<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, 1997
----------------------
Commission File Number 1-9240
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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 3,899,487
- ---------------------------- ---------------------------------
(Class) (Outstanding at October 31, 1997)
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been audited 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,
1997 1996
-------- --------
Assets (dollars in thousands)
<S> <C> <C>
Notes and interest receivable
Performing ...................................... $ 4,453 $ 9,075
Nonperforming, nonaccruing ...................... 404 457
-------- --------
4,857 9,532
Less - allowance for estimated losses .............. (891) (926)
-------- --------
3,966 8,606
Foreclosed real estate held for sale ............... -- 910
Real estate held for sale, net of accumulated
depreciation ($76 in 1996) ...................... 281 2,089
-------- --------
281 2,999
Real estate held for investment, net of
accumulated depreciation ($57,319 in 1997 and
$50,310 in 1996) ................................ 256,636 217,410
Investment in real estate entities ................. 4,290 4,578
Cash and cash equivalents .......................... 4,449 960
Other assets (including $412 in 1997 and $960 in
1996 from affiliates) ........................... 10,577 10,818
-------- --------
$280,199 $245,371
======== ========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable ......................... $193,069 $158,692
Other liabilities (including $167 in 1997 and $535
in 1996 to affiliates) .......................... 12,160 7,320
-------- --------
205,229 166,012
Stockholders' equity
Common stock, $.01 par value, authorized, 10,000,000
shares; issued and outstanding, 3,899,487 shares
in 1997 and 3,926,445 shares in 1996 ............ 39 39
Paid-in capital .................................... 217,831 218,133
Accumulated distributions in excess of
accumulated earnings ............................ (142,900) (138,813)
-------- --------
74,970 79,359
-------- --------
$280,199 $245,371
======== ========
</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,
-------------------- -------------------
1997 1996 1997 1996
------------- ----------- ----------- ---------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Income
Rents ...................... $ 13,781 $ 11,415 $ 39,205 $ 33,561
Interest ................... 510 361 1,283 1,126
------------- ----------- ----------- ---------
14,291 11,776 40,488 34,687
Expenses
Property operations ........ 8,378 7,040 23,403 21,372
Interest ................... 4,242 3,794 12,004 11,217
Depreciation ............... 2,443 2,125 7,048 6,290
Advisory fee to affiliate .. 503 464 1,459 1,410
General and administrative . 713 632 1,977 1,779
Provision for losses ....... -- -- -- 1,579
------------- ----------- ----------- ---------
16,279 14,055 45,891 43,647
------------- ----------- ----------- ---------
(Loss) from operations ........ (1,988) (2,279) (5,403) (8,960)
Equity in income (loss) of
investees .................. (97) (56) 680 (102)
Gain (loss) on sale of real
estate ..................... -- (71) 1,455 1,579
------------- ----------- ----------- ---------
(Loss) before extraordinary
gain ....................... (2,085) (2,406) (3,268) (7,483)
Extraordinary gain ............ -- 208 -- 256
------------- ----------- ----------- ---------
Net (loss) .................... $ (2,085) $ (2,198) $ (3,268) $ (7,227)
============= =========== =========== =========
Earnings Per Share
(Loss) before extraordinary
gain ....................... $ (.53) $ (.60) $ (.83) $ (1.86)
Extraordinary gain ............ -- $ .05 -- .06
------------- ----------- ----------- ---------
Net (loss) .................... $ (.53) $ (.55) $ (.83) $ (1.80)
============= =========== =========== =========
Weighted average Common
shares used in computing
earnings per share ......... 3,899,487 4,012,275 3,910,991 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, 1997
<TABLE>
<CAPTION>
Accumulated
Distributions
Common Stock in Excess of
------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
--------- -------- --------- --------- --------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 .... 3,926,445 $ 39 $ 218,133 $(138,813) $ 79,359
Fractional shares ........... (18) -- -- -- --
Repurchase of Common Stock .. (26,940) -- (302) -- (302)
Dividends ($.21 per share) .. -- -- -- (819) (819)
Net (loss) .................. -- -- -- (3,268) (3,268)
--------- ----- --------- --------- --------
Balance, September 30, 1997 3,899,487 $ 39 $ 217,831 $(142,900) $ 74,970
========= ===== ========= ========= ========
</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,
-----------------------
1997 1996
-------- --------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected ................................ $ 41,841 $ 33,667
Interest collected ............................. 882 946
Interest paid .................................. (11,389) (10,535)
Payments for property operations ............... (29,922) (22,033)
Advisory fee paid to affiliate ................. (1,409) (1,414)
General and administrative expenses paid ....... (2,062) (1,834)
Distributions from operating cash flow of equity
investees ................................... 1,695 419
