1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10643
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HALLWOOD REALTY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2313955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS
SUITE 1500
DALLAS, TEXAS 75219-4298
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
THE REGISTRANT IS A LIMITED PARTNERSHIP AND ISSUES UNITS REPRESENTING OWNERSHIP
OF LIMITED PARTNER INTERESTS.
NUMBER OF UNITS OUTSTANDING AT MAY 5, 1998: 1,672,556 UNITS.
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2
HALLWOOD REALTY PARTNERS, L.P.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1 Financial Statements (unaudited) :
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations, Liquidity and Capital Resources 8
PART II - OTHER INFORMATION
- ---------------------------
Items 1 to 6 Other Information 10
Signatures 11
Page 2
3
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
March 31, December 31,
1998 1997
--------- ---------
(unaudited)
ASSETS
Real estate:
Land $ 56,441 $ 56,441
Buildings and improvements 259,522 259,220
Tenant improvements 18,468 18,734
--------- ---------
334,431 334,395
Accumulated depreciation and amortization (156,799) (155,367)
--------- ---------
Real estate, net 177,632 179,028
Cash and cash equivalents 8,639 6,665
Accounts receivable 1,247 1,162
Deferred lease commissions, net 7,077 7,049
Lease concessions 2,596 2,511
Loan reserves and escrows 7,938 6,215
Loan costs, net 3,803 3,213
Prepaid expenses and other assets, net 1,205 1,291
--------- ---------
Total assets $ 210,137 $ 207,134
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 162,378 $ 157,911
Unamortized mortgage payable forgiveness 8,501 8,926
Accounts payable and accrued expenses 3,924 4,157
Prepaid rent and security deposits 2,495 2,764
Payable to affiliates 340 335
--------- ---------
Total liabilities 177,638 174,093
--------- ---------
Partners' capital:
Limited partners - 1,672,556 units outstanding 32,174 32,711
General partner 325 330
--------- ---------
Total partners' capital 32,499 33,041
--------- ---------
Total liabilities and partners' capital $ 210,137 $ 207,134
========= =========
See notes to consolidated financial statements.
Page 3
4
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
1998 1997
---------- ----------
REVENUES:
Property operations $ 13,676 $ 12,773
Interest 147 135
---------- ----------
Total revenues 13,823 12,908
---------- ----------
EXPENSES:
Property operations 5,591 5,821
Interest 3,183 3,217
Depreciation and amortization 3,078 2,985
General and administrative 902 817
---------- ----------
Total expenses 12,754 12,840
---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 1,069 68
Extraordinary item -
Loss on early extinguishment of debt (1,611) --
---------- ----------
NET INCOME (LOSS) $ (542) $ 68
========== ==========
ALLOCATION OF NET INCOME (LOSS):
Limited partners $ (537) $ 67
General partner (5) 1
---------- ----------
Total $ (542) $ 68
========== ==========
NET INCOME (LOSS) PER UNIT AND
POTENTIAL UNIT:
Earnings per unit - basic
Income before extraordinary item $ .63 $ .04
Loss on early extinguishment of debt (.95) --
---------- ----------
Net income (loss) $ (.32) $ .04
========== ==========
Earnings per unit -assuming dilution
Income before extraordinary item $ .61 $ .04
Loss on early extinguishment of debt (.92) --
---------- ----------
Net income (loss) $ (.31) $ .04
========== ==========
WEIGHTED AVERAGE UNITS USED IN COMPUTING
NET INCOME (LOSS) PER UNIT AND POTENTIAL UNIT:
Basic 1,673 1,673
========== ==========
Assuming dilution 1,739 1,720
========== ==========
See notes to consolidated financial statements.
