<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1994
Commission File Number 0-13291
TRANSCONTINENTAL REALTY INVESTORS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 94-6565852
- - - ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
--------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(214) 692-4700
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
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 ___.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.01 par value 2,674,850
- - - ---------------------------- --------------------------------
(Class) (Outstanding at October 28, 1994)
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been examined by
independent certified public accountants, but in the opinion of the management
of Transcontinental Realty Investors, Inc. (the "Company"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Company's consolidated financial position, consolidated results of
operations and consolidated cash flows at the dates and for the periods
indicated, have been included.
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
Assets (dollars in thousands)
------
<S> <C> <C>
Notes and interest receivable
Performing........................................ $ 16,641 $ 12,270
Nonperforming, nonaccruing........................ 593 1,172
-------------- --------------
17,234 13,442
Real estate held for sale, net of accumulated
depreciation ($478 in 1994 and $641 in 1993)...... 8,137 15,577
Less - allowance for estimated losses.............. (960) (5,504)
-------------- --------------
24,411 23,515
Real estate held for investment, net of
accumulated depreciation ($29,447 in 1994 and
$27,509 in 1993).................................. 183,217 179,662
Investment in partnerships......................... 11,094 7,127
Cash and cash equivalents.......................... 4,816 5,902
Other assets (including $392 in 1994 and $117
in 1993 due from affiliates)...................... 6,194 4,889
-------------- --------------
$ 229,732 $ 221,095
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable......................... $ 124,082 $ 116,024
Other liabilities (including $110 in 1994 and $182
in 1993 to affiliates)............................ 10,813 8,489
-------------- --------------
134,895 124,513
Stockholders' equity
Common stock, $.01 par value, authorized, 10,000,000
shares; issued and outstanding, 2,674,850 shares.. 27 27
Paid-in capital.................................... 219,049 219,049
Accumulated distributions in excess of
accumulated earnings.............................. (124,239) (122,494)
-------------- --------------
94,837 96,582
-------------- --------------
$ 229,732 $ 221,095
============== ==============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
2
<PAGE> 3
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------ ----------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Rentals..................... $ 9,104 $ 7,858 $ 26,376 $ 22,763
Interest.................... 353 337 1,160 1,322
Equity in (losses) of
investees................... (66) (15) (77) (528)
-------------- -------------- --------------- -------------
9,391 8,180 27,459 23,557
Expenses
Property operations......... 6,622 6,368 20,317 17,653
Interest.................... 2,783 2,128 7,711 6,444
Depreciation................ 1,544 1,420 4,472 4,013
Provision for losses........ - 142 - 873
Advisory fee to affiliate... 438 386 1,280 1,160
General and administrative.. 402 454 1,280 1,618
-------------- -------------- --------------- -------------
11,789 10,898 35,060 31,761
-------------- -------------- --------------- -------------
(Loss) before gain on
partnership interests, gain
on sale of real estate and
extraordinary gain.......... (2,398) (2,718) (7,601) (8,204)
Gain on sale of partnership
interests................... - - 2,514 -
Gain on sale of real estate.. 2,153 - 2,153 -
Extraordinary gain........... 1,189 500 1,189 1,545
-------------- -------------- --------------- -------------
Net income (loss)............ $ 944 $ (2,218) $ (1,745) $ (6,659)
============== ============== =============== =============
Earnings Per Share
(Loss) before gain on sale of
partnership interests, gain
on sale of real estate and
extraordinary gain........... $ (.89) $ (1.02) $ (2.84) $ (3.04)
Gain on sale of partnership
interests.................. - - .94 -
Gain on sale of real estate... .80 - .80 -
Extraordinary gain............ .44 .19 .44 .57
------------- ------------ ------------- ------------
Net income (loss)............. $ .35 $ (.83) $ (.66) $ (2.47)
============= ============ ============= ============
Weighted average Common
shares used in computing
earnings per share........... 2,674,850 2,678,580 2,674,850 2,693,618
============== ============== =============== =============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
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TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1994
<TABLE>
<CAPTION>
Accumulated
Distributions
Common Stock in Excess of
--------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
---------- --------- ---------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1994..................... 2,674,850 $ 27 $ 219,049 $ (122,494) $ 96,582
Net (loss).................... - - - (1,745) (1,745)
------------ ------- ----------- ---------- ---------
Balance, September 30,
1994..................... 2,674,850 $ 27 $ 219,049 $ (124,239) $ 94,837
============ ======= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
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TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
1994 1993