Insurance settlement ........................... 9,633 --
Other .......................................... (580) (4,211)
-------- --------
Net cash provided by (used in) operating
activities ............................... 8,689 (4,995)
Cash Flows from Investing Activities
Acquisition of real estate ..................... (13,100) (4,787)
Real estate improvements ....................... (4,408) (2,565)
Proceeds from sale of real estate .............. 3,710 5,973
Collections on notes receivable ................ 5,028 887
Contributions to equity investees .............. (727) (152)
-------- --------
Net cash (used in) investing activities ..... (9,497) (644)
Cash Flows from Financing Activities
Payments on notes payable ...................... (24,995) (11,020)
Proceeds from notes payable .................... 32,181 11,550
Deferred borrowing costs ....................... (1,358) (633)
Reimbursements to advisor ...................... (410) (309)
Repurchase of Common Stock ..................... (302) --
Dividends to stockholders ...................... (819) (869)
-------- --------
Net cash provided by (used in) financing
activities ............................... 4,297 (1,281)
Net increase (decrease) in cash and cash
equivalents .................................... 3,489 (6,920)
Cash and cash equivalents, beginning of period .... 960 9,620
-------- --------
Cash and cash equivalents, end of period .......... $ 4,449 $ 2,700
======== ========
</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,
----------------------
1997 1996
-------- -------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net (loss) to net cash
provided by (used in) operating activities
Net (loss) ........................................ $ (3,268) $(7,227)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization .................. 7,294 6,776
Provision for losses ........................... -- 1,579
Gain on sale of real estate .................... (1,455) (1,579)
Extraordinary gain ............................. -- (256)
Equity in (income) loss of equity investees .... (680) 102
Distributions from operating cash flow of equity
investees ................................... 1,695 419
(Increase) in interest receivable .............. (244) (239)
(Increase) decrease in other assets ............ (7,382) 470
Increase in interest payable ................... 211 196
Increase (decrease) in other liabilities ....... 12,518 (5,236)
-------- -------
Net cash provided by (used in) operating
activities ............................... $ 8,689 $(4,995)
======== =======
Schedule of noncash investing and financing
activities
Notes payable from purchase of real estate ........ $ 7,744 $ --
</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, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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, 1996 (the "1996 Form 10-K").
NOTE 2. REAL ESTATE
In February 1997, the Company completed the sale of the Fiesta Mart, a 29,000
square foot shopping center in San Angelo, Texas, which was under contract for
sale at December 31, 1996, for $544,000 in cash. The Company received net cash
of $403,000 after the payoff of $90,000 in existing mortgage debt and the
payment of various closing costs associated with the sale. The Company paid a
real estate brokerage commission of $22,000 to Carmel Realty, Inc. ("Carmel
Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Company's
advisor, based on the $544,000 sales price of the property. The Company
recognized no gain or loss on the sale.
Also in February 1997, the Company completed the sale of a .9976 acre parcel of
land in Dallas, Texas, which was under contract for sale at December 31, 1996,
for $2.7 million in cash. The Company received net cash of $2.6 million after
the payment of various closing costs associated with the sale. The Company paid
a real estate brokerage commission of $103,000 to Carmel Realty based on the
$2.7 million sales price of the property. The Company recognized a gain of $1.4
million on the sale.
In March 1997, the Company purchased the Terrace Hills Apartments, a 310 unit
apartment complex in El Paso, Texas, for $6.2 million. The Company paid $1.4
million in cash and obtained mortgage financing of $4.8 million. The mortgage
bears interest at 8.07% per annum, requires monthly payments of principal and
interest of $35,086 and matures in
7
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
April 2007. The Company paid a real estate brokerage commission of $193,000 to
Carmel Realty and a real estate acquisition fee of $62,000 to BCM based on the
$6.2 million purchase price of the property.
In March 1997, the Company purchased the Crescent Place Apartments, a 120 unit
apartment complex in Houston, Texas, for $2.3 million. The Company paid $500,000
in cash and obtained mortgage financing of $1.8 million. The mortgage bears
interest at 8.5% per annum, requires monthly payments of principal and interest
of $13,552 and matures in April 2004. The Company paid a real estate brokerage
commission of $91,000 to Carmel Realty and a real estate acquisition fee of
$24,000 to BCM based on the $2.3 million purchase price of the property.
Also in March 1997, the Company purchased the Savings of America Building, a
68,634 square foot office building in Houston, Texas, for $1.6 million in cash.
