<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, 1995
------------------
Commission File Number 0-13291
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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 November 3, 1995)
1
<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,
1995 1994
--------------- --------------
Assets (dollars in thousands)
------
<S> <C> <C>
Notes and interest receivable
Performing............................................. $ 10,603 $ 10,659
Nonperforming, nonaccruing............................. 434 1,502
-------------- --------------
11,037 12,161
Real estate held for sale, net of accumulated
depreciation ($627 in 1995 and $514 in 1994)........... 8,388 8,373
Less - allowance for estimated losses................... (948) (960)
-------------- --------------
18,477 19,574
Real estate held for investment, net of
accumulated depreciation ($45,129 in 1995 and
$31,035 in 1994)....................................... 238,069 213,445
Investment in real estate entities...................... 5,226 8,577
Cash and cash equivalents............................... 981 563
Other assets (including $681 in 1995 and $212 in
1994 from affiliates).................................. 9,237 5,805
-------------- --------------
$ 271,990 $ 247,964
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable.............................. $ 173,852 $ 145,514
Other liabilities (including $28 in 1995 and
$2,314 in 1994 to affiliates).......................... 10,416 9,273
-------------- --------------
184,268 154,787
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................................... (131,354) (125,899)
-------------- --------------
87,722 93,177
-------------- --------------
$ 271,990 $ 247,964
============== ==============
</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,
--------------------------------- ---------------------------------
1995 1994 1995 1994
------------- ------------- ------------- ------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Rents............................ $ 11,972 $ 9,104 $ 34,965 $ 26,376
Interest......................... 373 353 1,097 1,160
Equity in (losses) of
investees...................... (153) (66) (1,152) (77)
-------------- -------------- --------------- -------------
12,192 9,391 34,910 27,459
Expenses
Property operations.............. 7,700 6,622 22,623 20,317
Interest......................... 4,170 2,783 11,772 7,711
Depreciation..................... 2,304 1,544 6,413 4,472
Advisory fee to affiliate........ 517 438 1,511 1,280
General and administrative....... 460 402 1,523 1,280
Litigation settlement............ - - (500) -
-------------- -------------- --------------- -------------
15,151 11,789 43,342 35,060
-------------- -------------- --------------- -------------
(Loss) before gain on sale of
partnership interests, gain
on sale of real estate and
extraordinary gain............... (2,959) (2,398) (8,432) (7,601)
Gain on sale of partnership
interests........................ - - - 2,514
Gain on sale of real estate....... 1,636 2,153 1,636 2,153
Extraordinary gain................ - 1,189 1,341 1,189
-------------- -------------- --------------- -------------
Net income (loss)................. $ (1,323) $ 944 $ (5,455) $ (1,745)
============== ============== =============== =============
Earnings Per Share
(Loss) before extraordinary
gain............................. $ (.49) $ (.09) $ (2.54) $ (1.10)
Extraordinary gain................ - .44 .50 .44
-------------- -------------- --------------- -------------
Net income (loss)................. $ (.49) $ .35 $ (2.04) $ (.66)
============== ============== =============== =============
Common shares used in
computing earnings per share..... 2,674,850 2,674,850 2,674,850 2,674,850
============== ============== =============== =============
</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, 1995
<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,
1995..................... 2,674,850 $ 27 $ 219,049 $ (125,899) $ 93,177
Net (loss)................. - - - (5,455) (5,455)
------------- ----------- -------------- -------------- --------------
Balance, September 30,
1995..................... 2,674,850 $ 27 $ 219,049 $ (131,354) $ 87,722
============= =========== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE> 5
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------------
1995 1994
----------- -----------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected....................................... $ 35,209 $ 26,319
Interest collected.................................... 905 969
Interest paid......................................... (10,770) (6,593)
Payments for property operations...................... (22,768) (21,648)
Advisory fee paid to affiliate........................ (1,538) (1,299)
General and administrative expenses paid.............. (1,609) (1,852)
Distributions from operating cash flow of equity
investees.......................................... 447 240
Cash from replacement reserves........................ 594 125
Litigation settlement................................. 500 -
Other................................................. (447) (733)
-------------- --------------
Net cash provided by (used in) operating