---------- -----------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rentals collected................................ $ 26,319 $ 23,077
Interest collected............................... 969 803
Interest paid.................................... (6,593) (5,306)
Payments for property operations................. (21,648) (16,100)
Advisory fee paid to affiliate................... (1,299) (1,157)
General and administrative expenses paid......... (1,852) (2,360)
Distributions from operating cash flow of
investees..................................... 240 2,013
Cash from replacement reserves................... 125 487
Other............................................ (733) 1,799
-------------- --------------
Net cash provided by (used in) operating
activities................................. (4,472) 3,256
Cash Flows from Investing Activities
Funding of notes receivable...................... - (2,704)
Collections on notes receivable.................. 1,748 9,921
Real estate improvements......................... (2,432) (4,324)
Acquisition of real estate....................... (1,775) (5,085)
Contributions to investees....................... (2,878) (460)
Proceeds from sale of partnership interests...... 2,076 -
Proceeds from sale of real estate................ 3,285 275
-------------- --------------
Net cash provided by (used in) investing
activities................................. 24 (2,377)
Cash Flows from Financing Activities
Payments on notes payable........................ (1,519) (7,806)
Proceeds from notes payable...................... 4,881 2,746
Shares repurchased............................... - (473)
-------------- --------------
Net cash provided by (used in) financing
activities................................. 3,362 (5,533)
Net (decrease) in cash and cash equivalents....... (1,086) (4,654)
Cash and cash equivalents, beginning of period.... 5,902 11,780
-------------- --------------
Cash and cash equivalents, end of period.......... $ 4,816 $ 7,126
============== ==============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
5
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TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------------
1994 1993
---------- -----------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net (loss) to net cash
provided by (used in) operating activities
Net (loss)......................................... $ (1,745) $ (6,659)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization.................... 4,651 4,200
Provision for losses............................. - 873
Gain on sale of partnership interests............ (2,514) -
Gain on sale of real estate...................... (2,153) -
Extraordinary gain............................... (1,189) (1,545)
Equity in losses of investees.................... 77 528
Distributions from investees in excess of current
period earnings............................... 240 2,013
Decrease in interest receivable.................. (1) (310)
(Increase) decrease in other assets.............. (789) 2,596
Increase in interest payable..................... 748 742
Increase (decrease) in other liabilities......... (1,797) 818
-------------- --------------
Net cash provided by (used in) operating
activities................................. $ (4,472) $ 3,256
============== ==============
Noncash investing and financing activities
Carrying value of real estate acquired through
foreclosure (in satisfaction of notes
receivable with carrying values of $2,663 in
1993)......................................... $ - $ 2,213
Notes receivable from sales of real estate with
carrying value of $2,679 in 1994 and $1,686
in 1993....................................... 5,637 1,130
Notes payable from acquisition of real estate.... 10,584 12,375
Carrying value of property acquired through
assumption of debt of $6,559.................. - 6,559
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE> 7
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The Company, a Nevada corporation, is successor to a California business trust
which was organized on September 6, 1983. The Company invests in real estate
through direct equity ownership, leases and partnerships and it also invests in
mortgage loans on real estate, including first, wraparound and junior mortgage
loans.
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the nine month period ended September 30,
1994 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1994. For further information, refer to the
Consolidated Financial Statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993 Form
10-K").
NOTE 2. REAL ESTATE
In February 1994, the Company sold all of its Maumelle, Arkansas, residential
and commercial subdivisions, retaining 114 residential lots, for $8.4 million.
The Company received $1.7 million in cash and provided purchase money financing
of $6.7 million. The note receivable bears interest at 8.0% per annum,
requires annual payments of principal of $850,000 plus accrued interest through
maturity in February 1998 and provides discounts of up to $1.2 million for
early payments. The note is guaranteed by companies affiliated with the
purchaser. The Company has recorded this transaction as a cost recovery method
sale and accordingly has deferred recognizing a gain on the sale pending
collection of the note receivable. The Company paid a real estate brokerage
commission of $215,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate
of the Company's advisor, based on $7.2 million, the sales price of $8.4
million less the discounts allowable of $1.2 million. Through September 1994,
the Company has sold or otherwise disposed of an additional 44 lots for a total
of $101,000 in cash recognizing no gain or loss on the sales.