Page 4
5
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES:
Net income (loss) $ (542) $ 68
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,078 2,985
Loss on early extinguishment of debt 1,611 --
Amortization of mortgage principal forgiveness (425) (418)
Lease concessions (85) 4
Changes in assets and liabilities:
Receivables (85) (168)
Prepaid lease commissions (600) (578)
Prepaid expenses and other assets, net (981) 5
Accounts payable and other liabilities (497) (727)
---------- ----------
Net cash provided by operating activities 1,474 1,171
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INVESTING ACTIVITIES:
Property and tenant improvements (1,103) (1,080)
Tenant improvement escrow -- 125
Mortgage receivable principal payments -- 23
---------- ----------
Net cash used for investing activities (1,103) (932)
---------- ----------
FINANCING ACTIVITIES:
Mortgage principal proceeds 34,000 --
Mortgage principal refinanced (28,707) --
Mortgage prepayment penalty (1,465) --
Mortgage principal payments (826) (775)
Loan reserves (550) --
Loan fees (849) --
---------- ----------
Net cash provided by (used for) financing activities 1,603 (775)
---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,974 (536)
BEGINNING CASH AND CASH EQUIVALENTS 6,665 3,556
---------- ----------
ENDING CASH AND CASH EQUIVALENTS $ 8,639 $ 3,020
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash during the period $ 3,687 $ 3,503
========== ==========
See notes to consolidated financial statements.
Page 5
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1 ORGANIZATION AND ACCOUNTING POLICIES
Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited
partnership, is engaged in diversified real estate activities, including the
acquisition, ownership and operation of commercial office and industrial
real estate and other real estate related assets. The limited partners'
interests are traded on the American Stock Exchange under the symbol "HRY".
Hallwood Realty Corporation ("HRC" or "General Partner"), a Delaware
corporation and wholly-owned subsidiary of The Hallwood Group Incorporated
("Hallwood"), is HRP's general partner and is responsible for asset
management of the partnership and its real estate properties. Hallwood
Commercial Real Estate, Inc. ("HCRE"), another wholly-owned subsidiary of
Hallwood, provides property management services for HRP's real estate
properties.
HRP has adopted Statements of Financial Accounting Standards No. 130 -
"Reporting on Comprehensive Income" effective January 1, 1998. As HRP had
no items of other comprehensive income in the period presented,
comprehensive income is not reported.
The consolidated financial statements have been prepared in accordance with
the instructions to Form 10-Q and do not include all of the information and
disclosures required by generally accepted accounting principles, although,
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, 1997.
2 TRANSACTIONS WITH RELATED PARTIES
HRC and HCRE are compensated for services provided to HRP and its real
estate properties and are set forth in the following table for the periods
presented (in thousands):
Entity Three Months
Paid or Ended
REIMBURSED March 31,
---------- ----------------
1998 1997
----- -----
Asset management fee HRC $ 121 $ 103
Property management fee HCRE 391 344
Lease commissions HCRE 387 345
Construction fees HCRE 57 69
Reimbursements of costs (a) HRC 646 645
(a) These costs are mostly recorded as general and administrative
expenses and represent reimbursement to HRC, at cost, for
partnership level salaries, employee and director insurance, and
certain overhead costs. HRP pays, on a monthly basis, the
balance of its account with HRC.
3 MORTGAGES PAYABLE
On February 27, 1998, HRP entered into an agreement to refinance the
mortgage loan secured by Executive Park that became effective March 20,
1998. The new loan reduces the interest rate from 8.87% to an effective
interest rate of 7.32% and extends the amortization period from fifteen
years to approximately twenty-seven years with a maturity date of April 11,
2008. The loan proceeds of $34,000,000 were used (i) to pay the current
principal balance of $28,707,000, (ii) to pay transaction costs of
approximately $766,000, (iii) to pay a prepayment penalty of $1,465,000, and
(iv) for general working capital. The prepayment penalty along with the
write off of $146,000 of unamortized loan costs associated with the retired
loan were expensed and are included in the Statement of Operations as an
extraordinary item as a loss on early extinguishment of debt totaling
$1,611,000.
