<PAGE>
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 JUNE 30, 1999
-------------
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 3,880,014
- ---------------------------- --------------------------------
(Class) (Outstanding at July 31, 1999)
1
<PAGE>
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
June 30, December 31,
1999 1998
-------- ------------
(dollars in thousands,
except per share)
Assets
------
Notes and interest receivable
Performing........................................ $ 1,374 $ 1,429
Nonperforming..................................... 382 950
-------- --------
1,756 2,379
Less - allowance for estimated losses.............. (293) (886)
-------- --------
1,463 1,493
Foreclosed real estate held for sale............... 1,356 1,356
Real estate held for investment, net of
accumulated depreciation ($60,841 in 1999 and
$61,241 in 1998).................................. 359,362 347,389
Investment in real estate entities................. 1,563 3,458
Cash and cash equivalents.......................... 21,194 10,505
Other assets (including $1,855 in 1999 and $1,325
in 1998 from affiliates).......................... 17,220 18,002
-------- --------
$402,158 $382,203
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
------------ ------------
(dollars in thousands,
except per share)
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable.......................... $ 295,461 $ 282,688
Other liabilities (including $658 in 1999 and $62
in 1998 to affiliates)............................. 8,835 8,383
--------- ---------
304,296 291,071
Stockholders' equity
Preferred Stock
Series A; $.01 par value; authorized, 6,000 shares;
issued and outstanding 5,829 shares in 1999 and
1998 (liquidation preference $583)................ - -
Common stock, $.01 par value, authorized, 10,000,000
shares; issued and outstanding, 3,880,014 shares
in 1999 and 3,878,463 in 1998...................... 39 39
Paid-in capital..................................... 218,105 218,087
Accumulated distributions in excess of
accumulated earnings............................... (120,282) (126,994)
--------- ---------
97,862 91,132
--------- ---------
$ 402,158 $ 382,203
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -------------------------
1999 1998 1999 1998
------- ------- ------- -------
(dollars in thousands, except per share)
Income
<S> <C> <C> <C> <C>
Rents.......................... $20,073 $17,339 $39,166 $33,393
Interest....................... 38 175 140 393
------- ------- ------- -------
20,111 17,514 39,306 33,786
Expenses
Property operations............ 10,158 8,874 20,478 17,283
Interest....................... 6,203 5,609 12,433 10,944
Depreciation................... 2,962 2,606 5,846 5,129
Advisory fee to affiliate...... 740 689 1,455 1,303
Net income fee to affiliate... 641 - 659 -
General and administrative.... 571 486 1,203 1,065
------- ------- ------- -------
21,275 18,264 42,074 35,724
------- ------- ------- -------
<Loss> from operations.......... (1,164) (750) (2,768) (1,938)
Equity in income of investees... 479 450 504 432
Gain on sale of real estate..... 8,283 2,132 10,151 2,132
------- ------- ------- -------
Net income...................... 7,598 1,832 7,887 626
Preferred dividend requirement (7) - (14) -
------- ------- ------- -------
Net income applicable to
Common shares................. $ 7,591 $ 1,832 $ 7,873 $ 626
======= ======= ======= =======
Earnings Per Share
Net income applicable to
Common shares............... $1.96 $.47 $2.03 $.16
======= ======= ======= =======
Weighted average Common shares
used in computing earnings
per share................... 3,879,946 3,871,436 3,879,209 3,879,080
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
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, 1999......................... 3,878,463 $ 39 $ 218,087 $ (126,994) $ 91,132
Sale of Common Stock under dividend reinvestment
plan............................................ 1,551 18 18
Common dividends ($.30 per share)................. - - - (1,161) (1,161)
Preferred dividends($2.50 per share).............. - - - (14) (14)
Net income........................................ - - - 7,887 7,887
--------- -------- ----------- -------------- -------------
Balance, June 30, 1999............................ 3,880,014 $ 39 $218,105 $ (120,282) $ (97,862)
========= ======== =========== ============== =============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------
1999 1998
-------- --------
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Rents collected..................................... $ 38,911 $ 32,948
Interest collected.................................. 137 397
Interest paid....................................... (12,026) (9,984)
Payments for property operations.................... (20,777) (16,806)
Advisory and net income fee paid to affiliate....... (718) (2,094)
General and administrative expenses paid............ (1,470) (1,245)
Distributions from operating cash flow of
equity investees................................. 403 60
Other............................................... 259 (2,025)
-------- --------
Net cash provided by operating activities.......... 4,719 1,251