activities...................................... 523 (4,472)
Cash Flows from Investing Activities
Collections on notes receivable....................... 2,725 1,748
Real estate improvements.............................. (6,910) (2,432)
Acquisition of real estate............................ (168) (1,775)
Contributions to equity investees..................... (424) (2,878)
Proceeds from sale of partnership interests........... - 2,076
Proceeds from sale of real estate..................... - 3,285
-------------- --------------
Net cash provided by (used in) investing
activities...................................... (4,777) 24
Cash Flows from Financing Activities
Distributions from financing cash flow of equity
investees.......................................... 853 -
Payments on notes payable............................. (16,058) (1,519)
Proceeds from notes payable........................... 20,075 4,881
Reimbursements to advisor............................. (198) -
-------------- --------------
Net cash provided by financing activities.......... 4,672 3,362
Net increase (decrease) in cash and cash
equivalents........................................... 418 (1,086)
Cash and cash equivalents, beginning of period......... 563 5,902
-------------- --------------
Cash and cash equivalents, end of period............... $ 981 $ 4,816
============== ==============
</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,
---------------------------------
1995 1994
----------- -----------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net (loss) to net cash
provided by (used in) operating activities
Net (loss).............................................. $ (5,455) $ (1,745)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization.......................... 6,736 4,651
Gain on sale of partnership interests.................. - (2,514)
Gain on sale of real estate............................ (1,636) (2,153)
Extraordinary gain..................................... (1,341) (1,189)
Equity in losses of equity investees................... 1,152 77
Distributions from operating cash flow of equity
investees........................................... 447 240
Decrease in interest receivable........................ (11) (1)
(Increase) decrease in other assets.................... 723 (789)
Increase in interest payable........................... 497 748
(Decrease) in other liabilities........................ (589) (1,797)
-------------- --------------
Net cash provided by (used in) operating
activities....................................... $ 523 $ (4,472)
============== ==============
Noncash investing and financing activities
Real estate obtained in satisfaction of a
note receivable with no carrying value
Carrying value of real estate received................. $ 2,519 $ -
Carrying value of debt assumed......................... 2,675 -
Notes payable from acquisition of real estate........... - 10,584
Notes receivable from sale of real estate with
carrying value of $2,679............................... - 5,637
Acquisition of remaining general partner interests
in three partnerships
Carrying value of assets received...................... 22,807 -
Carrying value of liabilities assumed.................. 21,481 -
</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 also has invested
in mortgage loans on real estate, including first, wraparound and junior
mortgage loans. The Company is no longer seeking to fund or acquire new
mortgage loans other than those which it may originate in conjunction with
providing purchase money financing of a property sale.
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,
1995 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1995. 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, 1994 (the "1994 Form
10-K").
NOTE 2. NOTES AND INTEREST RECEIVABLE
In February 1994, the Company provided $6.7 million of purchase money financing
in conjunction with the sale of 1,406 acres of land in sixteen developed
residential and commercial subdivisions located in Maumelle, Arkansas secured
by a first lien on the properties sold. The note receivable bore interest at
8.0% per annum, required annual payments of principal of $850,000 plus accrued
interest and matured in February 1998. The note was guaranteed by companies
affiliated with the borrower. The borrower did not make the scheduled February
1995 principal and interest payments. In September 1995, the Company reached a
settlement with the borrower that provided the following: (i) the payment by
the borrower of $2.5 million in cash; (ii) the Company's release of all land
securing the note; (iii) the Company's acceptance of a new $1.4 million note
secured by 36.3 acres of commercial land, such note bears interest at 9.0% and
matures 120 days from closing (January 1996) and (iv) the Company's receipt of
700,000 shares of the borrower's capital stock, which the borrower has the
option to repurchase at $5.00 per share for two years from closing. The
original sale had been recorded under the cost recovery method with gain being
deferred until the note was collected. With the Company's receipt of $2.5
million on September 12, 1995, it recognized $1.6 million of the gain
previously deferred.