The Company paid a real estate brokerage commission of $64,000 to Carmel Realty
and a real estate acquisition fee of $16,000 to BCM based on the $1.6 million
purchase price of the property.
In April 1997, the Company sold a foreclosed single family residence in
Scottsdale, Arizona, for $778,000 in cash. The Company paid a real estate
brokerage commission of $31,000 to Carmel Realty based on the $778,000 sales
price of the property. The Company recognized a gain of $55,000 on the sale.
In May 1997, the Company purchased the Treehouse Apartments, a 160 unit
apartment complex in Irving, Texas, for $3.4 million in cash. The Company paid a
real estate brokerage commission of $122,000 to Carmel Realty and a real estate
acquisition fee of $34,000 to BCM based on the $3.4 million purchase price of
the property.
Also in May 1997, the Company purchased the Villas at Countryside Apartments, a
102 unit apartment complex in Sterling, Virginia, for $6.3 million. The Company
paid $1.1 million in cash and assumed the existing mortgage of $5.2 million. The
mortgage bears interest at a variable rate, currently 9.0% per annum, requires
monthly payments of principal and interest of $38,768 and matures in December
1997. The Company paid a real estate brokerage commission of $183,000 to Carmel
Realty and a real estate acquisition fee of $63,000 to BCM based on the $6.3
million purchase price of the property.
In August 1997, the Company purchased an 8.844 acre parcel of undeveloped land
in downtown Dallas, Texas, for $11.0 million. The Company paid $2.2 million in
cash with the seller providing purchase money financing of the remaining $8.8
million of the purchase price. The financing bears interest at 8.5% per annum,
requires monthly payments of principal and interest of $67,664 and matures in
September 2002. The Company paid a real estate brokerage commission of $285,000
to Carmel Realty and a real estate acquisition fee of $110,000 to BCM based on
the $11.0 million purchase price of the property.
8
<PAGE> 9
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
In September 1997, the Company purchased the Bonita Plaza, a 47,777 square foot
office building in Bonita, California, for $5.7 million. The Company paid $1.7
million in cash and obtained mortgage financing of $4.0 million. The mortgage
bears interest at a variable rate, currently 10.5% per annum, requires monthly
payments of interest of $34,956 and matures in September 1998. The Company paid
a real estate brokerage commission of $183,000 to Carmel Realty and a real
estate acquisition fee of $57,000 to BCM based on the $5.7 million purchase
price of the property.
Also in September 1997, the Company purchased the Country Bend Apartments, a 166
unit apartment complex in Fort Worth, Texas, for $3.4 million. The Company paid
$743,000 in cash and assumed the existing mortgage of $2.6 million. The mortgage
bears interest at 8.82% per annum, requires monthly payments of principal and
interest of $21,913 and matures in May 2005. The Company paid a real estate
brokerage commission of $121,000 to Carmel Realty and a real estate acquisition
fee of $34,000 to BCM based on the $3.4 million purchase price of the property.
NOTE 3. 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, 1997 (dollars in thousands):
Rents and interest income............. $14,610
Depreciation ......................... 1,517
Property operations .................. 6,940
Interest expense ..................... 3,202
-------
Net income ........................... $ 2,951
The Company owns a 60% general partner interest in Nakash Income Associates,
which in turn, owns a wraparound mortgage note receivable secured by a shopping
center in Maulden, Missouri. The shopping center is owned by Mountain Home
Associates ("MHA"). In August 1997, MHA refinanced the matured mortgage secured
by the shopping center in the amount of $850,000. The new mortgage bears
interest at a variable rate, currently 9.5% per annum, requires monthly payments
of principal and interest of $13,000 and matures in May 2005. The Company
contributed $271,000 to MHA to pay off the existing mortgage debt of $1.0
million. MHA also paid a mortgage brokerage and equity refinancing fee of $9,000
to BCM based on the $850,000 financing.
The Company owns a combined 63.7% general and limited partner interest in
Tri-City Limited Partnership ("Tri-City"), which owns five properties in Texas.
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES (Continued)
In September 1997, Tri-City obtained first mortgage financing of $1.9 million
secured by the previously unencumbered Oaks of Inwood and Inwood Green
Apartments. The mortgage bears interest at 7.905% per annum, requires monthly
payments of principal and interest of $14,415 and matures in September 2007. The
Company received $1.1 million of the net financing proceeds. In conjunction with
the financing, Tri-City paid a mortgage brokerage and equity refinancing fee of
$19,000 to BCM, based on the $1.9 million financing.
