is reimbursed for certain costs and expenses.
The following table sets forth such compensation and reimbursements paid by
HRP (in thousands):
<Table>
<Caption>
THREE MONTHS
ENDED
ENTITY MARCH 31,
PAID OR ------------------
REIMBURSED 2002 2001
---------- ------ ------
Asset management fee Realty $ 154 $ 155
Disposition fee Realty -- 120
Reimbursement of costs (a) Realty 792 711
Property management fee HCRE 508 513
Lease commissions HCRE 227 956
Construction fees HCRE 257 131
</Table>
(a) These costs are mostly recorded as general and administrative
expenses and represent reimbursement to Realty, at cost, for
administrative level salaries and compensation, bonuses, employee
and director insurance, and allocated overhead costs. HRP pays
its account balance with Realty on a monthly basis.
Page 8
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(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
MARCH 31,
---------------------
2002 2001
-------- --------
Weighted average units outstanding - basic 1,590 1,590
Potential weighted average units issued from options 69 69
Potential repurchase of units from unit option proceeds (12) (14)
-------- --------
Potential weighted average units outstanding - assuming dilution 1,647 1,645
======== ========
</Table>
4 STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information -
Cash interest payments were $3,880,000 (net of capitalized interest of
$256,000) and $4,398,000 in the three months ended March 31, 2002 and
2001, respectively.
Supplemental disclosure of noncash investing and financing activities are as
follows -
As of March 31, 2002 and December 31, 2001, HRP had a construction
payable for property development costs at Executive Park of $905,000
and $250,000, respectively.
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 125,000 net rentable square feet. As of March 31, 2002,
HRP had incurred and capitalized $15,468,000 of construction and development
costs, which includes substantially all of the costs for the building and
its parking garage (excluding the existing land costs, lease commissions and
tenant improvements to be spent after a lease is executed, and loan fees
once financing is secured). The building and its parking garage, excluding
tenant finish-out, was completed at the beginning of April 2002. All
development costs have been paid with cash funds on hand, however once the
property is substantially leased, it is anticipated that loan financing will
be secured to replenish HRP's cash. Costs for lease commissions, tenant
improvements and loan fees are dependant upon the terms of each lease and
loan agreement and are yet to be determined. HRP anticipates leasing
substantially all of the building by late 2002.
Page 9
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
6 LITIGATION
On June 20, 1997, an action was filed against HRP, the General Partner, its
directors, and Hallwood by Gotham Partners, L.P. in the Court of Chancery of
the State of 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 split of units 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 to HRP in
the amount of $3,417,423, plus pre-judgment interest from August 1995. The
judgment amount represents what the court determined was an underpayment by
Hallwood.
In August 2001, plaintiff and certain defendants appealed the Court of
Chancery's judgment to the Delaware Supreme Court. Those appeals are
pending. Oral arguments were heard on February 12, 2002, and a rehearing en
banc was held on March 26, 2002. 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. If the
appellate court reverses the judgment, any subsequent ruling by the trial
court on remand may be more or less favorable to HRP. As a result of the
appeals and the uncertainty of their outcome, HRP recorded the judgment and
interest as "Deferred Litigation Proceeds" on its balance sheet.
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 and other matters. All parties filed briefs
with the Second Circuit. Oral arguments were heard on March 4, 2002. On
April 11, 2002, the U.S. Court of Appeals for the Second Circuit upheld the
lower court's ruling in favor of defendants. On April 25, 2002, HRP filed
with the court a Petition for Rehearing and Rehearing en banc with respect
to the April 11, 2002 decision.
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
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
FIRST QUARTER OF 2002 COMPARED TO THE FIRST QUARTER OF 2001
REVENUE FROM PROPERTY OPERATIONS for the first quarter of 2002 decreased
$131,000, or 0.7%, compared to the 2001 first quarter. The following table
illustrates the components of the change, in thousands:
<Table>
Rental income, net $ (78)
Other property income (53)
-------
Net decrease $ (131)
=======
</Table>
Net rental income decreased primarily due to a decline in average occupancy
between periods from 90.4% to 89.6%.