In April 1994, the Company purchased the Corporate Center at Beaumeade I and
II, a two building, 100,411 square foot industrial facility in Ashburn,
Virginia, for $3.3 million, consisting of $600,000 in cash and new mortgage
financing of $2.7 million. The mortgage bears interest at 9.28% per annum,
requires monthly payments of principal and interest of $22,132 and matures on
April 30, 1999. The Company paid a real estate brokerage commission of
$119,000 to Carmel Realty and an acquisition fee of $33,000 to Basic Capital
Management, Inc. ("BCM"), the Company's advisor, based on the $3.3 million
purchase price. In October 1994, the
7
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
Company purchased the third building in the center, a 79,409 square foot
industrial facility for $2.7 million, consisting of $600,000 in cash and new
mortgage financing of $2.1 million. The mortgage bears interest at 10.09% per
annum, requires monthly payments of principal and interest of $19,693 and
matures on September 30, 1999. The Company paid a real estate brokerage
commission of $100,000 to Carmel Realty and an acquisition fee of $27,000 to
BCM based on the $2.7 million purchase price.
In June 1994, the Company purchased the Parke Long Industrial Buildings, a four
building, 222,197 square foot office/industrial facility in Chantilly,
Virginia, for $8.8 million, consisting of $900,000 in cash and $7.9 million in
seller mortgage financing. The mortgage bears interest at 6.0% per annum in
the first two years, increasing to 7.0% per annum in the third year, 8.0% per
annum in the fifth year and 9.0% in the ninth year. The mortgage requires
monthly payments of interest only in the first two years and monthly payments
of principal and interest thereafter, and matures in June 2006. The Company
paid a real estate brokerage commission of $246,000 to Carmel Realty and an
acquisition fee of $88,000 to BCM, based on the $8.8 million purchase price.
In June 1994, the Company sold the RCA Building, a vacant 100,800 square foot
office building in Mt. Laurel, New Jersey, which was held for sale, for
$100,000 providing purchase money financing for the entire sales price. The
Company also received an equity participation interest in the subsequent
appreciation of the building, if any. The Company incurred no loss on the sale
beyond the amounts which had been previously provided.
The Company owns Institute Place Lofts, a 142,215 square foot office building
in Chicago, Illinois. The Company did not payoff the $6.5 million mortgage
secured by the property on its June 1, 1993 maturity, as the Company determined
further investment in the property could not be justified without a substantial
modification of the mortgage. For the six months ended June 30, 1994, the
property's cash flow of $358,176 was remitted to the lender all of which was
applied to unpaid real estate taxes. In July 1994, the property was placed in
bankruptcy and all cash flow for the three months ended September 30, 1994 of
$212,803 has been remitted to the court appointed Receiver. The Company is
negotiating with the lender to obtain a long-term modification of this
mortgage. The Company has filed a settlement plan with the court which
provides for a reduction in the mortgage's principal balance to $4.1 million,
reduces the pay rate to 6% per annum in the first year, increasing to 10.25%
per annum in the fourth year, with a constant accrue rate of 10.25% per annum,
and the Company to fund $500,000 to satisfy outstanding taxes and to cover the
negative cash flow of the property. If such negotiations are not successful,
and the lender forecloses on the property securing the mortgage, the Company
would
8
<PAGE> 9
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
recognize a gain of $1.1 million, the amount by which the mortgage balance
exceeds the property's carrying value, which approximates the fair value of the
property.
In September 1994, the Company sold the Cedar Creek Apartments, a 260 unit
apartment complex in Charlotte, North Carolina, for $10.1 million, receiving
net cash of $2.2 million after payoff of the first mortgage of $7.7 million and
funding a $250,000 escrow for correction of a zoning violation, which is
expected to be received before the end of the year. The Company recognized a
gain on the sale of $2.2 million. The Company paid a real estate sales
commission of $272,000 to Carmel Realty based on the $10.1 million sales price.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In January 1994, the Company instituted foreclosure proceedings on a mortgage
note receivable secured by an office building in Madison, Wisconsin. In June
1994, the Company wrote off the debt as uncollectible, the building having been
foreclosed upon by the local taxing authority. The Company recognized no loss
beyond that which had previously been provided.
In June 1994, a note receivable with a principal balance of $2.7 million and
secured by an apartment complex in Dallas, Texas, was paid down and modified.
The Company received $1.3 million in cash and subordinated the remaining note
balance of $1.4 million to a new first mortgage secured by the property. The
$1.4 million note was also split into two new notes. One new note, in the
amount of $600,000, is secured by a second lien mortgage on the property, bears
interest at the prime rate plus 1%, requires monthly payments of interest only
and matures in June 2004. The second new note in the amount of $769,000, is
unsecured, bears interest at the prime rate plus 1% and requires payments of
net cash flow from property operations.
In July and August 1994, the Company received $120,000 and $105,000,
respectively, from the payoff of two notes receivable at their maturities.