NOTE 4. NOTES AND INTEREST PAYABLE
In January 1997, the Company refinanced the matured mortgage debt in the amount
of $6.3 million secured by 74 New Montgomery, an office building in San
Francisco, California. The Company received net cash of $1.0 million after the
payoff of $5.2 million in existing mortgage debt. The remainder of the
refinancing proceeds were used to fund a tax escrow and to pay various closing
costs associated with the refinancing. The new mortgage bears interest at a
variable rate, currently 9.25% per annum, requires monthly payments of principal
and interest of $53,996 and matures in January 2004. The Company paid a mortgage
brokerage and equity refinancing fee of $63,000 to BCM based on the $6.3 million
refinancing.
Also in January 1997, the Company refinanced the matured mortgage debt in the
amount of $6.2 million secured by the Woods Edge Apartments in Rockville,
Maryland. The Company received no net cash. The refinancing proceeds were used
to payoff $5.9 million in existing mortgage debt, fund a tax escrow and pay
various closing costs associated with the refinancing. The new mortgage bears
interest at 8.125% per annum, requires monthly payments of principal and
interest of $46,035 and matures in February 2007. The Company paid a mortgage
brokerage and equity refinancing fee of $62,000 to BCM based on the $6.2 million
refinancing.
In February 1997, the Company refinanced the matured mortgage debt in the amount
of $12.2 million secured by the Spa Cove Apartments in Annapolis, Maryland. The
Company received net cash of $245,000 after the payoff of $11.6 million in
existing mortgage debt. The remainder of the refinancing proceeds were used to
fund a tax escrow and pay various closing costs associated with the refinancing.
The new mortgage bears interest at 8.015% per annum, requires monthly payments
of principal and interest of $89,529 and matures in March 2007. The Company paid
a mortgage brokerage and equity refinancing fee of $122,000 to BCM based on the
$12.2 million refinancing.
In March 1997, the Company refinanced the mortgage debt in the amount of $1.9
million scheduled to mature in December 1997 and secured by President's Square,
a shopping center in San Antonio, Texas. The Company received net cash of
$600,000 after the payoff of $1.2 million
10
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. NOTES AND INTEREST PAYABLE (Continued)
in existing debt and the payment of various closing costs associated with the
refinancing. The new mortgage bears interest at 9.44% per annum, requires
monthly payments of principal and interest of $16,521 and matures in March 2009.
The Company paid a mortgage brokerage and equity refinancing fee of $19,000 to
BCM based on the $1.9 million refinancing.
In May 1997, the mortgage debt in the amount of $618,000 secured by the
Sheboygan Shopping Center in Sheboygan, Wisconsin matured. The Company is in
negotiations with the lender to extend the loan and expects to be successful in
such negotiations, but if not successful, the Company intends to payoff the
loan.
In June 1997, the Company obtained mortgage financing of $2.8 million secured by
the previously unencumbered Treehouse Apartments in Irving, Texas. The Company
received net cash of $2.3 million after funding required tax and repair escrows
and the payment of various closing costs associated with the financing. The
mortgage bears interest at 8.28% per annum, requires monthly payments of
principal and interest of $21,994 and matures in July 2007. The Company paid a
mortgage brokerage and equity refinancing fee of $28,000 to BCM based on the
$2.8 million financing.
In August 1996, the Company modified and extended the matured mortgage debt
secured by the Northtown Mall Shopping Center in Dallas, Texas. The Company paid
$450,000 in principal paydowns to extend the loan's maturity date to March 31,
1997. In October 1997, the Company made a $200,000 principal paydown and
extended the loan to December 31, 1997.
In August 1997, the Company obtained mortgage financing of $1.3 million secured
by the previously unencumbered Savings of America Office Building in Houston,
Texas. The Company received net cash of $1.2 million after funding a required
tax escrow and the payment of various closing costs associated with the
financing. The mortgage bears interest at 8.49% per annum, requires monthly
payments of principal and interest of $10,371 and matures in September 2007. The
Company paid a mortgage brokerage and equity refinancing fee of $13,000 to BCM
based on the $1.3 million refinancing.
In August 1997, the mortgage debt in the amount of $2.6 million secured by the
Shaws Plaza in Sharon, Massachusetts matured. The Company is in negotiations
with the lender to extend the loan and expects to be successful in such
negotiations, but if not successful, the Company intends to payoff the loan.
In September 1997, the Company obtained mortgage financing of $1.5 million
secured by the previously unencumbered Carseka Apartments in Los Angeles,
California. The Company received net cash of $1.5 million after funding required
tax and insurance escrows and the payment of
11
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. NOTES AND INTEREST PAYABLE (Continued)
various closing costs associated with the financing. The mortgage bears interest
at 7.6% per annum, requires monthly payments of principal and interest of
$10,768 and matures in October 2007. The Company paid a mortgage brokerage and
equity refinancing fee of $15,250 to BCM based on the $1.5 million financing.