GAIN FROM PROPERTY SALES of $4,219,000 in the first three months of 2001 is
comprised of the 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 sale of Joy
Road Distribution Center for a gross selling price of $5,326,000, resulting in a
gain of $1,916,000; and the sale of one building at Fairlane Commerce Park for a
gross selling price of $575,000, resulting in a gain of $153,000.
INTEREST INCOME decreased by $232,000, or 63.6%, as a result of decreased
earnings on overnight cash investments due to significantly lower interest rates
available between the periods.
PROPERTY OPERATING EXPENSES for the first quarter of 2002 decreased $404,000, or
5.7%, compared to the same period in 2001. The decrease is comprised primarily
of the following components:
o Utilities decreased $390,000 due to overall lower electrical and/or
natural gas usage.
o Combined, all other operating costs decreased
$14,000, or less than 1%, between the periods.
INTEREST EXPENSE for the first quarter of 2002 decreased $754,000, or 17.9%,
compared to the same period in 2001, as a result of a decrease in mortgage
interest of $329,000 (primarily due to a lower interest rate for HRP's only
variable rate mortgage secured by Allfirst Building), the capitalization of
$256,000 of interest for construction of the development project at Executive
Park (as described in Note 5 to the Consolidated Financial Statements), and a
decrease in loan cost amortization and other interest costs of $169,000.
DEPRECIATION AND AMORTIZATION EXPENSE increased $150,000, or 4.2%, due to an
increase in lease commission amortization of $80,000 as a result of the write
off of unamortized costs associated with an early lease termination. All other
depreciation costs increased $70,000, of which none were individually
significant.
GENERAL AND ADMINISTRATIVE EXPENSES for the first quarter of 2002 decreased
$119,000, or 11.1%, compared to the same period in 2001, due to lower personnel
costs and certain overhead costs.
LITIGATION COSTS were $217,000 and $2,690,000 for the first quarter of 2002 and
2001, respectively, and are related to the lawsuits described in Note 6 to the
Consolidated Financial Statements.
Page 11
HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL INFORMATION -
HRP operates in the commercial real estate industry. 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, operations, and other factors
to determine if any should be considered for disposal.
As of March 31, 2002, HRP owned fourteen real estate assets (the "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.
This Form 10-Q 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, 2001.
CASH SOURCES, CASH USES AND COMMITMENTS -
HRP's cash position decreased $172,000 during the first three months of 2002 to
$24,741,000 as of March 31, 2002. The source of cash during the period was
$2,797,000 of cash provided by operating activities. The uses of cash were
$1,026,000 for property and tenant improvements, $907,000 for property
development costs, and $1,036,000 for scheduled mortgage principal payments.
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. We believe that there will be sufficient
cash from operations to meet these needs because HRP had leases in place as of
December 31, 2001 to provide $55,261,000 of minimum rental payments during 2002.
HRP had $54,443,000 of minimum rental payments estimated for 2001 (based on
leases in place as of December 31, 2000), however the actual rental payments
recorded for 2001 were $60,494,000. For the three months ended March 31, 2002
and 2001, HRP's actual rental payments recorded were $15,287,000 and
$15,443,000, respectively. Our ability to fund operations in the future will
depend upon continued success in maintaining current occupancy levels, retaining
current tenants, and attracting new tenants. 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 Properties.
Each quarter Realty reviews HRP's capacity to make cash distributions. HRP has
not made any cash distributions since February, 1992. In addition to the
commitment described below with regards to the development project at Executive
Park, HRP has estimated and budgeted tenant and capital improvements of
$10,852,000 and lease commissions of $2,261,000 for 2002. For the first three
months of 2002, HRP incurred $1,026,000 of tenant and capital improvements and
$317,000 of lease commissions of these estimates.
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
125,000 net rentable square feet. As of March 31, 2002, HRP had incurred and
capitalized $15,468,000 of construction and development costs, which includes
substantially all of the costs for the building and its parking garage
(excluding the existing land costs, lease commissions and tenant improvements to
be spent after a lease is executed, and loan fees once financing is secured).
The building and its parking garage, excluding tenant finish-out, was completed
at the beginning of April 2002. All development costs have been paid with cash
funds on hand, however once the property is substantially leased, it is
anticipated that loan financing will be secured to replenish HRP's cash. Costs
for lease commissions, tenant improvements and loan fees are dependant upon the
terms of each lease and loan agreement and are yet to be determined. HRP
anticipates leasing substantially all of the building by late 2002.
