<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, 1996
Commission File Number 1-9240
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 3,929,308
- ---------------------------- ---------------------------------
(Class) (Outstanding at November 1, 1996)
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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,
1996 1995
------------- ------------
Assets (dollars in thousands)
------
<S> <C> <C>
Notes and interest receivable
Performing........................................ $ 9,149 $ 9,916
Nonperforming, nonaccruing........................ 387 1,150
-------------- --------------
9,536 11,066
Less - allowance for estimated losses............... (926) (1,049)
-------------- --------------
8,610 10,017
Foreclosed real estate held for sale, net of
accumulated depreciation ($33 in 1995)............ 1,219 2,460
Real estate held for sale, net of accumulated
depreciation ($1,684 in 1995)..................... 943 3,415
-------------- --------------
2,162 5,875
Real estate held for investment, net of
accumulated depreciation ($48,215 in 1996 and
$42,455 in 1995).................................. 217,155 220,249
Investment in real estate entities.................. 4,649 5,086
Cash and cash equivalents........................... 2,700 9,620
Other assets (including $358 in 1996 and $733 in
1995 from affiliates)............................. 10,717 9,333
-------------- -------------
$ 245,993 $ 260,180
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable.......................... $ 157,160 $ 159,889
Other liabilities (including $388 in 1996 and $677
in 1995 to affiliates)............................ 7,745 11,107
-------------- --------------
164,905 170,996
Stockholders' equity
Common stock, $.01 par value, authorized, 10,000,000
shares; issued and outstanding, 4,012,275 shares.. 40 40
Paid-in capital..................................... 219,036 219,036
Accumulated distributions in excess of
accumulated earnings.............................. (137,988) (129,892)
-------------- --------------
81,088 89,184
-------------- -------------
$ 245,993 $ 260,180
============== ==============
</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,
------------------------- -----------------------
1996 1995 1996 1995
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
(dollars in thousands, except per share)
Revenues
Rents....................... $ 11,415 $ 11,972 $ 33,561 $ 34,965
Interest.................... 361 373 1,126 1,097
-------------- -------------- --------------- -------------
11,776 12,345 34,687 36,062
Expenses
Property operations......... 7,040 7,700 21,372 22,623
Equity in losses of
investees.................. 56 153 102 1,152
Interest.................... 3,794 4,170 11,217 11,772
Depreciation................ 2,125 2,304 6,290 6,413
Advisory fee to affiliate... 464 517 1,410 1,511
General and administrative.. 632 460 1,779 1,523
Litigation settlement....... - - - (500)
Provision for losses........ - - 1,579 -
-------------- -------------- --------------- -------------
14,111 15,304 43,749 44,494
-------------- -------------- --------------- -------------
(Loss) before gain (loss) on
sale of real estate and
extraordinary gain.......... (2,335) (2,959) (9,062) (8,432)
Gain (loss) on sale of real
estate...................... (71) 1,636 1,579 1,636
-------------- -------------- --------------- -------------
(Loss) before extraordinary
gain........................ (2,406) (1,323) (7,483) (6,796)
Extraordinary gain............ 208 - 256 1,341
-------------- -------------- --------------- -------------
Net (loss).................... $ (2,198) $ (1,323) $ (7,227) $ (5,455)
============== ============== =============== =============
Earnings Per Share
(Loss) before extraordinary
gain........................ $ (.60) $ (.33) $ (1.86) $ (1.69)
Extraordinary gain............ .05 - .06 .33
-------------- -------------- --------------- -------------
Net (loss).................... $ (.55) $ (.33) $ (1.80) $ (1.36)
============== ============== =============== =============
Common shares used in
computing earnings per share 4,012,275 4,012,275 4,012,275 4,012,275
============== ============== =============== =============
</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, 1996
<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,
1996..................... 4,012,275 $40 $219,036 $(129,892) $89,184
Dividends ($.21 per share). - - - (869) (869)
Net (loss)................. - - - (7,227) (7,227)
--------- --- -------- --------- -------
Balance, September 30,
1996..................... 4,012,275 $40 $219,036 $(137,988) $81,088
========= === ======== ========= =======
</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,
------------------------------
1996 1995
----------- ----------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected.................................. $ 33,667 $ 35,209
Interest collected............................... 946 905
Interest paid.................................... (10,535) (10,770)