NOTE 5. 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 6. SUBSEQUENT EVENTS
In October 1997, the Company purchased the Sandstone Apartments, a 238 unit
apartment complex in Mesa, Arizona, for $7.9 million. The Company paid $2.0
million in cash and assumed the existing mortgage of $5.9 million. The mortgage
bears interest at a variable rate, currently 8.25% per annum, requires monthly
payments of principal and interest of $45,087 for the first sixty months and
thereafter requires monthly payments of principal and interest of $49,962 and
matures in August 2004. The Company paid a real estate brokerage commission of
$228,000 to Carmel Realty and an acquisition fee of $79,000 to BCM based on the
$7.9 million purchase price of the property.
In October 1997, the Company purchased the Encon Warehouse, a 279,290 square
foot warehouse facility in Fort Worth, Texas, for $4.7 million. The Company paid
$1.2 million in cash and obtained mortgage financing of $3.5 million. The
mortgage bears interest at 8.5% per annum, requires monthly payments of interest
only of $24,972 for the first thirty-six months and thereafter requires monthly
payments of principal and interest of $26,912 and matures in October 2007. The
Company paid a real estate brokerage commission of $161,000 to Carmel Realty and
a real estate acquisition fee of $47,000 to BCM based on the $4.7 million
purchase price of the property.
In October 1997, the Company purchased the Sunchase Apartments, a 300 unit
apartment complex in Odessa, Texas, for $3.6 million. The Company paid $1.5
million in cash and assumed the existing mortgage of $2.1 million. The mortgage
bears interest at 9.0% per annum, requires monthly payments of principal and
interest of $17,621 and matures in June 2001. The Company paid a real estate
brokerage commission of $127,000 to Carmel Realty and an acquisition fee of
$36,000 to BCM based on the $3.6 million purchase price of the property.
Also in October 1997, the Company refinanced the mortgage debt in the amount of
$2.0 million secured by the South Cochran Apartments in Los Angeles,
California. The Company received net cash of $921,000 after the payoff of
$902,000 in existing mortgage debt, funding of tax and
12
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TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. SUBSEQUENT EVENTS (Continued)
insurance escrows and the payment of various closing costs associated with the
refinancing. The new mortgage bears interest at 7.62% per annum, requires
monthly payments of principal and interest of $13,795 and matures in November
2007. The Company paid a mortgage brokerage and equity refinancing fee of
$20,000 to BCM based on the $2.0 million refinancing.
-----------------------
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 $4.4 million at September 30, 1997 compared
with $960,000 at December 31, 1996. 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 the first nine months of 1997, the Company paid dividends of $.21 per share,
or a total of $819,000.
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, 1997, the
Company had purchased a total of 377,528 shares, for an aggregate purchase price
of $2.0 million. The Company repurchased 26,940 shares at a total cost of
$302,000 during 1997.
In January 1997, the Company received a $9.6 million final payment on an
insurance settlement from the 1995 hail storm and flood damage to the
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Republic Towers Office Building in Dallas, Texas. The Company is not currently
able to estimate the amount of such proceeds that will be expended to complete
repairs to the building.
In January 1997, the Company refinanced the mortgage debt in the amount of $6.3
million secured by 74 New Montgomery, an office building in San Francisco,
California. The Company received net cash of $1.0 million after the payoff of
$5.2 million in existing mortgage debt and the payment of various closing costs
associated with the refinancing.
Also in January 1997, the Company refinanced the mortgage debt in the amount of
$6.2 million secured by the Woods Edge Apartments in Rockville, Maryland. The
Company received no net cash. The refinancing proceeds were used to payoff $5.9
million in existing mortgage debt, fund a tax escrow and to pay various closing
costs associated with the refinancing.
In February 1997, the Company refinanced the mortgage debt in the amount of
$12.2 million secured by the Spa Cove Apartments in Annapolis, Maryland. The
Company received net cash of $245,000 after the payoff of $11.6 million in
existing mortgage debt, funding a tax escrow and the payment of various closing
costs associated with the refinancing.
In February 1997, the Company completed the sale of two properties which were
under contract for sale at December 31, 1996, (i) the Fiesta Mart, a shopping
center in San Angelo, Texas, and (ii) a .9976 acre parcel of land in the central
business district of Dallas, Texas. The Company received net cash of $3.0
million after the payoff of $90,000 in existing mortgage debt secured by the
Fiesta Mart and the payment of various closing costs associated with the sales.