Page 12
HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) -
LITIGATION & JUDGMENT -
On July 18, 2001, the Delaware Court of Chancery rendered its opinion for the
action styled Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., et al.
(C.A. No. 15754). The court ruled that the defendants other than HRP pay a
judgment to HRP in the amount of $3,417,423, plus pre-judgment interest from
August 1995. The judgment amount represents what the court determined was an
underpayment by Hallwood. In August 2001, plaintiff and certain defendants
appealed the Court of Chancery's judgment to the Delaware Supreme Court. Those
appeals are pending. (For more information about this litigation and the lawsuit
filed in United States District Court of the Southern District of New York, see
Note 6 to the Consolidated Financial Statements.)
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. If
the appellate court reverses the judgment, any subsequent ruling by the trial
court on remand may be more or less favorable to HRP. As a result of the appeals
and the uncertainty of their outcome, HRP recorded the judgment and interest as
"Deferred Litigation Proceeds" on its balance sheet.
MORTGAGE LOANS -
Substantially all of the buildings in HRP's real estate properties were
encumbered and pledged as collateral by eleven non- recourse mortgage loans
aggregating $200,188,000 as of March 31, 2002. These mortgage loans have
interest rates ranging from 3.17% to 8.70% (with an effective average interest
rate of 7.59%) and mature between 2005 and 2020. Other than Allfirst Building's
mortgage ($25,000,000), all mortgages have fixed interest rates. Most of the
mortgage loans require monthly principal payments with balloon payments due at
maturity. Based upon loan amortizations in effect, HRP is required to pay
approximately $2,636,000 of principal payments during the remainder of 2002.
Since August 2000, HRP has had available a $2,000,000 revolving line of credit,
which matures on 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. HRP has not borrowed against this
facility.
TRANSACTIONS WITH RELATED PARTIES -
For information about transactions with related parties, see Note 2 to the
Consolidated Financial Statements.
INFLATION -
Inflation did not have a significant impact on HRP during the three years ended
December 31, 2001 and for the three months ended March 31, 2002. Additionally,
inflation is not anticipated to have a material impact on HRP for the rest of
2002.
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-K
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 the risks identified in Item 1 - Business -
"Risks, Competition and Other Factors" contained in HRP's Form 10-K for the year
ended December 31, 2001.
Page 13
HALLWOOD REALTY PARTNERS, L.P.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On July 27, 2000, HRP sold its interest rate swap agreement for $1,597,000. HRP
had entered into the interest rate swap agreement in 1998 to reduce its exposure
to changes in interest rates for the loan secured by Allfirst Building. This
interest rate swap agreement effectively fixed the loan's cash interest rate at
6.78%, as opposed to the mortgage loan interest rate of LIBOR plus 1.30% (or
7.94% at the time of the swap agreement sale). The proceeds from the sale were
designated for general working capital purposes. For financial reporting
purposes, the proceeds are being amortized over the life of the loan as a
reduction to interest expense. During 2001, as the result of the adoption of
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" HRP
reclassified the remaining unamortized gain from liabilities to accumulated
other comprehensive income. The proceeds will continue to be amortized over the
life of Allfirst Building's mortgage payable as a reduction to interest expense.
As of March 31, 2002 and December 31, 2001, the unamortized balance, included on
the balance sheet as "Accumulated other comprehensive income", was $1,134,000
and $1,204,000, respectively.
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 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 Allfirst Building's mortgage loan. Allfirst Building's
cash interest rate was 3.17% and 3.44% as of March 31, 2002 and December 31,
2001, 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
SFAS No. 133, 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. Thereafter, on a
quarterly basis, HRP has recorded changes in the estimated fair value of the cap
in interest expense. As of March 31, 2002 and December 31, 2001, the estimated
fair value of the interest rate cap was $149,000 and $68,000, respectively.
Other than Allfirst Building's mortgage ($25,000,000), all 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 100 basis
point, or 1%, change in LIBOR, interest paid by HRP would increase or decrease
by approximately $250,000 on an annual basis.
Page 14
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, 2001 and Note 6 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 15
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: May 9, 2002 By: /s/ JEFFREY D. GENT
----------- --------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and
Accounting Officer)
Page 16