<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 MARCH 31, 2000
--------------
Commission File Number 1-9240
------
TRANSCONTINENTAL REALTY INVESTORS, INC.
--------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 94-6565852
--------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
-----------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(214) 692-4700
------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.01 par value 8,630,538
---------------------------- -------------------------------
(Class) (Outstanding at April 28, 2000)
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. ("TCI"), all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of TCI'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
March 31, December 31,
2000 1999
-------- --------
(dollars in thousands,
except per share)
Assets
------
Notes and interest receivable
Performing.......................................... $ 10,854 $ 11,691
Nonperforming....................................... -- 382
-------- --------
10,854 12,073
Less - allowance for estimated losses................ (537) (543)
-------- --------
10,317 11,530
Foreclosed real estate held for sale................. 2,108 1,790
Real estate held for investment, net of
accumulated depreciation ($85,998 in 2000 and
$84,986 in 1999).................................... 611,641 599,746
Investment in real estate entities................... 1,038 2,310
Investment in marketable equity securities of
affiliate, at market................................ 13,339 13,954
Cash and cash equivalents............................ 31,639 41,266
Other assets (including $13,674 in 2000 and $14,945
in 1999 from affiliates)............................ 39,730 43,599
-------- --------
$709,812 $714,195
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
---------- --------
(dollars in thousands,
except per share)
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable............................ $506,897 $503,406
Other liabilities (including $376 in 2000 and
$2,356 in 1999 to affiliates)........................ 21,604 31,677
-------- --------
528,501 535,083
Stockholders' equity
Preferred Stock
Series A; $.01 par value; authorized, 6,000 shares;
issued and outstanding 5,829 shares
(liquidation preference $583)....................... - -
Common stock, $.01 par value, authorized, 10,000,000
shares; issued and outstanding, 8,627,570 shares
in 2000 and 8,626,611 in 1999........................ 86 86
Paid-in capital....................................... 278,138 278,119
Accumulated distributions in excess of
accumulated earnings................................. (97,015) (99,811)
Unrealized gain on marketable equity securities....... 102 718
-------- --------
181,311 179,112
-------- --------
$709,812 $714,195
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended March 31,
----------------------
2000 1999
---------- ---------
(dollars in thousands,
except per share)
Property revenue
Rents.................................. $ 34,041 $ 19,093
Property expense
Property operations.................... 18,396 10,320
---------- ---------
Operating income..................... 15,645 8,773
Other income
Interest and other..................... 404 102
Equity in income of equity investees... 7 25
Gain on sale of real estate............ 8,951 1,868
---------- ---------
9,362 1,995
Other expense
Interest............................... 11,192 6,230
Depreciation........................... 5,253 2,884
Advisory fee to affiliate.............. 1,182 715
Net income fee to affiliate............ 352 18
General and administrative............. 2,672 632
---------- ---------
20,651 10,479
---------- ---------
Net income.............................. 4,356 289
Preferred dividend requirement.......... (7) (7)
---------- ---------
Net income applicable to Common shares.. $ 4,349 $ 282
========== =========
Earnings per share
Net income applicable to Common shares.. $ .50 $ .07
========== =========
Weighted average Common shares used
in computing earnings per share....... 8,627,545 3,878,463
========== =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Distributions Accumulated
----------------- in Excess of Other
Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Earnings Income Equity
--------- ------ ---------- ------------- ------------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000.... 8,626,611 $ 86 $ 278,119 $ (99,811) $ 718 $ 179,112
Comprehensive income
Unrealized loss on
marketable equity
securities of
affiliate................. -- -- -- -- (616) (616)
Net income................. -- -- -- 4,356 -- 4,356
-------------
3,740
Sale of Common Stock under
dividend reinvestment
plan....................... 1,600 -- 19 -- -- 19
Fractional shares........... (641) -- -- -- -- --
Common dividends ($.18 per
share)..................... -- -- -- (1,553) -- (1,553)
Preferred dividends ($1.25
per share)................. -- -- -- (7) -- (7)
--------- ------ ---------- ------------- ------------- -------------
Balance, March 31, 2000..... 8,627,570 $ 86 $ 278,138 $ (97,015) $ 102 $ 181,311
========= ====== ========== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
------------------