Cash Flows from Investing Activities
Acquisition of real estate.......................... (22,556) (51,452)
Real estate improvements............................ (9,889) (3,237)
Proceeds from sale of real estate................... (24,864) 3,596
Deposits on pending purchases....................... 1,870 (505)
Collections on notes receivable..................... 33 2,180
Distributions of equity investees' investing
cash flow, net................................... 1,996 694
-------- --------
Net cash (used in) investing activities............ (3,682) (48,724)
Cash Flows from Financing Activities
Payments on notes payable......................... (27,092) (13,678)
Proceeds from notes payable....................... 40,051 49,654
Deferred borrowing costs.......................... (759) (876)
Reimbursements to affiliates...................... (1,405) (61)
Repurchase of Common Stock........................ - (336)
Sale of Common Stock under dividend reinvestment
plan............................................. 18 79
Dividends to stockholders......................... (1,161) (4,949)
-------- --------
Net cash provided by financing activities.......... 9,652 29,833
Net increase <decrease> in cash and cash
equivalents......................................... 10,689 (17,640)
Cash and cash equivalents, beginning of period....... 10,505 24,733
-------- --------
Cash and cash equivalents, end of period............. $ 21,194 $ 7,093
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------------
1999 1998
---------- -----------
(dollars in thousands)
Reconciliation of net income to net cash
<S> <C> <C>
provided by operating activities
Net income.............................................. $ 7,887 $ 626
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization.......................... 6,305 5,525
Gain on sale of real estate............................ (10,151) (2,132)
Equity in (income) of investees........................ (504) (432)
Distributions from operating cash flow of equity
investees...................................... 403 60
Decrease in interest receivable........................ - 4
(Increase) decrease in other assets.................... 273 (2,262)
Increase (decrease) in interest payable................ (55) 564
Increase (decrease) in other liabilities............... 561 (702)
-------- -------
Net cash provided by operating activities............ $ 4,719 $ 1,251
======== =======
Schedule of noncash investing and financing
activities
Notes payable from purchase of real estate............. $ - $ 2,970
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
<PAGE>
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
that was organized on September 6, 1983. The Company invests in real estate
through direct equity ownership and partnerships and also invests in mortgage
loans on real estate, including first and junior mortgage loans.
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the six month period ended June 30, 1999, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the Consolidated
Financial Statements and notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 (the "1998 Form 10-K").
NOTE 2. REAL ESTATE
- --------------------
In February 1999, the Company sold the 368 unit Mariner's Pointe Apartments in
St. Petersburg, Florida, for $6.7 million, receiving net cash of $2.6 million
after paying off $3.9 million in mortgage debt and the payment of various
closing costs, including a real estate brokerage commission of $204,000 to
Carmel Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital Management,
Inc. ("BCM"), the Company's advisor. A gain of $1.9 million was recognized on
the sale.
In March 1999, the Company purchased the 264 unit Vista Hills Apartments in El
Paso, Texas, for $5.2 million, paying $1.6 million in cash and obtaining
mortgage financing of $3.6 million. The mortgage bears interest at a variable
rate, currently 7.625% per annum, requires monthly payments of principal and
interest of $26,897 and matures in April 2004. A real estate brokerage
commission of $173,000 was paid to Carmel Realty and a real estate acquisition
fee of $52,000 was paid to BCM.
Also in March 1999, the Company purchased the Dominion land, a 14.39 acre parcel
of unimproved land in Dallas, Texas, for $3.6 million, paying $1.2 million in
cash and obtaining mortgage financing of $2.4 million. The mortgage bears
interest at 15% per annum, requires quarterly payments of interest only and
matures in March 2000. A real estate brokerage commission of $56,000 was paid
to Carmel Realty and a real estate acquisition fee of $36,000 was paid to BCM.
In May 1999, the Company purchased the Red Cross land, a 2.89 acre parcel of
unimproved land in Dallas, Texas, for $7.6 million, paying $2.7 million in cash
and obtaining mortgage financing of $4.3 million. The mortgage bears interest at
a variable rate, currently 12.50% per
8
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. REAL ESTATE (Continued)
- --------------------
annum, requires monthly payments of interest only and matures in October 2000.
A real estate brokerage commission of $70,000 was paid to Carmel Realty and a
real estate acquisition fee of $76,000 was paid to BCM.