Payments for property operations................. (22,033) (22,768)
Advisory fee paid to affiliate................... (1,414) (1,538)
General and administrative expenses paid......... (1,834) (1,609)
Distributions from operating cash flow of equity
investees...................................... 419 447
Cash from replacement reserves................... 53 594
Litigation settlement............................ - 500
Other............................................ (4,264) (198)
-------------- --------------
Net cash provided by (used in) operating
activities................................... (4,995) 772
Cash Flows from Investing Activities
Collections on notes receivable.................. 887 2,725
Real estate improvements......................... (2,565) (6,910)
Acquisition of real estate....................... (4,787) (168)
Contributions to equity investees................ (152) (424)
Proceeds from sale of real estate................ 5,973 -
-------------- --------------
Net cash (used in) investing activities........ (644) (4,777)
Cash Flows from Financing Activities
Distributions from financing cash flow of equity
investees...................................... - 853
Payments on notes payable........................ (11,020) (16,058)
Proceeds from notes payable...................... 11,550 20,075
Deferred borrowing costs......................... (633) (249)
Reimbursements to advisor........................ (309) (198)
Dividends to stockholders........................ (869) -
-------------- --------------
Net cash provided by financing activities...... (1,281) 4,423
Net increase (decrease) in cash and cash
equivalents...................................... (6,920) 418
Cash and cash equivalents, beginning of period..... 9,620 563
-------------- --------------
Cash and cash equivalents, end of period........... $ 2,700 $ 981
============== ==============
</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,
-------------------------------
1996 1995
----------- ----------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net (loss) to net cash
provided by (used in) operating activities
Net (loss)......................................... $ (7,227) $ (5,455)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization.................... 6,776 6,736
Gain on sale of real estate...................... (1,579) (1,636)
Extraordinary gain............................... (256) (1,341)
Equity in losses of equity investees............. 102 1,152
Distributions from operating cash flow of equity
investees...................................... 419 447
Provision for losses............................. 1,579 -
(Increase) in interest receivable................ (239) (11)
Decrease in other assets......................... 470 972
Increase in interest payable..................... 196 497
(Decrease) in other liabilities.................. (5,236) (589)
-------------- --------------
Net cash provided by (used in) operating
activities................................... $ (4,995) $ 772
============== ==============
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
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,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. 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, 1995 (the "1995 Form
10-K").
Certain balances for 1995 have been reclassified to conform to the 1996
presentation. Shares and per share data have been restated for the three for
two forward stock split effected February 15, 1996.
NOTE 2. NOTES AND INTEREST RECEIVABLE
In March 1996, the Company accepted a discounted payoff of $825,000 in full
settlement of a mortgage note receivable with a principal balance of $875,000.
The Company recorded no loss on the settlement in excess of the reserve
previously established.
In 1993 in conjunction with the sale of a foreclosed residence in Phoenix,
Arizona, the Company provided purchase money financing of $725,000 with a
maturity date of August 1996. In June 1996, the borrower filed for bankruptcy
protection. In September 1996, the Company reacquired the property through
trustee sale. The fair market value of the residence less estimated costs of
sale, exceeded the note's principal balance and accrued interest of $691,000 at
the date the property was reacquired.
NOTE 3. REAL ESTATE AND DEPRECIATION
In January 1996, the Company sold the Cheyenne Mountain land, a 7 acre held for
sale parcel of land in Colorado Springs, Colorado for $330,000 in cash. The
Company recognized a gain of $218,000 on the sale.
7
<PAGE> 8
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. REAL ESTATE AND DEPRECIATION (Continued)
Also in January 1996, the Company purchased a 4.7 acre parcel of partially
developed land in Las Colinas, Texas for $941,000 in cash. The Company paid a
real estate acquisition commission of $38,000 to Carmel Realty, Inc. ("Carmel
Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Company's
advisor, and a real estate acquisition fee of $9,000 to BCM based upon the
$941,000 purchase price.