2000 1999
-------- --------
(dollars in thousands)
Cash Flows from Operating Activities
Rents collected...................................... $ 33,046 $ 19,191
Interest collected................................... 71 99
Interest paid........................................ (10,679) (6,073)
Payments for property operations..................... (19,995) (11,150)
Advisory and net income fee paid (to)/refunded by
affiliate......................................... (2,330) 32
General and administrative expenses paid............. (2,295) (639)
Distributions from operating cash flow of equity
investees......................................... 38 216
Other................................................ (889) 263
-------- --------
Net cash provided by (used in) operating
activities....................................... (3,033) 1,939
Cash Flows from Investing Activities
Acquisition of real estate........................... (16,001) (9,414)
Real estate improvements............................. (3,469) (4,763)
Proceeds from sale of real estate.................... 2,871 6,273
Refunds of deposits on pending purchases and
financings........................................ 906 776
Deferred merger costs................................ -- (86)
Collections on notes receivable...................... 1,037 33
Contributions to equity investees.................... (17) (2)
-------- --------
Net cash (used in) investing activities............. (14,673) (7,183)
Cash Flows from Financing Activities
Payments on notes payable............................ (9,717) (20,082)
Proceeds from notes payable.......................... 19,448 29,661
Distributions from financing cash flow of
equity investees.................................. 1,258 --
Deferred borrowing costs............................. (172) (918)
Payments (to)/from advisor........................... (1,197) 12
Dividends to stockholders............................ (1,560) (588)
Sale of Common Stock under dividend reinvestment
plan.............................................. 19 --
-------- --------
Net cash provided by financing activities........... 8,079 8,085
Net increase (decrease) in cash and cash
equivalents........................................ (9,627) 2,841
Cash and cash equivalents, beginning of period........ 41,266 10,505
-------- --------
Cash and cash equivalents, end of period.............. $ 31,639 $ 13,346
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Three Months
Ended March 31,
-------------------------
2000 1999
----------- -----------
(dollars in thousands)
Reconciliation of net income to net cash
provided by operating activities
Net income.............................................. $ 4,356 $ 289
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization..................... 5,995 3,094
Gain on sale of real estate....................... (8,951) (1,868)
Equity in (income) of equity investees............ (7) (25)
Distributions from operating cash flow of equity
investees.................................. 38 216
(Increase) in interest receivable................. (177) -
(Increase) decrease in other assets............... (729) 2,069
(Decrease) in interest payable.................... (229) (56)
(Decrease) in other liabilities................... (3,329) (1,780)
------- -------
Net cash provided by (used in) operating
activities.......................... $(3,033) $ 1,939
======= =======
Schedule of noncash investing and financing
activities
Notes payable assumed on purchase of real estate........ $ 3,259 $ -
Notes payable assumed by buyer on sale of real
estate............................................ 8,652 -
Unrealized loss on marketable equity securities of
affiliate......................................... (616) -
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
TCI is a Nevada corporation and successor to a California business trust which
was organized on September 6, 1983. TCI invests in real estate through direct
ownership, leases and partnerships. TCI has also invested in mortgage loans on
real estate.
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. Dollar amounts in tables are in thousands, except per share
amounts. Certain balances for 1999 have been reclassified to conform to the
2000 presentation.
Operating results for the three month period ended March 31, 2000, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the Consolidated Financial
Statements and notes included in TCI's Annual Report on Form 10-K for the year
ended December 31, 1999 (the "1999 Form 10-K").
NOTE 2. ACQUISITION OF CONTINENTAL MORTGAGE AND EQUITY TRUST
On September 25, 1998, TCI and Continental Mortgage and Equity Trust ("CMET")
jointly announced the agreement of their respective Boards of Directors for TCI
to acquire CMET through merger. At special meetings held on September 28, 1999,
the stockholders of both companies approved the merger transaction. The merger
was completed on November 30, 1999. Pursuant to the merger agreement, TCI
acquired all of the outstanding CMET shares of beneficial interest in a tax free
exchange of shares, issuing 1.181 shares of its Common Stock for each
outstanding CMET share. TCI accounted for the merger as a purchase.