In April 1995, a note receivable with a principal balance of $100,000 plus
accrued interest was paid in full.
7
<PAGE> 8
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
In June 1995, the Company obtained the Gladstell Forest Apartments, a 136 unit
apartment complex in Conroe, Texas through foreclosure of a note receivable
which the Company had received in December 1991 in satisfaction of a debtor's
guarantee of another obligation to the Company. The Company had assigned no
value to the note receivable. In conjunction with the foreclosure, the Company
refinanced the property's $2.7 million mortgage for a like amount with the
Company receiving no net refinancing proceeds.
In April and May 1995, two mortgage notes receivable, secured by developed
residential lots in Greensboro, North Carolina, in the amounts of $19,000 and
$21,000, respectively, were paid in full.
In June 1991, in an effort to develop a potential source for future financing,
the Company entered into an asset sales agreement whereby the Company sold a
participation in one of its mortgage notes in the amount of $1.1 million in
exchange for the assignment of a first mortgage note for the same amount from
an insurance company. In December 1991, the participation in the Company's
mortgage note was increased by $181,000. In return, the Company received a
participation for a like amount in another first mortgage note (the "loan
participation"). In conjunction with these transactions, the Company entered
into a put and guaranty agreement.
Both the mortgage note and the loan participation received by the Company were
in default at December 31, 1991. In the first quarter of 1992, the Company
recorded a provision for losses of $366,000 to reduce the carrying value of the
$1.1 million mortgage note to the estimated fair value of the collateral
property. In April 1992, the property securing the note was deeded to the
Company in lieu of foreclosure. In September 1993, the Company sold the
collateral property for $850,000, receiving $125,000 in cash and providing
purchase money financing of $725,000. The Company recognized no loss on the
sale beyond the amount previously provided. In the third quarter of 1992, the
Company recorded a provision for losses of $184,000 to fully reserve for the
carrying value of the loan participation.
In March 1992, the insurance company was placed in receivership and in June
1992, the Company provided notice to the insurance company, under the terms of
the put and guaranty agreement, of its desire to divest itself of all assets
received. The Receiver refused to allow the enforcement of the terms of the
put and guaranty agreement.
A settlement between the Company and the Receiver was approved by the court on
February 15, 1995. Under the terms of the settlement, the Company paid the
insurance company a total of $1.1 million in July 1995. In exchange, the
Company retained the assets transferred to it by the insurance company as well
as received back from the insurance company the loan participation that the
insurance company had received from the Company. The Company incurred no loss
on the settlement.
8
<PAGE> 9
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. REAL ESTATE AND DEPRECIATION
In February 1995, the Company purchased 8,153 square feet of land across from
the Republic Towers Office Building ("Republic Towers") in Dallas, Texas for
$166,000 in cash.
As discussed in NOTE 2. "NOTES AND INTEREST RECEIVABLE," in June 1995, the
Company obtained the Gladstell Forest Apartments through foreclosure.
On May 5, 1995, Republic Towers sustained considerable damage from flooding,
which disabled the electrical and mechanical systems of the building. The
building was shut down for repairs from May 8, 1995 through July 17, 1995. The
Company believes that the loss is adequately covered by insurance.
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES
At December 31, 1994, the Company was a 50% general partner in both Twinbrook
Village Associates, which owns Twinbrook Village Apartments in Rockville,
Maryland, and Gate Laurel Associates, which owns the Westgate of Laurel
Apartments in Laurel, Maryland. Effective January 1, 1995, the other 50%
general partners conveyed their interests in the partnerships to the Company in
exchange for a release from their general partner liability.
In January 1995, the Company refinanced the mortgage debt secured by the Shadow
Run Apartments, an apartment complex in Pinellas Park, Florida. The new first
mortgage of $7.2 million bears interest at 10.21% per annum, requires monthly
payments of principal and interest of $64,305 and matures February 1, 2002.