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES
The Company owned a 55% limited partnership interest in One Penn Square
Associates Limited Partnership ("One Penn Square"), and accordingly accounted
for it under the equity method as control of the partnership was maintained by
the general partner. In January 1992, the partnership stopped making payments
on the first mortgage secured by One East Penn Square Office Building in
Philadelphia, Pennsylvania. An affiliate of the lender owned the remaining 45%
limited partnership interest. In May 1993, the lender filed a foreclosure
action against One Penn Square. The court appointed a receiver for the
property on October 6, 1993. The lender had also filed an action against the
partnership and the Company
9
<PAGE> 10
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES (Continued)
to set aside, as a fraudulent conveyance, payments from the partnership in 1992
and in 1993 to the Company of $1.8 million made to repay the Company's mortgage
note secured by a second lien on the One East Penn Square Office Building. In
April 1994, the Company and the lender reached an agreement which provided that
the Company would pay $575,000 to the lender and convey the Company's interest
in the partnership to the lender. In August 1994, the Company made the
required $575,000 payment, conveyed its partnership interest to the lender and
the parties executed mutual releases and all litigation between the parties was
dismissed. The Company recognized an extraordinary gain of $1.2 million as the
carrying value of its investment was less than the debt secured by the building
due to previously recognized equity losses.
In March 1994, the Company sold its 50% general partnership interests in
Pilgrim Village Associates and Pilgrim Village Associates II general
partnerships which owned the Pilgrim Village Apartments I and II, respectively,
in Canton Township, Michigan, to the co- general partner for $2.6 million in
cash. The Company recognized a gain of $2.5 million on the sale.
The following information summarizes the results of operations of the Company's
equity method investees for the nine months ended September 30, 1994 (dollars
in thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Rentals and interest income........................... $ 11,421
Depreciation.......................................... (1,592)
Property operations................................... (6,529)
Interest expense...................................... (3,417)
--------
Net (loss)............................................ $ (117)
========
</TABLE>
NOTE 5. NOTES PAYABLE
In January 1994, the mortgage secured by the Northtown Mall, a shopping center
in Dallas, Texas, matured. In February 1994, the Company reached an agreement
with the lender to modify and extend the mortgage, with the Company making a
principal paydown of $200,000. The modified mortgage required an additional
principal payment of $200,000 in July 1994. The Company did not make the July
1994 principal payment when due. In October 1994, the Company repaid the loan
in full.
In March 1994, the Company entered into a loan commitment with a Northtown Mall
tenant, providing for a loan to the Company of $1.4 million secured by a second
lien on the shopping center. The loan proceeds were used primarily for
specified renovations and repairs to the shopping center. The second lien
mortgage bore interest at 8.5% per annum, required monthly payments of interest
only and matured in March 1999. In October 1994, the Company reached agreement
with the tenant to finance an additional $1.9 million, the proceeds of which
were used
10
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. NOTES PAYABLE (Continued)
in part to repay the first mortgage secured by the property described above.
At funding of the second loan, the two loans were combined and the first loan
restructured. The combined mortgage bears interest at 12% per annum, requires
monthly payments of interest only of $32,500 and matures September 30, 1995.
In April 1994, the Company refinanced the mortgage debt secured by the Heritage
Apartments in Tulsa, Oklahoma in the amount of $2.1 million. The Company
received net cash of $1.2 million after the payoff of $650,000 in existing
mortgage debt and funding required repair and tax escrows and the payment of
various closing costs associated with the financing. The new mortgage bears
interest at 9.25% per annum, requires monthly payments of principal and
interest of $16,978 and matures May 1, 2001. The Company paid a mortgage
brokerage and equity refinancing fee of $21,000 to BCM based on the $2.1
million refinancing.
In July 1994, the Company refinanced the mortgage debt secured by the
Waterstreet Office Building in Boulder, Colorado in the amount of $8.6 million.
The Company received net cash of $1.4 million after the payoff of $6.8 million
in existing mortgage debt and funding required tenant improvement escrows and
the payment of various closing costs associated with the financing. The new
mortgage bears interest at 9.99% per annum, requires monthly payments of
principal and interest of $82,935 and matures February 28, 1999. The Company
paid a mortgage brokerage and equity refinancing fee of $86,000 to BCM based on
the $8.6 million refinancing.