The consolidation of TCI's accounts with those of CMET resulted in an increase
in TCI's net real estate of $258.8 million. This amount was allocated to the
individual real estate assets based on their relative individual fair market
values.
Pro forma operating results for the first quarter of 1999, as if TCI had
acquired CMET on January 1, 1999, would have been:
Revenues............................. $ 35,820
Property operating expenses.......... (20,063)
Interest............................. (11,703)
Depreciation......................... (4,729)
Advisory fee......................... (1,288)
Net income fee....................... (37)
General and administrative expenses.. (1,150)
--------
(Loss) from operations............... (3,150)
Equity in income of investees........ 81
Gain on sale of real estate.......... 2,020
--------
Net (loss)........................... $ (1,050)
========
8
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. REAL ESTATE
In 2000, TCI purchased the following properties:
<TABLE>
<CAPTION>
Net
Units/ Purchase Cash Debt Interest Maturity
Property Location Acres/Sq.Ft. Price Paid Incurred Rate Date
- --------------------- ------------------ ------------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter
Apartments
Quail Creek Lawrence, KS 95 units $ 3,250 $1,088 $2,254 7.44% 07/03
Apple Lane Lawrence, KS 75 units 1,575 595 1,005 8.63 05/07
Land
Netzer Collin County, TX 20 acres 400 418 -- -- --
Limestone Canyon II Austin, TX 17.07 acres 1,500 517 1,030 10.00 12/00
Manhattan Farmers Branch, TX 108.9 acres 10,743 6,144 5,000 14.00 02/01
DF Fund Collin County, TX 79.5 acres 2,545 1,047 1,545 10.00 03/01
Second Quarter
Apartments
Autumn Chase Midland, TX 64 units 1,338 458 936 9.45 * 04/05
Primrose Bakersfield, CA 162 units 4,100 1,189 3,000 9.25 * 03/07
Office Building
9033 Wilshire Blvd. Los Angeles, CA 44,253 Sq.Ft. 9,225 2,536 6,861 8.07 08/09
</TABLE>
- --------------------
* Variable interest rate.
In 2000, TCI sold the following properties:
<TABLE>
<CAPTION>
Net
Sales Cash Debt Gain on
Property Location Units Price Received Discharged Sale
- -------------------- --------------- --------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
First Quarter
Apartments
Hunters Bend San Antonio, TX 96 units $ 1,683 $ 418 $1,127 * $ 572
Westgate of Laurel Laurel, MD 218 units 11,290 2,599 7,525 * 3,575
</TABLE>
- --------------------
* Debt assumed by purchaser.
NOTE 4. NOTES AND INTEREST RECEIVABLE
At December 31, 1999, mortgage note receivables with a combined principal
balance of $4.6 million and a carrying value of $356,000, secured by first and
second liens on a closed hotel in Lake Charles, Louisiana were in default.
Title to the collateral property was obtained in February 2000 through
foreclosure. No loss was incurred on foreclosure as the estimated fair value of
the property, less estimated costs of sale, exceeded the carrying value of the
mortgage notes receivable.
In December 1999, TCI provided $8.5 million of purchase money financing in
conjunction with the sale of 253 acres of unimproved land in McKinney
9
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. NOTES AND INTEREST RECEIVABLE (Continued)
and Collin County, Texas. The note receivable bears interest at 8.5% per annum,
required a $1.0 million principal paydown in February 2000, which was received,
requires payment of accrued interest in June 2000 and the payment of all
principal and remaining accrued interest at maturity in September 2000. In
conjunction with the principal paydown, TCI recognized a previously deferred
gain on the sale of $4.8 million.
NOTE 5. NOTES AND INTEREST PAYABLE
In 2000, TCI financed/refinanced the following properties:
<TABLE>
<CAPTION>
Net
Debt Debt Cash Interest Maturity
Property Location Units/Sq.Ft. Incurred Discharged Received Rate Date
- ---------------------- ------------ -------------- -------- ---------- -------- -------- --------
First Quarter
Apartments
<S> <C> <C> <C> <C> <C> <C> <C>
Crescent Place Houston, TX 120 units $2,165 $1,722 $ 370 7.04%* 03/30
Madison @ Bear Creek Houston, TX 180 units 3,500 2,625 730 7.04 * 03/30
Office Buildings
Westgrove Air Plaza Addison, TX 78,326 Sq.Ft. 2,087 1,180 742 9.02 * 01/05
Venture Center Atlanta, GA 38,772 Sq.Ft. 2,700 1,113 1,592 8.75 03/10
Second Quarter
Office Building
Technology Trading Sterling, VA 197,659 Sq.Ft. 6,300 3,881 2,065 8.26 * 05/05
</TABLE>
- ----------------
* Variable interest rate.