Also in May 1999, the Company sold the 109,497 sq. ft. 74 New Montgomery Office
Building in San Francisco, California, for $19.3 million, receiving $12.1
million after paying off $6.5 million of mortgage debt and the payment of
various closing costs, including a real estate brokerage commission of $410,000
to Carmel Realty. A gain of $8.3 million was recognized on the sale.
In June 1999, the Company purchased the 90,000 sq. ft. 4135 Beltline Road Office
Building in Addison, Texas, for $4.5 million, paying $1.0 million in cash and
obtaining mortgage financing of $3.5 million. The mortgage bears interest at a
variable rate, currently 9.5% per annum, requires monthly payments of interest
only and matures in June 2001. A real estate brokerage commission of $154,000
was paid to Carmel Realty and a real estate acquisition fee of $45,000 was paid
to BCM.
NOTE 3. NOTES AND INTEREST RECEIVABLE
- --------------------------------------
In March 1999, the Company accepted $33,000 for the early discounted payoff of
four mortgage notes receivable with a combined principal balance of $55,000 and
secured by undeveloped residential lots in Greensboro, North Carolina. No loss
was incurred in excess of the reserves previously established.
In June 1999, seven mortgage notes receivable with an aggregate principal
balance of $570,000 were written off as uncollectible. No loss was recognized
in excess of the reserve previously established.
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES
- ----------------------------------------------------------
Set forth below are summarized results of operations of the real estate entities
the Company accounts for using the equity method for the six months ended June
30, 1999 (dollars in thousands):
Rents and interest income............................. $9,903
Depreciation.......................................... (1,562)
Property operations................................... (4,422)
Interest expense...................................... (3,076)
------
Net income............................................ $ 843
======
The Company owns a combined 63.7% general and limited partner interest in Tri-
City Limited Partnership ("Tri-City"), which, at January 1, 1999, owned three
commercial properties in Texas. In June 1999, Tri-City sold the 48,696 sq. ft.
Summit at Bridgewood Shopping Center in Ft. Worth, Texas, for $3.3 million,
receiving net cash of $3.1 million after the payment of various closing costs,
including a real estate brokerage
9
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES (Continued)
- ---------------------------------------------------------
commission of $119,000 to Carmel Realty. The Company received a distribution of
$2.0 million of such net cash. Tri-City recognized a gain of $587,000 on the
sale of which the Company's equity share was $374,000.
NOTE 5. NOTES AND INTEREST PAYABLE
- ----------------------------------
In January 1999, the maturity date of the $4.9 million mortgage secured by the
242 unit Summerstone Apartments in Houston, Texas, was extended from December
1998 to July 1999. All other terms of the mortgage remained unchanged. See
NOTE 8. "SUBSEQUENT EVENTS."
In March 1999, the Company refinanced the matured mortgage debt secured by the
74,603 sq. ft. Lexington Center Office Building in Colorado Springs, Colorado,
in the amount of $4.3 million, receiving net cash of $136,000 after paying off
$4.0 million in mortgage debt and the payment of various closing costs. The new
mortgage bears interest at a variable rate, currently 7.75% per annum, requires
monthly payments of principal and interest of $32,479 and matures in April 2004.
A mortgage brokerage and equity refinancing fee of $43,000 was paid to BCM.
In April 1999, the Company refinanced the matured mortgage debt secured by the
97,846 sq. ft. Texstar Industrial Warehouse in Arlington, Texas, in the amount
of $1.3 million, receiving net cash of $100,000 after paying off $1.2 million in
mortgage debt and the payment of various closing costs. The new mortgage bears
interest at 8.5% per annum, requires monthly payments of principal and interest
of $11,282 and matures in April 2004. A mortgage brokerage and equity
refinancing fee of $13,000 was paid to BCM.
Also in April 1999, the Company refinanced the mortgage debt secured by the
106,257 sq. ft. Waterstreet Office Building in Boulder, Colorado, in the amount
of $13.3 million receiving net cash of $5.4 million after paying off $7.9
million in mortgage debt and the payment of various closing costs. The new
mortgage bears interest at 7.76% per annum, requires monthly payments of
principal and interest of $95,375 and matures in April 2009. A mortgage
brokerage and equity refinancing fee of $133,000 was paid to BCM.