The Company used the refinancing proceeds and $300,000 of its cash reserves to
pay the existing mortgage of $7.0 million, accrued but unpaid interest, real
estate taxes, financing fees and closing costs. The Company paid a mortgage
brokerage and equity refinancing fee of $72,000 to Basic Capital Management,
Inc. ("BCM"), the Company's advisor, based on the $7.2 million refinancing.
Prior to the refinancing, the Company had agreed to purchase the remaining
general partner interest in Shadow Run Associates, which owns the Shadow Run
Apartments, for $50,000 in cash. The purchase was completed in April 1995.
The Company owns a combined 63.7% limited and general partner interest and
Income Opportunity Realty Trust ("IORT") owns a 36.3% general partner interest
in Tri-City Limited Partnership ("Tri-City") which owns five properties in
Texas. In July 1995, Tri-City obtained first mortgage financing of $1.4
million secured by the previously unencumbered MacArthur Mills Office Park
located in Dallas, Texas. The mortgage bears interest at 9.32% per annum,
requires monthly payments of principal and interest of $12,186 and matures
August 1, 2005. The Company received $929,000 of the net financing proceeds.
In conjunction with the financing, Tri-City paid a mortgage brokerage and
equity refinancing fee of $14,000 to BCM, based on the $1.4 million financing.
9
<PAGE> 10
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES (Continued)
The Company owns a 60% general partner interest in Nakash Income Associates
("NIA"). NIA owns two wraparound mortgage notes receivable, one of which is
secured by the Green Hills Shopping Center ("Green Hills") in Onandaga, New
York. The shopping center in turn is owned by Green Hills Associates ("GHA").
In July 1995, GHA determined that further investment in Green Hills was not
justified, and further that it intends to deed the property back to the first
lienholder in lieu of foreclosure. As GHA has no other assets, the wraparound
note receivable held by NIA will become uncollectible, and therefore, at June
30, 1995, NIA recorded a provision for loss of $1.5 million to write its
wraparound note receivable down to the balance of the first lien mortgage. The
Company's equity share of the loss is $901,000.
In September 1995, the Company received notice from NIA that one of its
wraparound notes receivable had been modified in conjunction with the
modification of the underlying note payable. NIA recorded a provision for loss
of $212,000 on such modification of which the Company's share is $127,000.
Set forth below is summarized results of operations for the real estate
entities the Company accounts for using the equity method for the nine months
ended September 30, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Rents and interest income............................. $ 7,929
Depreciation.......................................... (1,317)
Property operations................................... (5,366)
Interest expense...................................... (2,006)
Provision for loss.................................... (1,714)
---------
Net loss.............................................. $ (2,474)
=========
</TABLE>
NOTE 5. NOTES PAYABLE
The Company owns Institute Place Lofts, an 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. In July 1994, the property was placed in
bankruptcy. In January 1995, the bankruptcy court approved a plan of
reorganization which provided for a reduction in the mortgage's principal
balance to $4.1 million, reduced the pay rate to 6% per annum in the first
year, increasing to 10.25% per annum in the fourth year, with interest accruing
at 10.25% per annum. In February and March 1995, the Company funded required
escrows of $500,000 to satisfy outstanding property taxes and to cover
projected negative cash flow of the property. The Company recorded no gain or
loss as a result of the debt restructuring.
In March 1995, the Company refinanced the mortgage debt secured by the Fountain
Village Apartments in Tucson, Arizona, in the amount of $6.2
10
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. NOTES PAYABLE (Continued)
million. The Company received net cash of $1.1 million after the payoff of
$4.9 million in existing mortgage debt. The remainder of the refinancing
proceeds were used to fund required repair and tax escrows and the payment of
various closing costs associated with the refinancing. The new mortgage bears
interest at a variable rate of 2.75% above the average yield of United States
Treasury Securities, adjusted annually, (9.13% per annum at September 30,
1995), requires monthly payments of principal and interest and matures April
1, 1998. The Company guaranteed repayment of $1.3 million of the mortgage.