NOTE 6. OPERATING SEGMENTS
Significant differences among the accounting policies of the operating segments
as compared to the Consolidated Financial Statements principally involve the
calculation and allocation of administrative expenses. Management evaluates the
performance of each of the operating segments and allocates resources to them
based on their net operating income and cash flow. Expenses that are not
reflected in the segments are $2.7 million of administrative expenses for the
three months ended March 31, 2000 and $632,000 for the three months ended March
31, 1999. Also excluded from operating segments assets are assets of $96.1
million at March 31, 2000 and $34.0 million at March 31, 1999, which are not
identifiable with an operating segment. There are no intersegment revenues and
expenses and all business is conducted in the United States.
10
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. OPERATING SEGMENTS (Continued)
Presented below is the operating income of each operating segment for the three
months ended March 31, and each segment's assets at March 31.
<TABLE>
<CAPTION>
Commercial
Land Properties Apartments Hotels Total
------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
2000
Rents........................ $ 161 $ 14,220 $ 19,227 $ 433 $ 34,041
Property operating expenses.. 155 7,161 11,013 67 18,396
------- -------- -------- ------- --------
Segment operating income..... $ 6 $ 7,059 $ 8,214 $ 366 $ 15,645
======= ======== ======== ======= ========
Depreciation................. $ -- $ 2,509 $ 2,497 $ 247 $ 5,253
Interest..................... 875 4,854 5,084 379 11,192
Real estate improvements..... (65) 2,208 826 500 3,469
Assets....................... 62,516 272,383 258,896 19,954 613,749
</TABLE>
Property Sales
Apartments Total
---------- --------
Sales price........................................ $12,973 $12,973
Cost of sales...................................... 8,826 8,826
---------- -------
Gain on sale....................................... $ 4,147 $ 4,147*
========== =======
- --------------------
* Excludes a $4.8 million gain previously deferred on the sale of land.
<TABLE>
<CAPTION>
Commercial
Land Properties Apartments Hotels Total
------- ---------- ---------- ------- --------
1999
<S> <C> <C> <C> <C> <C>
Rents........................ $ 177 $ 7,953 $ 9,492 $ 1,471 $ 19,093
Property operating expenses.. 152 3,177 5,789 1,202 10,320
------- -------- -------- ------- --------
Segment operating income..... $ 25 $ 4,776 $ 3,703 $ 269 $ 8,773
======= ======== ======== ======= ========
Depreciation................. $ -- $ 1,548 $ 1,195 $ 141 $ 2,884
Interest..................... 286 2,659 2,879 406 6,230
Real estate improvements..... 17 2,076 2,598 72 4,763
Assets....................... 26,053 152,359 159,299 17,807 355,518
</TABLE>
Property Sales
Apartments Total
---------- --------
Sales price...................................... $6,700 $6,700
Cost of sales.................................... 4,832 4,832
------ ------
Gain on sale..................................... $1,868 $1,868
====== ======
NOTE 7. COMMITMENTS AND CONTINGENCIES
TCI is involved in various lawsuits arising in the ordinary course of business.
Management is of the opinion that the outcome of these lawsuits will have no
material impact on TCI's financial condition, results of operations or
liquidity.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
TCI invests in real estate through acquisitions, leases and partnerships. TCI
has also invested in mortgage loans, including first, wraparound and junior
mortgage loans. TCI is the successor to a business trust organized on September
6, 1983, and commenced operations on January 31, 1984.
On September 25, 1998, TCI and CMET jointly announced the agreement of their
respective Boards of Directors for TCI to acquire CMET through merger. At
special meetings held on September 28, 1999, the stockholders of both companies
approved the merger transactions. The merger was completed on November 30,
1999. Pursuant to the merger agreement, TCI acquired all of the outstanding
CMET shares of beneficial interest in a tax-free exchange of shares, issuing
1.181 shares of its Common Stock for each outstanding CMET share. TCI accounted
for the merger as a purchase. See NOTE 2. "ACQUISITION OF CONTINENTAL MORTGAGE
AND EQUITY TRUST."