In September 1994, the Company obtained first mortgage financing of $1.0
million secured by the previously unencumbered South Cochran Apartments in Los
Angeles, California. The mortgage bears interest at a variable rate of 4 1/2%
above the Eleventh District monthly weighted average cost of funds of rate,
currently 10% per annum, requires monthly payments of principal and interest
and matures October 1, 2004. The mortgage is guaranteed by the Company.
NOTE 6. EXTRAORDINARY GAIN
In August 1994, the Company recognized an extraordinary gain of $1.2 million on
the conveyance of it's limited partner interest in One Penn Square to the
lender on a mortgage secured by the property, in satisfaction of all claims
against the Company. See "NOTE 4. INVESTMENT IN EQUITY METHOD REAL ESTATE
ENTITIES".
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various lawsuits arising in the ordinary course of
business. The Company's management is of the opinion that the outcome of these
lawsuits will have no material impact on the Company's financial condition.
11
<PAGE> 12
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 8. SUBSEQUENT EVENTS
In October 1994, the Company purchased Corporate Pointe at Westfields, a 70,000
square foot office building located in Chantilly, Virginia for $4.0 million,
consisting of $1.0 million in cash and new mortgage financing of $3.0 million.
The mortgage bears interest at 10.09% per annum, requires monthly payments of
principal and interest of $29,052 and matures September 30, 1999. The Company
paid a real estate brokerage commission of $139,000 to Carmel Realty and
$40,000 to BCM based on the $4.0 million purchase price. Concurrently, the
Company also purchased from an affiliate of the seller the third of the
Corporate Center at Beaumeade industrial facilities. See NOTE 2. "REAL
ESTATE".
In November 1994, the Company purchased the Summerfield Apartments, a 224 unit
apartment complex in Orlando, Florida, for $5.6 million, consisting of $800,000
in cash and assumption of existing mortgage debt of $4.8 million. The mortgage
bears interest at a variable rate based on the LIBOR six month rate plus 4.10%,
currently 10.25% per annum, requires monthly payments of principal and interest
of $43,240 and matures March 1, 2024. The Company paid a real estate brokerage
commission of $182,000 to Carmel Realty and $56,000 to BCM based on the $5.6
million purchase price.
Also in November 1994, the Company purchased the Hartford Building, a 174,227
square foot office building in Dallas, Texas, for $3.0 million, consisting of
$700,000 in cash and seller provided financing of $2.3 million. The mortgage
bears interest at 7% per annum in the first year, increasing to 8% per annum in
the second year and thereafter. The mortgage requires monthly payments of
principal and interest and matures October 31, 1999. The Company guaranteed
the first $450,000 of the principal balance. The Company paid a real estate
brokerage commission of $110,000 to Carmel Realty and an acquisition commission
of $30,000 to BCM, based on the $3.0 million purchase price.
________________________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Transcontinental Realty Investors, Inc. (the "Company") invests in real estate
through direct ownership, leases and partnerships and in mortgage loans,
including first, wraparound and junior mortgage loans. The Company was
organized on September 6, 1983 and commenced operations on January 31, 1984.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
Cash and cash equivalents aggregated $4.8 million at September 30, 1994
compared with $5.9 million at December 31, 1993. The Company's principal
sources of cash have been and will continue to be from property operations,
proceeds from property and mortgage note sales, the collection of mortgage
notes receivable and borrowings. The Company anticipates that its cash on
hand, as well as cash generated from the collection of mortgage notes
receivable, sales of properties, borrowings against certain of the Company's
unencumbered properties and refinancing or extending certain of its mortgage
debt will be sufficient to meet all of the Company's cash requirements,
including debt service obligations and property maintenance and improvements.
In February 1994, the Company sold all of its Maumelle, Arkansas, residential
and commercial subdivisions, retaining 114 residential lots, for $8.4 million.
The Company received $1.7 million in cash and provided purchase money financing
of $6.7 million. Through September 1994, the Company has sold or otherwise
disposed of 44 of its remaining residential lots for $101,000 in cash.
In March 1994, the Company sold its 50% general partnership interests in
Pilgrim Village Associates and Pilgrim Village Associates II general
partnerships which own the Pilgrim Village Apartments I and II, respectively,
in Canton Township, Michigan, to the co- general partner for $2.6 million in
cash.
In February 1994, the Company modified and extended the first lien mortgage
debt secured by the Northtown Mall in Dallas, Texas, which required a principal
paydown of $200,000. In March 1994, the Company entered into a loan commitment
with a tenant, providing for a loan to the Company of $1.4 million secured by a
second lien on the shopping center. In October 1994, the Company reached an
agreement with the second lienholder to refinance the first lien debt in the
amount of $1.9 million. The Company paid an additional $400,000 to the first
lienholder to retire such debt.