The Company recognized an extraordinary gain of $1.3 million on the payoff of
the existing mortgage. The Company paid a mortgage brokerage and equity
refinancing fee of $62,000 to BCM based on the $6.2 million refinancing.
In April 1995, the Company obtained mortgage financing of $1.2 million secured
by the previously unencumbered Venture Centre Office Building in Atlanta,
Georgia. The Company received net cash of $1.1 million after funding required
tax and insurance escrows and the payment of various closing costs associated
with the financing. The mortgage bears interest at 9.79% per annum, requires
monthly payments of principal and interest of $10,405 and matures May 1, 2005.
The Company guaranteed repayment of the mortgage. The Company paid a mortgage
brokerage and equity refinancing fee of $12,000 to BCM based on the $1.2
million financing.
Also in April 1995, the Company modified and extended three of the mortgage
loans secured by the Dunes Plaza Shopping Center in Michigan City, Indiana.
The three loans, totaling $4.6 million after a principal reduction payment of
$185,000, were consolidated into one loan. In consideration of the Company's
principal paydown, the lender forgave $48,000 of the consolidated loan's
principal balance. The Company recorded an extraordinary gain of $48,000 on
the debt forgiveness. The consolidated loan provides that for every $3.86 of
principal prepayments made by the Company during the first year, the lender
will forgive $1.00 of indebtedness, up to $191,632. Also, for each $3.86 of
certain capital and tenant improvement expenditures approved by the lender, the
lender shall forgive an additional $1.00 of indebtedness, up to $323,507. The
consolidated loan bears interest at 9.5% per annum, requires monthly payments
of principal and interest of $42,505 and matures March 10, 2000.
In May 1995, the Company obtained mortgage financing of $3.0 million secured by
the previously unencumbered Plaza Tower Office Building in St. Petersburg,
Florida. The Company received net cash of $2.2 million after funding required
tax and repair escrows and the payment of various closing costs associated with
the financing. The mortgage bears interest at a variable rate of 3.25% over
the London Interbank Offered Rate ("LIBOR") three month rate, adjusted
quarterly, (10.82% per annum at September 30, 1995), requires monthly payments
of principal and
11
<PAGE> 12
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. NOTES PAYABLE (Continued)
interest of $27,964, and matures May 2000. The Company paid a mortgage
brokerage and equity refinancing fee of $30,000 to BCM based on the $3.0
million financing.
A mortgage principal paydown of $1.6 million was due in June 1995 on the
mortgage secured by the Spa Cove Apartments, in Annapolis, Maryland. The
lender agreed to an extension of such payment until July 31, 1995, in exchange
for the Company's agreement to increase its pay down by $300,000. The Company
made the required $1.9 million paydown. Upon payment, all of the Company's
shareholdings of IORT which had been pledged to the lender as additional
collateral for the mortgage were released.
In July 1995, the Company obtained mortgage financing of $5.5 million secured
by the previously unencumbered Chesapeake Ridge Office Park in San Diego,
California. The Company received net cash of $4.6 million after funding
required tax, insurance, repair and tenant finish escrows and the payment of
various closing costs associated with the financing. The mortgage bears
interest at 9.0% per annum, requires monthly payments of principal and interest
of $46,156 and matures August 2002. The Company paid a mortgage brokerage and
equity refinancing fee of $55,000 to BCM based on the $5.5 million financing.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various lawsuits arising in the ordinary course of
business. The opinion of the Company's management is that the outcome of these
lawsuits will have no material impact on the Company's financial condition or
results of operations.
NOTE 7. SUBSEQUENT EVENTS
In October 1995, the Company obtained first mortgage financing of $750,000
secured by the previously unencumbered Parkway Center in Dallas, Texas. The
Company received net cash of $712,000 after funding required tax and insurance
escrows and the payment of various closing costs associated with the financing.