Page 6
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
4 EARNINGS PER UNIT
Basic earnings per unit is computed by dividing net income (loss)
attributable to the limited partners' interests by the weighted average
number of units outstanding. Earnings per unit assuming dilution is computed
by dividing net income (loss) attributable to the limited partners'
interests by the weighted average number of units and potential units
outstanding. Options to acquire units were issued during 1995 and are
considered to be potential units. The number of potential units is computed
using the treasury stock method which assumes that the increase in the
number of units is reduced by the number of units which could have been
repurchased by HRP with the proceeds from the exercise of these options. The
following table illustrates the amounts used to calculate the weighted
average number of units outstanding:
Three Months Ended
March 31,
------------------
1998 1997
------ -------
Weighted average units outstanding - basic 1,673 1,673
Issuance of units from options 86 86
Repurchase of units from unit option proceeds (20) (39)
------ ------
Weighted average units outstanding - assuming dilution 1,739 1,720
====== ======
5 LITIGATION
Reference is made to Note 9 to the audited consolidated financial statements
contained in Form 10-K for the year ended December 31, 1997.
Beginning in 1997, HRP has been involved in two lawsuits with Gotham
Partners, L.P. The first complaint seeks access to certain books and
records of HRP, a list of the limited partners and reimbursement of the
plaintiff's expenses. The second complaint alleges claims of breach of
fiduciary duties, breach of HRP's partnership agreement, fraud, and as to
Hallwood, aiding and abetting these alleged breaches.
On June 27, 1997, the parties entered into a Stipulation and Order under
which HRP provided to plaintiff copies of certain of the documents
requested. The other claims in the two actions remain outstanding.
On August 27, 1997, defendants moved to dismiss the complaint in the second
action for plaintiff's failure either to make a demand on the general
partner to bring suit or to allege adequately that such a demand was futile.
On February 6, 1998, the Court granted defendants' motion to dismiss but
gave plaintiff thirty days to file an amended complaint. Plaintiffs filed
an amended complaint on March 6, 1998, which defendants have again moved to
dismiss.
HRP's management believes that the claims are without merit and intend to
defend the cases vigorously, but because of their early stages, cannot
predict the outcome of the claims or any possible effect an adverse outcome
might have.
Page 7
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
RESULTS OF OPERATIONS
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
REVENUE FROM PROPERTY OPERATIONS increased $903,000, or 7.1%, for the first
quarter of 1998, compared to the 1997 first quarter. The following table
illustrates the components of the change, in thousands:
Rental income, net $ 880
Expense recoveries (45)
Other property income 68
------
Net increase $ 903
======
Rental income increased due to a rise in average occupancy between the
comparable periods from 91.6% to 94.0% and due to rental rate increases
primarily at the properties in the Atlanta market. As of March 31, 1998, HRP
had leases executed and in place for 94.1% of the portfolio's net rentable
square feet.
INTEREST INCOME increased $12,000 as a result of additional earnings on
overnight investments due to higher average cash balances available for
investment between the periods.
PROPERTY OPERATING EXPENSES decreased $230,000, or 4.0%, for the first quarter
of 1998, compared to the same period in 1997. The following table illustrates
the components of the change, in thousands:
Administrative costs $ (10)
Management fees 66
Marketing and leasing 9
Utilities (154)
Services, including janitorial (57)
Repairs and maintenance (25)
Real estate taxes (45)
Insurance (14)
-------
Net decrease $ (230)
=======
Management fees increased as a result of the increase in occupancy and net
rental income mentioned above. Most of the decline in utilities costs were due
to a milder winter at the Michigan properties during 1998 as compared to the
comparable period in 1997. Service costs declined due to a decrease in snow
removal costs.
INTEREST EXPENSE diminished $34,000, or 1.1%, principally due to the reduction
in average debt levels between the periods as a result of monthly principal
payments.
DEPRECIATION AND AMORTIZATION EXPENSE increased $93,000 primarily due to an
increase in lease commission amortization as a result of new leases executed
during 1997 which have increased the portfolio's occupancy.
GENERAL AND ADMINISTRATIVE EXPENSES increased $85,000 for the first three
months of 1998, as compared to the 1997 period, primarily due to an increase in
state franchise taxes in Michigan and certain personnel costs.
LOSS ON EARLY EXTINGUISHMENT OF DEBT of $1,611,000 in the 1998 period
represents a prepayment penalty of $1,465,000 incurred with the early payoff of
a loan secured by Executive Park and the write off of $146,000 of unamortized
loan costs associated with the retired loan (see Note 3 to the consolidated
financial statements for more information about the refinancing). The new loan
will generate annual cash flow savings of approximately $750,000 in reduced
principal and interest payments.