Further in April 1999, the Company refinanced the matured mortgage debt secured
by the 70,295 sq. ft. Sadler Square Shopping Center in Amelia Island, Florida,
in the amount of $2.9 million, receiving net cash of $500,000 after paying off
$2.4 million in mortgage debt and the payment of various closing costs. The new
mortgage bears interest at 7.96% per annum, requires monthly payments of
principal and interest of $22,382 and matures in April 2009. A mortgage
brokerage and equity refinancing fee of $29,000 was paid to BCM.
10
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. OPERATING SEGMENTS
- --------------------------
Significant differences among the accounting policies of the Company's operating
segments as compared to the Company's consolidated financial statements
principally involve the calculation and allocation of administrative expenses.
Management evaluates the performance of the operating segments and allocates
resources to each of them based on their operating income and cash flow. The
Company based reconciliation of expenses that are not reflected in the segments
is $1.2 million of administrative expenses in the six months ended June 30,
1999, and $1.1 million in 1998. There are no intersegment revenues and expenses
and the Company conducts all of its business in the United States.
Presented below is the operating income of each of the Company's reportable
operating segments, for the six months ended June 30, 1999, and each segment's
assets at June 30.
<TABLE>
<CAPTION>
Commercial
Properties Apartments Hotels Land Total
---------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1999
- ---------
Rents............... $ 15,935 $ 19,299 $ 3,460 $ 472 $ 39,166
Property operating
expenses........... 6,360 11,297 2,476 345 20,478
-------- -------- ------- ------- --------
Operating income.... $ 9,575 $ 8,002 $ 984 $ 127 $ 18,688
======== ======== ======= ======= ========
Depreciation........ $ 3,139 $ 2,408 $ 299 $ - $ 5,846
Interest on debt.... 5,258 5,739 734 702 12,433
Real estate
improvements....... 3,131 6,092 666 - 9,889
Assets.............. 145,100 161,580 18,243 34,439 359,362
Commercial
Properties Apartments Total
---------- ---------- -------
Sales price........ $ 19,300 $ 6,700 $26,000
Cost of sale....... 11,017 4,832 15,849
-------- -------- -------
Gain on sale....... $ 8,283 $ 1,868 $10,151
======== ======== =======
</TABLE>
11
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. OPERATING SEGMENTS
- ---------------------------
Commercial
Properties Apartments Hotels Land Total
-------- -------- ------- ------- --------
1998
- ---------
Rents............... $ 14,882 $ 16,806 $ 1,306 $ 399 $ 33,393
Property operating
expenses........... 6,365 10,003 823 92 17,283
-------- -------- ------- ------- --------
Operating income.... $ 8,517 $ 6,803 $ 483 $ 307 $ 16,110
======== ======== ======= ======= ========
Depreciation........ $ 3,062 $ 1,925 $ 142 $ - $ 5,129
Interest on debt.... 5,212 5,021 308 403 10,944
Real estate
improvements....... 2,144 951 94 48 3,237
Assets.............. 160,314 136,522 5,429 22,066 324,331
Commercial
Properties Land Total
---------- -------- -------
Sales price........ $ 3,800 $ - $ 3,800
Cost of sale....... 3,800 - 3,800
-------- ------- -------
Gain on sale....... $ - $ 2,132* $ 2,132
======== ======= =======
- -----------------
* In April 1998, the Company recognized the previously deferred gain on a prior
years' land sale, on collection of the mortgage note receivable secured by the
land parcel.
NOTE 7. COMMITMENTS AND CONTINGENCIES
- -------------------------------------
The Company is involved in various lawsuits arising in the ordinary course of
business. The Company's management is of the opinion that the outcome of these
lawsuits will have no material impact on the Company's financial condition.
NOTE 8. SUBSEQUENT EVENTS
- -------------------------
In July 1999, the Company purchased the 57,493 sq. ft. Chesapeake Center Office
Building in San Diego, California, for $5.2 million. The Company paid $2.2
million in cash, assumed the existing mortgage of $2.5 million and obtained
seller financing of the remaining $500,000 of the purchase price. The mortgage
bears interest at 8.875% per annum, requires monthly payments of principal and
interest of $24,076 and matures in August 2005. The seller financing bears
interest at 7.25% per annum, requires quarterly payments of interest only and
matures in July 2002. The Company paid a real estate brokerage commission of
$174,000 to Carmel Realty and a real estate acquisition fee of $52,000 to BCM.