The mortgage bears interest at a variable rate of prime plus 1.0% adjusted
daily (currently 8.13% per annum), requires monthly payments of principal and
interest of $7,114 and matures November 2000. The Company paid a mortgage
brokerage and equity refinancing fee of $7,500 to BCM based on the financing.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
12
<PAGE> 13
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 has invested in mortgage
loans, including first, wraparound and junior mortgage loans. The Company has
determined that it will no longer seek to fund or acquire new mortgage loans,
other than those which it may originate in conjunction with providing purchase
money financing of a property sale. The Company was organized on September 6,
1983 and commenced operations on January 31, 1984.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $981,000 at September 30, 1995 compared
with $563,000 at December 31, 1994. The Company's principal sources of cash
have been and will continue to be from property operations, proceeds from
property sales, the collection of mortgage notes receivable, borrowings and
distributions from equity investees. 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 expenditures for property maintenance
and improvements.
In March 1995, the Company refinanced the mortgage debt secured by the Fountain
Village Apartments in Tucson, Arizona, in the amount of $6.2 million. The
Company received net cash of $1.1 million after the payoff of $4.9 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
fund required repair and tax escrows and for the payment of various closing
costs associated with the refinancing.
In April 1995, the Company obtained mortgage financing secured by the
previously unencumbered Venture Centre Office Building in Atlanta, Georgia, in
the amount of $1.2 million. The Company received net cash of $1.1 million
after the funding of required tax and insurance escrows and the payment of
various closing costs associated with the financing.
Also in April 1995, the Company modified, extended and consolidated three of
the mortgage loans secured by the Dunes Plaza Shopping Center in Michigan City,
Indiana. In conjunction with the modification, the Company made a $185,000
principal paydown.
In May 1995, the Company obtained mortgage financing secured by the previously
unencumbered Plaza Tower Office Building in St. Petersburg, Florida in the
amount of $3.0 million. The Company received net cash of $2.2 million after
the funding of required tax and repair escrows and the payment of various
closing costs associated with the financing.
In June 1995, the Company received $500,000 in partial settlement from one of
the defendants in a lawsuit brought by the Company against the former owners of
the RCA Building and their agents. The Company made a
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
loan secured by the building in 1987 and filed a foreclosure action which was
subsequently amended in 1990, to include claims of negligent misrepresentation
against the borrowers, their legal counsel, architect and engineers.
The Company owns a combined 63.7% limited and general partner interest in
Tri-City Limited Partnership which owns five properties in Texas. In July
1995, the Company received distributions of $223,000 from the partnership's
operating cash flow, and $929,000 from its financing cash flow. See NOTE 4.
"INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES."
In July 1995, the Company obtained mortgage financing secured by the previously
unencumbered Chesapeake Ridge Office Park in San Diego, California in the
amount of $5.5 million. The Company received net cash of $4.6 million after
funding required tax, insurance, repair and tenant finish escrows and the
payment of various closing costs associated with the financing.
Also in July 1995, the Company made a mortgage principal paydown of $1.9
million on the mortgage secured by the Spa Cove Apartments in Annapolis,
Maryland.
The Company's Board of Directors has approved the Company's repurchase of a
total of 458,000 shares of its Common Stock. Through September 30, 1995, 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
1995.
On a quarterly basis, the Company's management reviews the carrying amount of
the Company's mortgage notes receivable, properties held for investment and
properties held for sale. Generally accepted accounting principles require
that the carrying amount of such assets cannot exceed the lower of their
respective carrying amounts or estimated net realizable value. In an instance
where the estimated net realizable value is less than the carrying amount at
the time of evaluation, a provision for loss is recorded by a charge against
earnings. The estimate of net realizable value of the mortgage notes
receivable is based on management's review and evaluation of the collateral
property securing each mortgage note. The property 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. See "Recent Accounting Pronouncement," below.