Page 8
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HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES
HRP is engaged in diversified real estate activities, including the
acquisition, ownership and operation of commercial office and industrial real
estate and other real estate related assets. While it is the General Partner's
primary intention to operate HRP's existing real estate investments and to
acquire and operate additional real estate investments, HRC 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 March 31, 1998, HRP owned twelve real estate properties located in six
states. Seven are commercial office building properties and five are
industrial park properties containing approximately 2,608,000 and 2,554,000 net
rentable square feet, respectively. 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 reducing operating expenses where
possible.
On February 27, 1998, HRP entered into an agreement to refinance the mortgage
loan secured by Executive Park that became effective March 20, 1998. The new
loan reduces the interest rate from 8.87% to an effective interest rate of
7.32% and extends the amortization period from fifteen years to approximately
twenty-seven years with a maturity date of April 11, 2008. The loan proceeds of
$34,000,000 were used (i) to pay the current principal balance of $28,707,000,
(ii) to pay transaction costs of approximately $766,000, (iii) to pay a
prepayment penalty of $1,465,000, and (iv) for general working capital. The
new loan will generate annual cash flow savings of approximately $750,000 in
reduced principal and interest payments.
HRP's cash position increased $1,974,000 during the first three months of 1998
from $6,665,000 as of December 31, 1997 to $8,639,000 as of March 31, 1998.
The sources of cash during the period were $34,000,000 of mortgage principal
proceeds and $1,474,000 of cash provided by operating activities. Uses of cash
during the period were $28,707,000 of mortgage principal refinanced, $1,103,000
of property and tenant improvements, $1,465,000 of mortgage prepayment penalty,
$826,000 of mortgage principal payments, $849,000 of loan fees, and $550,000 of
net loan reserve requirements.
Substantially all of the buildings in eleven of HRP's Properties were
encumbered by and pledged as collateral under non-recourse mortgages as of
March 31, 1998. HRP has no mortgage loans maturing or requiring balloon
principal payments until the year 2000. Based upon loan amortizations in
effect, HRP is required to pay $1,951,000 of principal payments in for the
remainder of 1998.
HRP has estimated and budgeted tenant and capital improvements of approximately
$5,370,000 and lease commissions of about $1,570,000 for 1998. HRP has
incurred $1,103,000 of tenant and capital improvements and $600,000 of lease
commissions in the first three months of 1998 of these estimates.
For the foreseeable future, HRP anticipates that mortgage principal payments,
tenant and capital improvements, and lease commissions will be funded by net
cash from operations. The primary sources of capital to fund any future
acquisitions will be proceeds from the sale or financing of one or more of its
Properties.
Each quarter HRC, as General Partner, reviews the Partnership's capacity to
make cash distributions. HRP has not made any cash distributions since
February, 1992.
This Form 10-Q contains certain forward-looking statements. These statements
include the plans and objectives of management for future operations. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, 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. 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 included in this Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by HRP or any other person that the
objectives and plans of HRP will be achieved.
Page 9
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HALLWOOD REALTY PARTNERS, L.P.
PART II - OTHER INFORMATION
Item
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1 Legal Proceedings None.
2 Changes in Securities 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
2.1 - Loan Agreement between Hallwood 98, L.P.
and Nomura Asset Capital Corporation Page 12
27 - Financial Data Schedule Page 135
(b) Reports on Form 8-K None.
Page 10
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HALLWOOD REALTY PARTNERS, L.P.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HALLWOOD REALTY PARTNERS, L.P.
-----------------------------------------
(Registrant)
By: HALLWOOD REALTY CORPORATION
General Partner
Date: May 6, 1998 By: /s/ WILLIAM L. GUZZETTI
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William L. Guzzetti
President
(Chief Operating Officer)
Date: May 6, 1998 By: /s/ JEFFREY D. GENT
----------- ----------------------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and
Accounting Officer)
Page 11
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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2.1 Loan Agreement between Hallwood 98, L.P.
and Nomura Asset Capital Corporation
27 Financial Data Schedule