In April 1994, the Company refinanced the mortgage debt secured by the Heritage
Apartments in Tulsa, Oklahoma. The Company received net cash of $1.2 million
after the payoff of the existing mortgage debt of $650,000 and funding of
required repair and tax escrows and payment of various closing costs associated
with the financing.
Also in April 1994, the Company purchased the Corporate Center at Beaumeade I
and II in Ashburn, Virginia for $3.3 million, consisting of $600,000 in cash
and new mortgage financing of $2.7 million.
In June 1994, the Company purchased the Parke Long Industrial Buildings in
Chantilly, Virginia for $8.8 million, consisting of $900,000 in cash and $7.9
million in seller financing.
Also in June 1994, the Company received a $1.3 million paydown on a mortgage
note receivable.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
In July and August 1994, the Company received $120,000 and $105,000,
respectively, from the payoff of two notes receivable at their maturities.
In July 1994, the Company refinanced the mortgage debt secured by the
Waterstreet Office Building in Boulder, Colorado in the amount of $8.6 million.
The Company received net cash of $1.4 million after the payoff of $6.8 million
in existing mortgage debt and funding required tenant improvement escrows.
In August 1994, the Company paid $575,000 and transferred its limited partner
interest in One Penn Square Associates Limited Partnership to the lender on the
mortgage secured by the One East Penn Square Office Building in Philadelphia,
Pennsylvania, which was owned by the partnership in settlement of all of the
lender's claims against the Company.
In September 1994, the Company sold the Cedar Creek Apartments in Charlotte,
North Carolina, for $10.1 million receiving cash of $2.2 million after payoff
of the first lien mortgage of $7.7 million and funding a $250,000 escrow for
correction of a zoning violation.
Also in September 1994, the Company obtained first mortgage financing of $1.0
million secured by the previously unencumbered South Cochran Apartments in Los
Angeles, California.
In October 1994, the Company purchased Corporate Center at Beaumeade III in
Ashburn, Virginia for $2.7 million, consisting of $600,000 in cash and new
mortgage financing of $2.1 million.
Also in October 1994, the Company purchased Corporate Point at Westfield in
Chantilly, Virginia for $4.0 million, consisting of $1.0 million in cash and
new mortgage financing of $3.0 million.
In November 1994, the Company purchased the Summerfield Apartments in Orlando,
Florida for $5.6 million, consisting of $800,000 in cash and assumption of
existing mortgage debt of $4.8 million.
Also in November 1994, the Company purchased the Hartford Building in Dallas,
Texas for $3.0 million, consisting of $700,000 in cash and seller provided
financing of $2.3 million.
The Company's Board of Directors has approved the Company's repurchase of a
total of 458,000 shares of its Common Stock. Through October 28, 1994, the
Company had purchased a total of 233,725 shares, for an aggregate purchase
price of $1.7 million. The Company has repurchased none of its shares during
1994.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations
The Company's net loss for the nine months ended September 30, 1994 was $1.7
million as compared to a net loss of $6.7 million in the corresponding period
in 1993. The Company's net income for the three months ended September 30,
1994 was $944,000 as compared to a net loss of $2.2 million in the
corresponding period in 1993. The Company's net income for the three months
ended September 30, 1994 is due to the gain on the sale of real estate of $2.2
million and the extraordinary gain of $1.2 million, both of which are more
fully described below. Fluctuations in the other major components of the
Company's revenues and expenses between the 1993 and 1994 periods are also
described below.
Net rental income (rental income less property operating expenses) was $2.5
million and $6.1 million for the three and nine months ended September 30, 1994
compared to $1.5 million and $5.1 million for the corresponding periods in
1993. The increase for the three and nine months of 1994 is attributable to
net rental income of $501,000 and $1.3 million, respectively, from properties
acquired subsequent to the third quarter of 1993 and increase of $377,000 and
$388,000, respectively, due to increased rental revenue and decreased property
operating expenses at several of the Company's residential and commercial
properties. The nine months increase being partially offset by a decrease of
$882,000 due to a lease buyout at the Northtown Mall in the second quarter of
1994.
Although performing receivables have increased by one-third, the note
responsible for this increase is accounted for under the cost recovery method
and as such, no income is recognized pending a portion of principal
collections. See NOTE 2. "REAL ESTATE". Accordingly, interest income for the
three months ended September 30, 1994 was $353,000 compared to $337,000 in the
same period in 1993. The increase is attributable to the loans acquired in
1993. Interest income decreased to $1.2 million in the nine months ended
September 30, 1994 compared to $1.3 million in the same period in 1993.