In March 1997, the Company purchased (i) the Crescent Place, an apartment
complex in Houston, Texas, for $2.3 million, consisting of $500,000 in cash and
mortgage financing of $1.8 million, (ii) the Savings of America Building, an
office building in Houston, Texas, for $1.6 million in cash and (iii) Terrace
Hills, an apartment complex in El Paso, Texas, for $6.2 million consisting of
$1.4 million in cash and mortgage financing of $4.8 million.
Also in March 1997, the Company refinanced the mortgage debt secured by
President's Square, a shopping center in San Antonio, Texas. The Company
received net cash of $600,000 after the payoff of $1.2 million in existing
mortgage debt and the payment of various closing costs associated with the
refinancing.
In April 1997, the Company sold a foreclosed single family residence in
Scottsdale, Arizona, for $778,000 in cash.
In May 1997, the Company purchased (i) the Treehouse Apartments, an apartment
complex in Irving, Texas, for $3.4 million in cash and (ii) the Villas at
Countryside, an apartment complex in Sterling, Virginia,
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
for $6.3 million, consisting of $1.1 million in cash and the assumption of the
existing mortgage of $5.2 million. Also in May 1997, the Company accepted a
discounted early payoff of $2,075,000 in settlement of a mortgage note
receivable with a principal balance of $2,110,000.
In June 1997, the Company obtained mortgage financing in the amount of $2.8
million secured by the previously unencumbered Treehouse Apartments. The Company
received net cash of $2.3 million after funding required tax, insurance and
repair escrows and the payment of various closing costs associated with the
financing.
In August 1997, the Company obtained mortgage financing in the amount of $1.3
million secured by the previously unencumbered Savings of America Office
Building. The Company received net cash of $1.2 million after funding a required
tax escrow and the payment of various closing costs associated with the
financing.
In August 1997, the Company purchased an 8.844 acre parcel of undeveloped land
in downtown Dallas, Texas, for $11.0 million. The Company paid $2.2 million in
cash and the seller provided purchase money financing of $8.8 million.
In August 1997, the Company received cash of $72,000 from the early payoff of
two mortgage notes receivable.
Also in August 1997, Mountain Home Associates, an equity investee refinanced the
matured mortgage debt secured by a shopping center in Maulden, Missouri in the
amount of $850,000. The Company contributed $271,000 to the partnership to pay
off the existing mortgage debt.
In September 1997, Tri-City Limited Partnership, an equity investee, obtained
mortgage financing of $1.9 million on the previously unencumbered Oaks of Inwood
and Inwood Green Apartments. The Company received $1.1 million of the net
financing proceeds.
Also in September 1997, the Company purchased (i) the Bonita Plaza, an office
building in Bonita, California, for $5.7 million, consisting of $1.7 million in
cash and mortgage financing of $4.0 million and (ii) Country Bend Apartments,
an apartment complex in Fort Worth, Texas, for $3.4 million, consisting of
$743,000 in cash and an assumed mortgage of $2.6 million.
Further in September 1997, the Company received $2.8 million in payment of a
wraparound mortgage note receivable, prior to maturity. Included in interest
income in the accompanying Consolidated Statement of Operations is $248,000 of
an unamortized discount on such note receivable.
In October 1997, the Company purchased (i) Sandstone Apartments, an apartment
complex in Mesa, Arizona, for $7.9 million, consisting of $2.0 million in cash
and assumed financing of $5.9 million; (ii) Encon
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Warehouse, a warehouse facility in Fort Worth, Texas, for $4.7 million,
consisting of $1.2 million in cash and mortgage financing of $3.5 million; and
(iii) Sunchase Apartments, an apartment complex in Odessa, Texas, for $3.6
million, consisting of $1.5 million in cash and assumed financing of $2.1
million.
Also in October 1997, the Company refinanced the mortgage debt secured by the
South Cochran Apartments in Los Angeles, California. The Company received net
cash of $933,000 after the payoff of $902,000 in existing mortgage debt, funding
of tax and insurance escrows and the payment of various closing costs associated
with the refinancing.
The Company's management reviews the carrying values of the Company's properties
and mortgage notes receivable at least annually and whenever events or a change
in circumstances indicate that impairment may exist. Impairment is considered to
exist if, in the case of a property, the future cash flow from the property
(undiscounted and without interest) is less than the carrying amount of the
property. For notes receivable impairment is considered to exist if it is
probable that all amounts due under the terms of the note will not be collected.
In those instances where impairment is found to exist, a provision for loss is
recorded by a charge against earnings. The Company's mortgage note receivable
review includes an evaluation of the collateral property securing such 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, a review of the
property's cash flow, discussions with the manager of the property and a review
of properties in the surrounding area.