In March 1996, the Company sold the Park Forest Apartments, a 44 unit held for
sale apartment complex in Dearborn Heights, Michigan, for $4.8 million in cash.
The Company received net cash of $1.6 million after paying off the existing
first mortgage of $2.9 million and various closing costs associated with the
sale. The Company paid a real estate sales commission of $165,000 to Carmel
Realty based upon the $4.8 million sales price. The Company recognized a gain
on the sale of $1.4 million.
In July 1996, the Company sold the Latham Square Office Building, a 106,067
square foot office building in Oakland, California for $2.2 million in cash.
The Company received net cash of $2.0 million after the payment of various
closing costs associated with the sale. The Company paid a real estate sales
commission of $85,000 to Carmel Realty based upon the $2.2 million sales price.
The Company incurred a loss on the sale of $64,000 in excess of the amounts
which had been previously provided.
In August 1996, the Company sold a 177 acre parcel of the Moss Creek land, a
257 acre tract of foreclosed land held for sale in Greensboro, North Carolina,
for $750,000 in cash. The Company received net cash of $690,000 after paying
various closing costs associated with the sale. The Company recognized a gain
of $56,000 on the sale.
In August 1996, the Company purchased four apartment complexes consisting of a
total of 573 units in a single transaction with a single seller for $4.1
million cash. Three of the apartment complexes are in Odessa, Texas and the
fourth is in Midland, Texas. A real estate acquisition commission of $144,000
was paid to Carmel Realty and a real estate acquisition fee of $41,000 to BCM
based on the $4.1 million purchase price.
In September 1996, the Company sold the Byron land, a 522 acre tract of
foreclosed land held for sale in Greensboro, North Carolina, for $1.6 million
in cash. The Company paid a real estate sales commission of $33,000 to Carmel
Realty based on the $1.6 million sales price. The Company recognized a loss of
$63,000 on the sale.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
8
<PAGE> 9
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES
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, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Rents and interest income............................. $ 8,789
Depreciation.......................................... (1,156)
Property operations................................... (4,814)
Interest expense...................................... (3,348)
Provision for loss.................................... -
--------
Net loss.............................................. $ (529)
========
</TABLE>
NOTE 5. NOTES AND INTEREST PAYABLE
In May 1996, the Company refinanced the mortgage debt secured by Parkway Centre
Shopping Center in Dallas, Texas in the amount of $1.8 million. The Company
received net cash of $771,000 after the payoff of $735,000 in existing mortgage
debt and the payment of various closing costs associated with the refinancing.
The new mortgage bears interest at 9.5625% per annum, requires monthly payments
of principal and interest of $16,024 and matures June 1, 2006. The Company
paid a mortgage brokerage and equity refinancing fee of $18,000 to BCM based on
the $1.8 million refinancing.
In July 1996, the Company refinanced the matured mortgage debt secured by the
Westgate of Laurel Apartments in Laurel, Maryland in the amount of $7.7
million. The Company received net cash of $126,000 after the payoff of $7.2
million in existing mortgage debt and the payment of various closing costs and
escrows associated with the refinancing. The new mortgage bears interest at
9.1875% per annum, requires monthly payments of principal and interest of
$63,202 and matures August 1, 2006. The Company paid a mortgage brokerage and
equity refinancing fee of $77,000 to BCM based upon the $7.7 million
refinancing.
In August 1996, the Company modified and extended the mortgage debt secured by
the Northtown Mall Shopping Center in Dallas, Texas. In conjunction with the
modification, the Company paid $350,000 in principal paydowns to extend the
loan's maturity date to December 31, 1996. The Company may further extend the
maturity date to March 31, 1997 by paying a $100,000 principal payment before
December 31, 1996. All other terms of the loan remained unchanged.