Equity in (losses) of investees was a loss of $66,000 and $77,000 for the three
and nine months ended September 30, 1994 compared to a loss of $15,000 and
$528,000 for the corresponding periods in 1993. The decrease in equity losses
for the nine months ended September 30, 1994 is due primarily to the Company
ceasing to record equity losses on the One East Penn partnership. See NOTE 4.
"INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES."
Interest expense for the three months ended September 30, 1994 was $2.8 million
as compared to $2.1 million for the corresponding period in 1993. This
increase is attributable to properties acquired and property refinancings
subsequent to September 30, 1993. This increase is partially offset by a
decrease of $260,000 attributable to loans paid off or modified during 1993.
Interest expense increased to $7.7 million in the nine months ended
September 30, 1994 compared to $6.4 million in
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
the same period in 1993. The increase for the nine months is generally
attributable to the same factors as the increase for the three months ended
September 30, 1994.
Depreciation expense increased to $1.5 million and $4.5 million in the three
and nine months ended September 30, 1994 as compared to $1.4 million and $4.0
million in the corresponding periods in 1993. These increases are attributable
to properties acquired by the Company subsequent to September 30, 1993.
The Company recorded a provision for losses of $142,000 and $873,000 in the
three and nine months ended September 30, 1993. The 1993 provision for losses
includes $731,000 to reduce the carrying value of a property held for sale to
its estimated fair value. No such provision was required in 1994.
The advisory fee increased to $438,000 and $1.3 million in the three and nine
months ended September 30, 1994 as compared to $386,000 and $1.2 million in the
corresponding periods in 1993. The increase is due to the increase in the
Company's gross assets, the basis for such fee. The advisory fee is expected
to continue to increase as the Company makes additional property acquisitions.
General and administrative expenses decreased to $402,000 and $1.3 million for
the three and nine months ended September 30, 1994 compared to $454,000 and
$1.6 million in the corresponding periods in 1993. The decrease is primarily
attributable to decreased legal fees.
For the three and nine months ended September 30, 1994, the Company recognized
a gain of $2.1 million on the sale of Cedar Creek Apartments, and an
extraordinary gain of $1.2 million on the disposition of a limited partnership
interest. See NOTE 2. "REAL ESTATE" and NOTE 4. "INVESTMENTS IN EQUITY METHOD
REAL ESTATE ENTITIES". In the first quarter of 1994, the Company recognized a
gain of $2.5 million on the sale of its interest in two partnerships. See NOTE
4. "INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES." In the three and nine
months ended September 30, 1993, the Company recognized an extraordinary gain
of $1.0 million as a result of the forgiveness of debt related to the Fountain
Village mortgage modification.
On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage loans, properties held for investment and properties
held for sale. Generally accepted accounting principles require that the
carrying value of an investment held for sale cannot exceed the lower of its
cost or its estimated net realizable value. In those instances in which
estimates of net realizable value of the Company's properties are less than the
carrying value thereof at the time of evaluation, a provision for loss is
recorded by a charge against operations. The estimate of net realizable value
of the mortgage loans is based on management's review and evaluation of the
collateral
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
properties securing the mortgage loans. The review generally includes
selective property inspections, a review of the property's current rents
compared to market rents, a review of the property's expenses, a review of the
maintenance requirements, discussions with the manager of the property and a
review of the surrounding area. Future quarterly reviews could cause the
Company's management to adjust its estimates of net realizable value.
Income Tax Aspects
As more fully discussed in the Company's 1993 Form 10-K, the Company has
elected and, in the opinion of the Company's management, qualified, to be taxed
as a Real Estate Investment Trust ("REIT"), as defined under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended, and as such, will
not be taxed for federal income tax purposes on that portion of its taxable
income which is distributed to stockholders provided that at least 95% of its
REIT taxable income is distributed.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Company may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances. In addition, certain environmental
laws impose liability for release of asbestos- containing materials into the
air, and third parties may seek recovery from the Company for personal injury
associated with such materials.
The Company's management is not aware of any environmental liability relating
to the above matters that would have a material adverse effect on the Company's
business, assets or results of operations.