Also in July 1999, the Company refinanced the matured mortgage debt secured by
the 242 unit Summerstone Apartments in Houston, Texas, in the amount of $5.3
million, receiving net cash of $347,000 after paying off $4.9 million in
mortgage debt and the payment of various closing costs, including a mortgage
brokerage and equity refinancing fee of $53,000 to
12
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 8. SUBSEQUENT EVENTS (Continued)
- -------------------------
BCM. The new mortgage bears interest at 7.67% per annum, requires monthly
payments of principal and interest of $37,535 and matures in August 2009.
Further in July 1999, the Company sold the .925 acre Republic land parcel in
Dallas, Texas, for $1.8 million, receiving net cash of $443,000 after paying off
$1.2 million of mortgage debt and the payment of various closing costs,
including a real estate brokerage commission of $75,000 to Carmel Realty. A
gain will be recognized on the sale.
In July 1999, the Company sold the 216,131 sq. ft. Parke Long Industrial
Warehouse in Chantilly, Virginia, for $15.1 million, receiving net cash of $6.4
million after paying off $7.6 million of mortgage debt and the payment of
various closing costs, including a real estate brokerage commission of $347,000
to Carmel Realty. A gain will be recognized on the sale.
In July 1999, Tri-City sold the 53,472 sq. ft. MacArthur Mills Office Building
in Carrollton, Texas, for $3.9 million, receiving net cash of $2.3 million after
paying off $1.3 million of mortgage debt and the payment of various closing
costs, including a real estate brokerage commission of $137,000 to Carmel
Realty. The Company received a distribution of $1.5 million of such net cash.
Tri-City will recognize a gain on the sale.
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Introduction
- ------------
The Company invests in real estate through direct ownership and partnerships and
invests in mortgage loans, including first, wraparound and junior mortgage
loans. The Company is the successor to a business trust that was organized on
September 6, 1983, and commenced operations on January 31, 1984.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents aggregated $21.2 million at June 30, 1999, compared
with $10.5 million at December 31, 1998. 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
property operations, the sale of properties and the refinancing 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.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
Net cash provided by operating activities increased to $4.7 million for the six
months ended June 30, 1999, from $1.3 million for the six months ended June 30,
1998. The primary factors affecting the Company's cash flow from operations are
discussed in the following paragraphs.
The Company's cash flow from property operations (rents collected less payments
for expenses applicable to rental income) increased to $18.1 million in 1999,
from $16.1 million in 1998. Of this increase, $1.5 million was due to the
Company having acquired 25 properties during 1998 and 1999 and $1.4 million was
due to an increase in rental rates and a decrease in vacancies at the Company's
commercial properties. These increases were partially offset by a decrease of
$1.2 million due to six properties being sold during 1998 and 1999.
Interest collected decreased to $137,000 in 1999, from $397,000 in 1998. The
decrease was due to eight mortgage notes receivable being collected in full in
1998 and 1999, the foreclosure of the collateral securing one note receivable in
1998 and the foreclosure of another note receivable expected to occur in the
third quarter of 1999.
Interest paid increased to $12.0 million in 1999, from $10.0 million in 1998.
This increase was due to the acquisition of 23 properties subject to debt,
refinancings of properties where the debt balance was increased and financings
obtained on two previously unencumbered properties during 1998 and 1999. The
increase was partially offset by a decrease of $682,000 due to the sale of six
properties in 1998 and 1999.
Advisory and net income fee payments decreased to $718,000 in 1999, from the
$2.1 million paid in 1998. The decrease was due to the payment in 1998 of the
accrued fourth quarter 1997 net income fee of $1.0 million, no such fee being
earned by the advisor in 1998, and an additional $458,000 was due to an increase
in the advisory fee refund for 1998 received in the first quarter of 1999.
Under its advisory agreement with BCM, all or a portion of the annual advisory
fee must be refunded by the advisor if the operating expenses of the Company
exceed certain limits specified in the advisory agreement.
General and administrative expenses paid increased to $1.5 million in 1999, from
$1.2 million in 1998. This increase was mainly due to an increase in legal and
other professional fees.
Distributions received from equity joint ventures' operating cash flow increased
to $403,000 in 1999, from $60,000 in 1998. This increase is mainly due to a
decrease in operating expense at Tri-City's properties.
In February 1999, the Company sold the Mariner's Point Apartments in St.
Petersburg, Florida, receiving net cash of $2.6 million after paying off $3.9
million in mortgage debt and the payment of various closing costs. See NOTE 2.
"REAL ESTATE."