Results of Operations
The Company's net loss for the three and nine months ended September 30, 1997
was $2.1 million and $3.3 million as compared to a net loss of $2.2 million and
$7.2 million in the corresponding periods in 1996. Net loss for the nine months
ended September 30, 1997 includes gains on sale of real estate of $1.5 million.
The 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.
Fluctuations in these and other components of the Company's revenues and
expenses between the 1996 and 1997 periods are discussed below.
Rents in the three and nine months ended September 30, 1997 were $13.8 million
and $39.2 million compared to $11.4 million and $33.6 million in the
corresponding periods in 1996. Of the increases, $531,000 and $1.6 million for
the three and nine months ended September 30, 1997 relates to an increase in
rental rates at the Company's properties, $20,000 and $516,000 relates to a
decrease in discounts and concessions primarily at the Company's office
buildings, and $1.8 million and $4.0 million is due to the acquisition of
thirteen properties in 1996 and 1997. These increases are partially offset by
decreases of $10,000 and $705,000 for
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
the three and nine months ended September 30, 1997 due to the sale of three
properties subsequent to September 30, 1996. Rents are expected to continue to
increase due to properties acquired in 1996 and 1997.
Interest income increased from $361,000 and $1.1 million in the three and nine
months ended September 30, 1996 to $510,000 and $1.3 million in the three and
nine months ended September 30, 1997. Of the increases, $248,000 for the three
and nine months ended September 30, 1997 is due to a writeoff of unamortized
discount from the early payoff of a mortgage note receivable and an increase in
interest earned on the short-term investment of the Company's excess cash. These
increases are partially offset by decreases of $101,000 and $132,000 for the
three and nine months ended September 30, 1997 due to two mortgage notes
receivable paid in full in 1997. Interest income for the remainder of 1997 is
expected to approximate that of the third quarter of 1997, excluding the
unamortized discount discussed above.
Property operations expense in the three and nine months ended September 30,
1997 was $8.4 million and $23.4 million as compared to $7.0 million and $21.4
million in the corresponding periods in 1996. Of the increases, $1.4 million and
$3.0 million is due to the acquisition of thirteen properties in 1996 and 1997.
These increases are partially offset by decreases of $39,000 and $526,000 due to
the sale of three properties subsequent to September 30, 1996 and $153,000 and
$715,000 due to a decrease in operating expenses at Republic Towers. Property
operating expenses are expected to continue to increase due to properties
acquired in 1996 and 1997.
Interest expense increased from $3.8 million and $11.2 million in the three and
nine months ended September 30, 1996 to $4.2 million and $12.0 million in the
three and nine months ended September 30, 1997. Of the increases, $280,000 and
$622,000 is due to the debt incurred or assumed on five of thirteen properties
acquired in 1996 and 1997 and $115,000 and $380,000 is due to refinancings and
financing obtained on previously unencumbered properties. Interest expense for
the remainder of 1997 is expected to be comparable to that of the third quarter
of 1997.
Depreciation expense increased to $2.4 million and $7.0 million for the three
and nine months ended September 30, 1997 compared to $2.1 million and $6.3
million in the corresponding periods in 1996. The increases are due to the
acquisition of thirteen properties in 1996 and 1997 with seven of the properties
being acquired in the first nine months of 1997. The increases are partially
offset by the sale of three properties in 1997. Depreciation is expected to
continue to increase during the remainder of 1997 as a result of depreciation on
the properties acquired in 1996 and in 1997.
Advisory fees increased to $503,000 and $1.5 million for the three and nine
months ended September 30, 1997 compared to $464,000 and $1.4
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
million in the corresponding periods in 1996. Advisory fees are expected to
continue to increase with increases in the Company's gross assets, the basis for
such fee.
General and administrative expenses increased to $713,000 and $2.0 million for
the three and nine months ended September 30, 1997 compared to $632,000 and $1.8
million in the corresponding periods in 1996. The increases are mainly due to
legal fees related to Republic Towers litigation and an increase in other
professional fees.
Equity in earnings of investees was a loss of $97,000 and income of $680,000 for
the three and nine months ended September 30, 1997 compared to losses of $56,000
and $102,000 for the corresponding periods in 1996. Included in equity earnings
of investees for the nine months ended September 30, 1997 are gains on sale of
real estate of $747,000, which is the Company's equity share of the gains
recognized by Income Opportunity Realty Investors, Inc. ("IORI") on the sale of
two of its apartment complexes. At October 31, 1997, the Company owned
approximately 22.5% of IORI's outstanding shares of common stock.