Recent Accounting Pronouncement
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 114 - "Accounting by Creditors
for Impairment of a Loan" which amends SFAS No. 5 - "Accounting for
Contingencies" and SFAS No. 15 - "Accounting by Debtors and Creditors for
Troubled Debt Restructurings." The statement requires that notes receivable be
considered impaired when "based on current information and events, it is
probable that a creditor will be unable to collect all amounts due, both
principal and interest, according to the contractual terms of the loan
agreement". Impairment is to be measured either on the present value of
expected future cash flows discounted at the note's effective interest rate or
if the note is collateral dependent, on the fair value of the collateral. In
October
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement (Continued)
1994, the FASB issued SFAS No. 118 - "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosure" which amends SFAS No. 114. SFAS
No. 118 eliminates the income recognition provision of SFAS No. 114,
substituting disclosure of the creditor's policy of income recognition on
impaired notes. SFAS No. 114 and SFAS No. 118 are both effective for fiscal
years beginning after December 15, 1994. The Company's management has not
fully evaluated the effects of implementing these statements, but expects that
they will not affect the Company's interest income recognition policy but may
require the classification of otherwise performing loans as impaired.
__________________________________
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Olive Litigation. In February 1990, Transcontinental Realty Investors, Inc.
(the "Company") together with Continental Mortgage and Equity Trust ("CMET"),
Income Opportunity Realty Trust ("IORT") and National Income Realty Trust
("NIRT"), three real estate entities with, at the time, the same officers,
directors or trustees and advisor as the Company, entered into a settlement of
a class and derivative action entitled Olive et al. v. National Income Realty
Trust et al. relating to the operation and management of each of the entities.
On April 23, 1990, the court granted final approval of the terms of the
settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Modification") which settles subsequent
claims of breaches of the settlement agreement which were asserted by the
plaintiffs and modifies certain provisions of the April 1990 settlement. The
Modification was preliminarily approved by the court on July 1, 1994. At a
hearing held on November 1, 1994, the court indicated that it would enter a
judgment approving the Modification. The Modification shall become effective
at such time as the court's judgment becomes final.
The Modification, among other things, provides for the addition of three new
unaffiliated members of the Company's Board of Directors and sets forth new
requirements for the approval of any transactions with affiliates over the next
five years. In addition, Basic Capital Management, Inc., the Company's
advisor, Gene E. Phillips and William S. Friedman have agreed to pay a total of
$1.2 million to CMET, IORT, NIRT and the Company.
Under the Modification, the Company, CMET, IORT and NIRT and their shareholders
will release the defendants from any claims relating to the plaintiffs'
allegations. The Company, CMET, IORT and NIRT have also agreed to waive any
demand requirement for the plaintiffs to pursue
18
<PAGE> 19
ITEM 1. LEGAL PROCEEDINGS (Continued)
claims on behalf of each of them against certain persons or entities. The
Modification also requires that any shares of the Company held by Messrs.
Phillips, Friedman or their affiliates shall be (1) voted in favor of the
reelection of all current Board members that stand for reelection during the
two calendar years following the effective date of the Modification and (ii)
voted in favor of all new Board members appointed pursuant to the terms of the
Modification that stand for reelection during the three calendar years
following the effective date of the Modification.
The Modification also terminates a number of the provisions under the
Stipulation of Settlement, including the requirement that the Company, CMET,
IORT and NIRT maintain a Related Party Transaction Committee and a Litigation
Committee of their respective Boards. The court will retain jurisdiction to
enforce the Modification.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- - - ------- ---------------------------------------------------------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K as follows:
None.
19
<PAGE> 20
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.
TRANSCONTINENTAL REALTY
INVESTORS, INC.
Date: November 14, 1994 By: /s/ Oscar W. Cashwell
Oscar W. Cashwell
President
Date: November 14, 1994 By: /s/ Hamilton P. Schrauff
Hamilton P. Schrauff
Executive Vice President and
Chief Financial Officer
20
<PAGE> 21
TRANSCONTINENTAL REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended September 30, 1994
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- - - ------- --------------------------------------------------- ------
<S> <C> <C>
27.0 Financial Data Schedule 22
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 4,816
<SECURITIES> 0
<RECEIVABLES> 17,234
<ALLOWANCES> 960
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 221,279
<DEPRECIATION> 29,925
<TOTAL-ASSETS> 229,732
<CURRENT-LIABILITIES> 0
<BONDS> 124,082
<COMMON> 27
0
0
<OTHER-SE> 94,810
<TOTAL-LIABILITY-AND-EQUITY> 229,732
<SALES> 0
<TOTAL-REVENUES> 26,376
<CGS> 0
<TOTAL-COSTS> 20,317
<OTHER-EXPENSES> 4,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,711
<INCOME-PRETAX> (7,601)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,601)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,189
<CHANGES> 0
<NET-INCOME> (1,745)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