Results of Operations
The Company's net loss for the three and nine months ended September 30, 1995
was $4.6 million and $5.5 million, respectively, as compared to net income of
$944,000 and a net loss of $1.7 million in the corresponding
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
periods in 1994. The Company's 1995 net loss includes extraordinary gains of
$1.3 million and a gain on sale of real estate of $1.6 million and its 1994 net
income includes a gain on sale of partnership interest of $2.5 million, a gain
on sale of real estate of $2.2 million and an extraordinary gain of $1.2
million. Fluctuations in the components of the Company's revenues and expenses
between the 1994 and 1995 periods are described below.
Net rental income (rental income less expenses applicable to rental income) was
$4.3 million and $12.3 million for the three and nine months ended September
30, 1995 compared to $2.5 million and $6.1 million for the corresponding
periods in 1994. The increase in net rental income for the three and nine
months of 1995 is attributable in part to properties acquired subsequent to
September 30, 1994 of $507,000 and $1.7 million, respectively, increases of
$961,000 and $2.9 million, respectively, due to increased rental revenue and
decreased property operating expenses at several of the Company's commercial
properties primarily in Texas and California, increases of $596,000 and $1.7
million due to the acquisition of the remaining general partner interests in
three partnerships in 1995, and an increase of $800,000 related to a lease buy
out in the second quarter of 1994 at the Northtown Mall. These increases are
partially offset by decreases of $123,000 and $556,000 in the three and nine
months ended September 30, 1995, respectively, due to properties sold in 1994.
Interest income for the three and nine months ended September 30, 1995 of
$323,000 and $1.1 million was comparable to the $353,000 and $1.2 million for
the corresponding periods in 1994.
Equity in losses of investees was $153,000 and $1.2 million for the three and
nine months ended September 30, 1995 compared to $66,000 and $77,000 for the
corresponding periods in 1994. The increased equity loss for the three months
is primarily due to the modification of a wraparound mortgage note receivable
and underlying note payable by Nakash Income Associates ("NIA"), a partnership
in which the Company has a 60% general partner interest. The increased equity
loss for the nine months is primarily due to the modification discussed above,
and the writedown of a wraparound mortgage note receivable to the balance of an
underlying first lien mortgage also by NIA. The Company's equity share of the
loss on the note modification was $127,000 and its equity share of the note
writedown was $901,000. See NOTE 4. "INVESTMENTS IN EQUITY METHOD REAL ESTATE
ENTITIES."
Interest expense increased to $4.2 million and $11.8 million in the three and
nine months ended September 30, 1995 as compared to $2.8 million and $7.7
million for the corresponding periods in 1994. These increases are
attributable to properties acquired and property financings and refinancings
subsequent to September 30, 1994.
Depreciation expense increased to $2.3 million and $6.4 million in the three
and nine months ended September 30, 1995 as compared to $1.5
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
million and $4.5 million in the corresponding periods in 1994. Increases of
$409,000 and $1.1 million, in the three and nine months of 1995 are due to
properties acquired by the Company subsequent to September 30, 1994 and
increases of $299,000 and $876,000, in the three and nine months of 1995 are
due to increased depreciation of property and tenant improvements. The
increases are partially offset by decreases of $41,000 and $175,000 in the
three and nine months of 1995 due to properties sold in 1994.
The advisory fee increased to $517,000 and $1.5 million in the three and nine
months ended September 30, 1995 as compared to $438,000 and $1.3 million in the
corresponding periods in 1994. The increase is due to the increase in the
Company's gross assets, the basis for such fee. Such fee is expected to
increase as the Company's asset base increases.