In September 1996, the Company increased the mortgage debt on the Plaza Office
Building in St. Petersburg, Florida by $2.0 million. Such increase in the
principal balance was provided for in the original mortgage terms. The Company
received net cash of $1.9 million after paying various costs associated with
the additional borrowing. The additional $2.0 million borrowing bears interest
at 3.75% above the London Interbank Offered Rate rate, currently 9.22%,
requires monthly
9
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. NOTES AND INTEREST PAYABLE (Continued)
payments of $18,741 and matures May 31, 2000. The Company paid a mortgage
brokerage and equity refinancing fee of $20,000 to BCM based upon the mortgage
increase.
NOTE 6. 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.
NOTE 7. SUBSEQUENT EVENTS
In October 1996, the Company received $1.5 million in cash in settlement of
litigation relating to the RCA Building in Mount Laurel, New Jersey.
---------------------------------
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 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 Company is the successor to a business trust which was
organized on September 6, 1983 and commenced operations on January 31, 1984.
Liquidity and Capital Resources
Cash and cash equivalents aggregated $2.7 million at September 30, 1996
compared with $9.6 million at December 31, 1995. 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 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 extensions of 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 January 1996, the Company received $330,000 in cash from the sale of the
Cheyenne Mountain land in Colorado Springs, Colorado, net cash of $1.6 million
from the sale of the Park Forest Apartments in Dearborn
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Heights, Michigan after paying off the existing first mortgage, both of which
properties were held for sale, and $825,000 in full settlement of a mortgage
note receivable.
Also in January 1996, the Company purchased 4.7 acres of partially developed
land in Las Colinas, Texas for $941,000 in cash and paid off at maturity the
underlying lien on a property securing one of its wraparound mortgage notes
receivable in the amount of $893,000.
In May 1996, the Company refinanced the mortgage debt secured by the Parkway
Centre Shopping Center in Dallas, Texas, in the amount $1.8 million. The
Company received net cash of $771,000 after the payoff of $735,000 in existing
mortgage debt and the payment of various closing costs associated with the
refinancing.
In July 1996, the Company refinanced the matured mortgage debt secured by the
Westgate of Laurel Apartments in Laurel, Maryland in the amount of $7.7
million. The Company received net cash of $126,000 after the payoff of $7.2
million in existing mortgage debt and the payment of various closing costs and
escrows associated with the refinancing.
In July 1996, the Company sold the Latham Square Office Building in Oakland,
California. The Company received net cash of $2.0 million after paying various
closing costs associated with the sale.
In August 1996, the Company sold 177 acre parcel of land in Greensboro, North
Carolina for $750,000. The Company received net cash of $690,000 after paying
various closing costs associated with the sale.
In August 1996, the Company purchased four apartment complexes in a single
transaction for $4.1 million cash. Three of the properties are in Odessa,
Texas and the fourth is in Midland, Texas.
Also in August 1996, the Company modified and extended the mortgage secured by
the Northtown Mall Shopping Center in Dallas, Texas to December 31, 1996. In
conjunction with the modification the Company paid $350,000 in principal
paydowns.
In September 1996, the Company increased the mortgage debt secured by the Plaza
Office Building in St. Petersburg, Florida by $2.0 million. The Company
received net cash of $1.9 million after paying various closing costs associated
with the financing.
In September 1996, the Company sold the Byron land, a 522 acre parcel of land
in Greensboro, North Carolina, for $1.6 million cash.
In October 1996, the Company received cash of $1.5 million in settlement of
litigation related to the RCA Building in Mount Laurel, New Jersey.
In the first nine months of 1996, the Company paid dividends of $.21 per share,
or a total of $869,000.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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, 1996, 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
1996.
In August 1996, the Company announced an offer to buy back shares of its Common
Stock from stockholders owning 99 or fewer shares. The Company paid a premium
of $.50 per share over the average closing price of its shares as reported from
August 8, 1996 through September 30, 1996, the expiration date of the offer.
On October 17, 1996, the Company repurchased 82,967 of its shares pursuant to
such offer, at a total cost of $913,467.
On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage notes receivable and properties held for sale and
periodically, but no less than annually, its properties held for investment.