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
In March 1999, the Company purchased (1) the Vista Hills Apartments in El Paso,
Texas, for $5.2 million, consisting of $1.6 million in cash and mortgage
financing of $3.6 million; and, (2) the Dominion land in Dallas, Texas, for $3.6
million, consisting of $1.2 million in cash and mortgage financing of $2.4
million. See NOTE 2. "REAL ESTATE."
Also in March 1999, the Company received $33,000 on the early discounted payoff
of four mortgage note receivables. See NOTE 3. "NOTES AND INTEREST
RECEIVABLE."
Further in March 1999, the Company refinanced the mortgage debt secured by the
Lexington Center Office Building in Colorado Springs, Colorado, receiving net
cash of $136,000 after paying off $4.0 million in mortgage debt and the payment
of various closing costs. See NOTE 5. "NOTES AND INTEREST PAYABLE."
In April 1999, the Company refinanced the mortgage debt secured by (1) the
Texstar Industrial Warehouse in Arlington, Texas, receiving net cash of $100,000
after paying off $1.2 million in mortgage debt and the payment of various
closing costs; (2) the Waterstreet Office Building in Boulder, Colorado,
receiving net cash of $5.4 million after paying off $7.9 million in mortgage
debt and the payment of various closing costs; and, (3) the Sadler Square
Shopping Center in Amelia Island, Florida, receiving net cash of $500,000 after
paying off $2.4 million in mortgage debt and the payment of various closing
costs. See NOTE 5. "NOTES AND INTEREST PAYABLE."
In May 1999, the Company sold the 74 New Montgomery Office Building in San
Francisco, California, receiving net cash of $12.1 million after paying off $6.5
million in mortgage debt and the payment of various closing costs. See 2. "REAL
ESTATE."
Also in May 1999, the Company purchased the Red Cross land in Dallas, Texas, for
$7.6 million, consisting of $3.3 million in cash and mortgage financing of $4.3
million. See NOTE 2. "REAL ESTATE."
In June 1999, the Company purchased the 4135 Beltline Road Office Building in
Addison, Texas, for $4.5 million, consisting of $1.0 million in cash and
mortgage financing of $3.5 million. See NOTE 2. "REAL ESTATE."
In the first six months of 1999, the Company paid quarterly dividends to Common
stockholders of $.30 per share, or a total of $1.2 million, and $2.50 per share
or a total of $14,000 to Preferred stockholders and 1,551 shares of Common Stock
were sold through the dividend reinvestment program for a total of $18,000.
The Company's Board of Directors has approved the repurchase of a total of
687,000 shares of the Company's Common Stock. Through June 30, 1999, a total of
409,765 shares had been repurchased at a total cost of $3.3 million. During the
first six months of 1999, no shares were repurchased.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
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.
If impairment is found to exist, a provision for loss is recorded by a charge
against earnings. The mortgage note receivable review includes an evaluation of
the collateral property securing each note. The property review generally
includes: (1) selective property inspections; (2) a review of the property's
current rents compared to market rents; (3) a review of the property's expenses;
(4) a review of maintenance requirements; (5) a review of the property's cash
flow; (6) discussions with the manager of the property; and, (7) a review of
properties in the surrounding area.
Results of Operations
- ---------------------
The Company had net income of $7.6 million and $7.9 million in the three and six
months ended June 30, 1999, as compared to net income of $1.8 million and
$626,000 in the corresponding periods in 1998. Net income in the three and six
months ended June 30, 1999, included $8.3 million and $10.2 million of gains on
the sale of real estate. Net income in the three and six months ended June 30,
1998, included gains on sale of real estate of $2.1 million. Fluctuations in
this and other components of revenue and expense between the 1998 and 1999
periods are discussed below.
Rents in the three and six months ended June 30, 1999, increased to $20.1
million and $39.2 million from $17.3 million and $33.4 million in 1998. Of
these increases, $591,000 and $1.9 million were due to an increase in rental
rates and an increase in occupancy at the Company's commercial properties and
$2.9 million and $5.2 million were due to the acquisition of 25 properties in
1998 and 1999. These increases were partially offset by decreases of $1.4
million and $2.0 million due to the sale of six properties in 1998 and 1999.
Rents are expected to continue to increase due to properties acquired in 1998
and 1999.
Interest income decreased to $38,000 and $140,000 in the three and six months
ended June 30, 1999, compared to $175,000 and $393,000 in 1998. The decrease was
due to the collateral securing one mortgage note receivable being foreclosed in
1998 and the collateral securing one note receivable expected to be foreclosed
in the third quarter of 1999. Interest income for the remaining quarters of 1999
is expected to be insignificant.