General and administrative expenses increased to $460,000 and $1.5 million for
the three and nine months ended September 30, 1995 compared to $402,000 and
$1.3 million in the corresponding periods in 1994. The increases are due to
increases in advisor cost reimbursements, legal fees, and costs related to the
Company's 1994 annual meeting of stockholders, which meeting was held in March
1995. There was no annual meeting of shareholders held in 1994.
In the three months ended September 30, 1995, the Company recognized a gain of
$1.6 million on the collection of the note receivable secured by the Maumelle
land. See NOTE 2. "NOTES AND INTEREST RECEIVABLE." In the first nine months
of 1995, the Company recognized extraordinary gains totaling $1.3 million on
the payoff of the mortgage debt secured by the Fountain Village Apartments and
a principal pay down and modification of the mortgage debt secured by the Dunes
Plaza Shopping Center. See NOTE 5. "NOTES PAYABLE." 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. In the first
quarter of 1994, the Company recognized a gain of $2.5 million on the sale of
its interests in two partnerships. No such gain was recognized in 1995.
Tax Matters
As more fully discussed in the Company's 1994 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, (the "Code"). To
continue to qualify for federal taxation as a REIT under the Code, the Company
is required to hold at least 75% of the value of its total assets in real
estate assets, government securities, cash and cash equivalents at the close of
each quarter of each taxable year. The Code also requires a REIT to distribute
at least 95% of its REIT taxable income, plus 95% of its net income from
foreclosure property, all as defined in Section 857 of the Code, on an annual
basis to stockholders.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Inflation
The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations generally fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the
rate of inflation also affect the sales values of properties, and
correspondingly, the ultimate gains to be realized by the Company from property
sales. To the effect that inflation affects interest rates, the Company's
earnings from short-term investments and the cost of new financings as well as
the cost of its variable note financing will be affected.
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 March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of".
The statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount,
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement (Continued)
but not in excess of the assets carrying amount when originally classified or
held for sale. A corresponding charge or credit to earnings is to be
recognized. Long-lived assets held for sale are not to be depreciated. SFAS
No. 121 is effective for fiscal years beginning after December 15, 1995.
The Company's management has not fully evaluated the effects of adopting SFAS
No. 121, but expects that the Company's policy with regard to the
classification of foreclosed revenue producing properties as assets held for
sale will require reevaluation.
The Company's management estimates that if the Company had adopted SFAS No. 121
effective January 1, 1995, without a change in its policy of classifying
foreclosed revenue producing assets as held for sale its depreciation in the
three and nine months ended September 30, 1995 would have been reduced by
$37,000 and $105,000, respectively, its net loss reduced by a like amount in
each period and that a provision for loss for either impairment of its
properties held for investment or for a decline in estimated fair value less
cost to sell of its properties held for sale would not have been required in
either period.
_______________________________________
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ---------------------------------------------------------
<S> <C>
27.0 Financial Data Schedule, filed herewith.
</TABLE>
(b) Reports on Form 8-K as follows:
None.
18
<PAGE> 19
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.
<TABLE>
<S> <C>
TRANSCONTINENTAL REALTY
INVESTORS, INC.
Date: November 13, 1995 By: /s/ Randall M. Paulson
---------------------------- --------------------------------
Randall M. Paulson
President
Date: November 13, 1995 By: /s/ Thomas A. Holland
---------------------------- --------------------------------
Thomas A. Holland
Executive
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
19
<PAGE> 20
TRANSCONTINENTAL REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Three Months ended September 30, 1995
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- --------------------------------------------------- ------
<S> <C> <C>
27.0 Financial Data Schedule 21
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 981
<SECURITIES> 0
<RECEIVABLES> 11,037
<ALLOWANCES> 948
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 292,213
<DEPRECIATION> 45,756
<TOTAL-ASSETS> 271,990
<CURRENT-LIABILITIES> 0
<BONDS> 173,852
<COMMON> 27
0
0
<OTHER-SE> 87,695
<TOTAL-LIABILITY-AND-EQUITY> 271,990
<SALES> 0
<TOTAL-REVENUES> 34,965
<CGS> 0
<TOTAL-COSTS> 22,623
<OTHER-EXPENSES> 6,413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,772
<INCOME-PRETAX> (8,432)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,432)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,341
<CHANGES> 0
<NET-INCOME> (5,455)
<EPS-PRIMARY> (2.04)
<EPS-DILUTED> (2.04)
</TABLE>