Generally accepted accounting principles require that the carrying value of
such assets cannot exceed the lower of their respective carrying amounts or
estimated net realizable value. In the initial instance when estimated net
realizable value of a mortgage note receivable or a property held for sale is
less than the carrying amount at the time of evaluation, a reserve is
established and a corresponding provision for loss is recorded by a charge
against earnings. A subsequent revision to estimated net realizable value
either increases or decreases such reserve with a corresponding charge against
or credit to earnings. In the case of properties held for investment the
carrying value of the property is written down and a provision for loss is
recorded. The estimate of net realizable value of the Company's mortgage notes
receivable is based on management's review and evaluation of the collateral
property securing the 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
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, 1996
was $2.2 million and $7.2 million as compared to a net loss of $1.3 million and
$5.5 million in the corresponding periods in 1995. The Company's 1996 net loss
includes an extraordinary gain of $256,000, gains on sales of real estate of
$1.6 million and a provision for loss of $1.6 million. The 1995 net loss
includes an extraordinary gain of $1.3 million and gains on sales of real
estate of $1.6 million. Fluctuations in these and other components of the
Company's revenues and expenses between the 1995 and 1996 periods are described
below.
Rents in the three and nine months ended September 30, 1996 were $11.4 million
and $33.6 million as compared to $12.0 million and $35.0 million
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
in the corresponding periods in 1995. Of this decrease, $1.6 million and $4.1
million in the three and nine months is due to four properties being sold
subsequent to September 30, 1995. This decrease is partially offset by an
increase of $414,000 in the nine months ended September 30, 1996 due to the
obtaining through foreclosure of the Gladstell Forest Apartments in June 1995
and $349,000 and $930,000 in the three and nine months ended September 30, 1996
due to a decrease in discounts and concessions at various of the Company's
properties. Additionally, for the nine months ended September 30, 1996, an
increase of $482,000 is due to the acquisition of 100% ownership of Shadow Run
Associates partnership in April 1995, $256,000 is due to increases in rental
rates and occupancy at various of the Company's properties and $252,000 is due
to increased collections for common area maintenance at various of the
Company's commercial properties.
Property operations expense in the three and nine months ended September 30,
1996 was $7.0 million and $21.4 million as compared to $7.7 million and $22.6
million in the corresponding periods in 1995. Of this decrease, $898,000 and
$1.6 million in the three and nine months ended September 30, 1996 is due to
four properties being sold subsequent to September 30, 1995. This decrease is
partially offset by an increase of $41,000 and $288,000 in the three and nine
months ended September 30, 1996 due to the obtaining through foreclosure of the
Gladstell Forest Apartments. Additionally, for the nine months ended September
30, 1996 an increase of $266,000 due to the acquisition of 100% ownership of
Shadow Run Associates partnership.
Interest income for the three and nine months ended September 30, 1996 of
$361,000 and $1.1 million was comparable to the $373,000 and $1.1 million for
the corresponding periods in 1995.
Equity in loss of investees was a loss of $56,000 and $102,000 for the three
and nine months ended September 30, 1996 compared to a loss of $153,000 and
$1.2 million for the corresponding periods in 1995. The 1995 equity loss is
due to the write-down of a wraparound mortgage note receivable to the balance
of the underlying first lien mortgage by the Nakash Income Associates, a
partnership in which the Company has a 60% general partner interest. The
Company's equity share of the loss was $901,000.
Interest expense decreased to $3.8 million and $11.2 million in the three and
nine months ended September 30, 1996 as compared to $4.2 million and $11.8
million for the corresponding periods in 1995. Of this decrease, $444,000 and
$1.3 million in the three and nine months ended September 30, 1996 is due to
four properties being sold subsequent to September 30, 1995 and decreases of
$20,000 and $51,000 for the three and nine months ended September 30, 1996 due
to mortgages being paid in full. These decreases are partially offset by
increases of $71,000 and $269,000 for the three and nine months ended
September 30, 1996 due to note modifications and refinancings, $78,000 and
$483,000 for the three
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
and nine months ended September 30, 1996 due to new financings obtained and
$108,000 in the nine months ended due to the foreclosure of the Gladstell
Apartments.