Property operations expense in the three and six months ended June 30, 1999
increased to $10.2 million and $20.5 million from $8.9 million and $17.3 million
in 1998. Of these increases, $2.0 million and $3.2 million were due to the
acquisition of 25 properties in 1998 and 1999,
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- ---------------------
partially offset by a decrease of $668,000 and $725,000 due to the sale of six
properties during 1998 and 1999. Property operating expenses are expected to
continue to increase due to properties acquired in 1998 and 1999.
Interest expense increased to $6.2 million and $12.4 million in the three and
six months ended June 30, 1999, from $5.6 million and $10.9 million in 1998. Of
these increases, $956,000 and $2.1 million were due to the debt incurred or
assumed on 23 of the 25 properties acquired in 1998 and 1999 and $86,000 and
$227,000 due to refinancings where the debt balance was increased and financing
obtained on unencumbered properties. These increases were partially offset by
decreases of $347,000 and $634,000 due to the sale of six properties in 1998 and
1999. Interest expense for the remainder of 1999 is expected to increase due to
properties acquired in 1998 and 1999.
Depreciation increased to $3.0 million and $5.8 million in the three and six
months ended June 30, 1999, from $2.6 million and $5.1 million in 1998. Of
these increases, $436,000 and $854,000 were due to the acquisition of 20 income
producing properties in 1998 and 1999 and $210,000 and $432,000, due to
depreciation of prior years capital and tenant improvements. These increases
were partially offset by decreases of $290,000 and $569,000 due to six
properties being sold during 1998 and 1999. Depreciation is expected to
continue to increase during the remainder of 1999 as a result of the properties
acquired in 1998 and 1999.
Advisory fee increased to $740,000 and $1.5 million in the three and six months
ended June 30, 1999, from $641,000 and $1.3 million in 1998. These increases
were due to an increase in the Company's gross assets, the basis for such fee.
Advisory fees are expected to continue to increase with increases in the
Company's gross assets.
Net income fee increased to $641,000 and $659,000 in the three and six months
ended June 30, 1999 as compared to $48,000 in the three and six months ended
June 30, 1998. The net income fee is payable to the Company's advisor based on
7.5% of the Company's net income. No such fee was incurred in the first quarter
of 1998.
General and administrative expenses increased to $571,000 and $1.2 million in
the three and six months ended June 30, 1999, from $486,000 and $1.1 million in
1998. These increases were mainly due to an increase in legal and other
professional fees.
Equity in earnings of investees increased to $479,000 and $504,000 in the three
and six months ended June 30, 1999, from $414,000 and $432,000 in 1998. The
increases were mainly due to a decrease in property operating expenses at one of
the commercial properties in the Tri-City joint venture.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Results of Operations (Continued)
- ---------------------
In the three and six months ended June 30, 1999, the Company recognized gains of
$8.3 million and $10.1 million from the sale of Mariner's Pointe Apartments and
74 New Montgomery Office Building. In the six months ended June 30, 1998, a
previously deferred gain of $2.1 million was recognized on the sale of real
estate in the first quarter of 1998. Such gain had been deferred on a prior
years sale on one of the Company's properties until the financing provided by
the Company was collected.
Tax Matters
- -----------
As more fully discussed in the Company's 1998 Form 10-K, the Company has elected
and, in the opinion of 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 apartment operations tend to fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the rate
of inflation also affect sales values of properties, and the ultimate gain to be
realized from property sales. To the extent that inflation affects interest
rates, the Company's earnings from short-term investments, the cost of new
financings as well as the cost of variable interest rate debt 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 for personal injury associated with such
materials.
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.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
---------------------
Year 2000
- ---------
BCM, the Company's advisor, has informed management that its computer hardware
operating system and computer software have been certified as year 2000
compliant.
Further, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM,
that performs property management services for the Company's properties, has
informed management that effective January 1, 1999, it began using year 2000
compliant computer hardware and property management software for the Company's
commercial properties. With regard to the Company's apartments, Carmel, Ltd.
has informed management that its subcontractors are also using year 2000
compliant computer hardware and property management software.
The Company has not incurred, nor does it expect to incur, any costs related to
its computer hardware and accounting and property management software being
modified, upgraded or replaced in order to make them year 2000 compliant. Such
costs have been or will be borne by either BCM, Carmel, Ltd. or the property
management subcontractors of Carmel, Ltd.