In the nine months ended September 30, 1997, the Company recognized gains
totaling $1.5 million from the sale of (i) the Fiesta Mart, a shopping center,
(ii) a parcel of land in the Dallas central business district, both of which
were under contract for sale at December 31, 1996 and (iii) a foreclosed single
family residence. In the nine months ended September 30, 1996, the Company
recognized gains totaling $1.6 million from the sales of Cheyenne Mountain land
and Park Forest Apartments. In the three and nine months ended September 30,
1996, the Company recognized an extraordinary gain of $208,000 and $256,000 on
the paydown of the mortgage debt secured by the Dunes Plaza, a shopping center.
No such gain was recognized in 1997.
Tax Matters
As more fully discussed in the Company's 1996 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.
Inflation
The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations generally fluctuate
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Inflation (Continued)
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.
------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Olive Litigation. In February 1990, the Company, together with Continental
Mortgage and Equity Trust ("CMET"), Income Opportunity Realty Investors, Inc.
("IORI") and 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
19
<PAGE> 20
ITEM 1. LEGAL PROCEEDINGS (Continued)
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.
The Court retained jurisdiction to enforce the Modification, and during August
and September 1996, the Court held evidentiary hearings to assess compliance
with the terms of the Modification by various parties. The Court issued no
ruling or order with 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 intended to assert that certain actions taken by the
Board of Directors breached the terms of the Modification. On January 27, 1997,
the parties entered into an Amendment to the Modification effective January 9,
1997 (the "Amendment"), which was submitted to the Court for approval on January
29, 1997. The Amendment provides for the settlement of all matters raised at the
evidentiary hearings and by plaintiffs' counsel in his notices to the Company's
Board of Directors. On May 2, 1997, a hearing was held for the Court to consider
approval of the Amendment. As a result of the hearing, the parties entered into
a revised Amendment. The Court issued an order approving the Amendment on July
3, 1997.
The Amendment provides for the addition of four new unaffiliated members to the
Company's Board of Directors and sets forth new requirements for the approval of
any transactions with certain affiliates until April 28, 1999. In addition, the
Company, CMET, IORI and their shareholders released the defendants from any
claims relating to the plaintiffs' allegations and matters which were the
subject of the evidentiary hearings. The plaintiffs' allegations of any breaches
of the Modification shall be settled by mutual agreement of the parties or,
lacking such agreement, by an arbitration proceeding.
Under the Amendment, all shares of the Company owned by Gene E. Phillips or any
of his affiliates shall be voted at all stockholders' meetings held until April
28, 1999 in favor of all new Board members added under the Amendment. The
Amendment also requires that, until April 28, 1999, all shares of the Company
owned by Gene E. Phillips or his affiliates in excess of forty percent (40%) of
the Company's outstanding shares shall be voted in proportion to the votes cast
by all non-affiliated shareholders of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits:
Exhibit
Number Description
27.0 Financial Data Schedule
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
(b) Reports on Form 8-K as follows:
A Current Report on Form 8-K, dated September 16, 1997, was filed with
respect to Item 2. "Acquisition or Disposition of Assets," and Item 7.
"Financial Statements and Exhibits," which reports the acquisition of the
Terrace Hills Apartments, the Crescent Place Apartments, the Savings of
America Building, the Treehouse Apartments, the Villas at Countryside
Apartments, the Bonita Plaza Office Building, the Country Bend Apartments,
the Encon Warehouse, the Sandstone Apartments and the Sunchase Apartments.
21
<PAGE> 22
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 7, 1997 By: /s/ Randall M. Paulson
------------------------ ----------------------------------
Randall M. Paulson
President
Date: November 7, 1997 By: /s/ Thomas A. Holland
------------------------ ----------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
<PAGE> 23
TRANSCONTINENTAL REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Nine Months ended September 30, 1997
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
----- ----------- ------
<S> <C>
27.0 Financial Data Schedule 24
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,449
<SECURITIES> 0
<RECEIVABLES> 4,857
<ALLOWANCES> 891
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 314,236
<DEPRECIATION> 57,319
<TOTAL-ASSETS> 280,199
<CURRENT-LIABILITIES> 0
<BONDS> 193,069
39
0
<COMMON> 0
<OTHER-SE> 74,931
<TOTAL-LIABILITY-AND-EQUITY> 280,199
<SALES> 0
<TOTAL-REVENUES> 39,205
<CGS> 0
<TOTAL-COSTS> 23,403
<OTHER-EXPENSES> 7,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,004
<INCOME-PRETAX> (3,268)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,268)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,268)
<EPS-PRIMARY> (.83)
<EPS-DILUTED> (.83)
</TABLE>