Depreciation expense decreased to $2.1 million and $6.3 million for the three
and nine months ended September 30, 1996 compared to $2.3 million and $6.4
million in the corresponding periods in 1995. The decrease is due to the sale
of four properties subsequent to September 30, 1995.
Advisory fees decreased to $464,000 and $1.4 million for the three and nine
months ended September 30, 1996 compared to $517,000 and $1.5 million in the
corresponding period in 1995. The decrease is due to a decrease in the
Company's gross assets in 1996, the basis for such fee.
General and administrative expenses increased to $632,000 and $1.8 million for
the three and nine months ended September 30, 1996 compared to $460,000 and
$1.5 million in the corresponding periods in 1995. The increase is mainly due
to legal fees related to ongoing litigation proceedings.
In the second quarter of 1996, the Company recognized a provision for loss of
$1.6 million to reduce the carrying value of the Latham Square Office Building
in Oakland, California to its agreed sales price less estimated costs of sale.
No such provision was recorded in 1995. See NOTE 3. "REAL ESTATE AND
DEPRECIATION."
In the nine months ended September 30, 1996, the Company recognized net gains
totaling $1.6 million on the sales of the Cheyenne Mountain land and the Park
Forest Apartments, both of which were held for sale. In the nine 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. In the three
and nine months ended September 30, 1996, the Company recognized extraordinary
gains of $208,000 and $256,000 on the paydown of the mortgage secured by the
Dunes Plaza Shopping Center. In the nine months ended September 30, 1995, the
Company recognized extraordinary gains of $1.3 million on the payoff of the
mortgage secured by the Fountain Village Apartments and a principal paydown and
modification of the mortgage secured by the Dunes Plaza Shopping Center.
Tax Matters
As more fully discussed in the Company's 1995 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
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Tax Matters (Continued)
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.
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.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncement (Continued)
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, 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. The Company adopted SFAS No. 121 effective
January 1, 1996.
The effect of adopting SFAS No. 121 was the discontinuance of depreciation on
the Company's one apartment complex held for sale of $24,000 and a
corresponding reduction in the Company's reported gain on the March 1996 sale
of the property.
----------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Olive Litigation. In February 1990, the Company, together with Continental
Mortgage and Equity Trust, Income Opportunity Realty Investors, Inc., National
Income Realty Trust, 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. pending before the United States District Court for
the Northern District of California and relating to the operation and
management of each of the entities (the "Olive Litigation"). On April 23,
1990, the court granted final approval of the terms of a Stipulation of
Settlement.
On May 4, 1994, the parties entered into a Modification of Stipulation of
Settlement dated April 27, 1994 (the "Olive Modification") that settled
subsequent claims of breaches of the settlement that were asserted by the
plaintiffs and that modified certain provisions of the April 1990 settlement.
The Olive Modification was preliminarily approved by the court on July 1, 1994,
and final court approval was entered on December 12, 1994. The effective date
of the Olive Modification was January 11, 1995.
During August and September 1996, the court held evidentiary hearings to assess
compliance with the terms of the Olive Modification by the various parties.
The court has not issued any ruling or order with
16
<PAGE> 17
ITEM 1. LEGAL PROCEEDINGS (Continued)
respect to the matters addressed at the hearings. Separately, in 1996, legal
counsel for the plaintiffs notified the Company's Board of Directors that
he intends to assert that certain actions taken by the Board of Directors
during 1994, 1995 and 1996 breached the terms of the Olive Modification.
Plaintiffs' counsel has not made a petition to the court on any of these
claims.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------- ---------------------------------------------------------
27.0 Financial Data Schedule
(b) Reports on Form 8-K as follows:
None.
17
<PAGE> 18
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 12, 1996 By: /s/ Randall M. Paulson
------------------------ --------------------------------
Randall M. Paulson
President
Date: November 12, 1996 By: /s/ Thomas A. Holland
------------------------ --------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<PAGE> 19
TRANSCONTINENTAL REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Three Months ended September 30, 1996
Exhibit Page
Number Description Number
- ------- --------------------------------------------------- ------
27.0 Financial Data Schedule 20
19
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