Management has completed its evaluation of the Company's computer controlled
building systems, such as security, elevators, heating and cooling, etc., to
determine what systems are not year 2000 compliant. Management believes that
necessary modifications to such systems are insignificant and do not require
significant expenditures as such enhanced operating systems are readily
available.
The Company has or will have in place the year 2000 compliant systems that will
allow it to operate. The risks the Company faces are that certain of its
vendors will not be able to supply goods or services and that financial
institutions and taxing authorities will not be able to accurately apply
payments made to them. Management believes that other vendors are readily
available and that financial institutions and taxing authorities will, if
necessary, apply monies received manually. The likelihood of the above having a
significant impact on the Company's operations is negligible.
----------------------
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 (the "Settlement") of a class and derivative action
entitled Olive et al. v.
19
<PAGE>
ITEM 1. LEGAL PROCEEDINGS (Continued)
- -------------------------
National Income Realty Trust et al. 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 the Settlement.
On January 27, 1997, the parties entered into an Amendment to the Settlement
effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided
for the settlement of additional matters raised by plaintiffs' counsel in 1996.
The Court issued an order approving the Olive Amendment on July 3, 1997.
The Olive Amendment provided for the addition of four new unaffiliated members
to the Company's Board of Directors and set forth new requirements for the
approval of any transactions with certain affiliates until April 28, 1999. In
addition, the Company, CMET, IORI and their stockholders released the defendants
from any claims relating to the plaintiffs' allegations.
Under the Olive Amendment, all shares of the Company owned by any affiliates
were required to be voted at all stockholder meetings of the Company held until
April 28, 1999 in favor of all new members of the Company's Board of Directors
added under the Olive Amendment. The Olive Amendment also required that, until
April 28, 1999, all shares of the Company owned by any affiliates in excess of
forty percent (40%) of the Company's outstanding shares were to be voted in
proportion to the votes cast by all non-affiliated stockholders of the Company.
The provisions of the Settlement and the Olive Amendment terminated on April 28,
1999.
ITEM 5. OTHER INFORMATION
- -------------------------
Proposed Merger with Continental Mortgage and Equity Trust
- ----------------------------------------------------------
On September 25, 1998, the Company and CMET jointly announced the agreement of
their respective Boards, for the Company to acquire CMET. Under the proposal the
Company would acquire all of CMET's outstanding shares of beneficial interest in
a tax free exchange, for shares of its Common Stock. The Company will issue
1.181 shares of its Common Stock for each outstanding share of beneficial
interest of CMET. Upon the exchange of shares, CMET would merge into the
Company. The share exchange and merger are subject to a vote of shareholders of
both entities. Approval requires the vote of a majority of the shareholders
holding a majority of CMET's outstanding shares of beneficial interest and, if a
proposed amendment to the Company's Articles of Incorporation is approved, the
vote of a majority of the Company's outstanding shares of Common Stock. As of
July 31, 1999, BCM, the Company's advisor, and its affiliates held shares
representing approximately 60.1% of the outstanding shares of CMET and
approximately 46.6% of the outstanding shares of the Company. A date for the
special meeting of the shareholders to vote on the merger proposal has been set
for September 28, 1999. The Company has the same Board and advisor as CMET.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit
Number Description
- ------- ---------------------------------------------------------
27.0 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K as follows:
None.
21
<PAGE>
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: August 16, 1999 By: /s/ Randall M. Paulson
------------------------- --------------------------------
Randall M. Paulson
President
Date: August 16, 1999 By: /s/ Thomas A. Holland
------------------------- --------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
Principal Financial and
Accounting Officer)
22
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Six Months ended June 30, 1999
Exhibit Page
Number Description Number
- ------- --------------------------------------------------- ------
27.0 Financial Data Schedule 24
23
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 21,194
<SECURITIES> 0
<RECEIVABLES> 1,756
<ALLOWANCES> (293)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 421,559
<DEPRECIATION> 60,841
<TOTAL-ASSETS> 402,158
<CURRENT-LIABILITIES> 0
<BONDS> 295,461
0
0
<COMMON> 39
<OTHER-SE> 97,823
<TOTAL-LIABILITY-AND-EQUITY> 402,158
<SALES> 0
<TOTAL-REVENUES> 39,166
<CGS> 0
<TOTAL-COSTS> 20,478
<OTHER-EXPENSES> 5,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,433
<INCOME-PRETAX> 7,887
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,887
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,887
<EPS-BASIC> 2.03
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