Liquidity and Capital Resources
Cash and cash equivalents totaled $31.6 million at March 31, 2000, compared with
$41.3 million at December 31, 1999. TCI'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. Management
anticipates that TCI's cash on hand, as well as cash generated from property
operations, the sale of properties and the refinancing of certain of TCI's
mortgage debt will be sufficient to meet all of TCI's cash requirements,
including debt service obligations and expenditures for property maintenance and
improvements.
Net cash from operating activities decreased to use of $3.0 million for the
three months ended March 31, 2000, from $1.9 million being provided by
operations for the three months ended March 31, 1999. The primary factors
affecting TCI's cash from operations are discussed in the following paragraphs.
Cash from property operations (rents collected less payments for expenses
applicable to rental income) increased to $13.1 million in the three months
ended March 31, 2000, from $8.0 million in 1999. Of this increase, $404,000 was
due to the purchase of nine income producing properties during 1999 and 2000 and
an increase of $7.2 million was due to the properties obtained in the merger
with CMET. These increases were partially offset by a decrease of $1.3 million
due to the sale of ten income producing properties in 1999 and the first quarter
of 2000.
Interest collected of $71,000 in the three months ended March 31, 2000,
approximated the $99,000 in 1999.
Interest paid increased to $10.7 million in the three months ended March 31,
2000, from $6.1 million in 1999. Of this increase $4.2 million was
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
due to the properties obtained in the merger with CMET, $755,000 was due to the
acquisition of 13 properties subject to debt during 1999 and 2000 and $319,000
was due to refinancings of properties where the debt balance was increased.
These increases were partially offset by a decrease of $907,000 due to the sale
of eight properties subject to debt in 1999 and the first quarter of 2000.
Advisory and net income fee paid increased to $2.3 million in the three months
ended March 31, 2000, from a refund of $32,000 in the three months ended March
31, 1999. The increase was primarily due to the increase in assets due to the
merger with CMET, and not being entitled to a refund of any of its 1999 advisory
fee. In the first quarter of 1999, TCI had received a $458,000 refund of
advisory fees for 1998. Under its advisory agreement, all or a portion of the
annual advisory fee must be refunded by the advisor if the operating expenses of
TCI exceed certain limits specified in the advisory agreement.
General and administrative expenses paid increased to $2.3 million in the three
months ended March 31, 2000, from $639,000 in 1999. This increase was mainly
due to an increase in legal fees, other professional fees and increased
franchise taxes.
In the first quarter of 2000, TCI sold two apartments for a total of $13.0
million, receiving net cash of $3.0 million, after the payment of various
closing costs. The purchasers assumed $13.1 million in mortgage debt. Also in
the first quarter of 2000, TCI purchased two apartments and four parcels of
unimproved land for a total of $20.0 million, paying $9.6 million in cash,
including various closing costs, and either obtaining new mortgage financing or
assuming existing mortgage debt of $10.8 million. Further in the first quarter
of 2000, TCI refinanced two apartments and two office buildings for a total of
$10.5 million, receiving net cash of $3.4 million after paying off $6.6 million
in mortgage debt and the payment of various closing costs.
In the second quarter of 2000, TCI purchased two apartments and one office
building for a total of $14.7 million, paying $4.2 million in cash, including
various closing costs, and either obtaining new mortgage financing or assuming
existing mortgage debt of $10.8 million. Also in the second quarter of 2000,
TCI refinanced an office building for $6.3 million, receiving net cash of $3.9
million after paying off $2.1 million in mortgage debt and the payment of
various closing costs.
In the first quarter of 2000, TCI paid dividends to Common stockholders of $.18
per share, or a total of $1.6 million, and $1.25 per share or a total of $7,000
to Preferred stockholders. 1,600 shares of Common Stock were sold through the
dividend reinvestment program, for a total $19,000.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
The Board of Directors has approved the repurchase of a total of 687,000 shares
of TCI's Common Stock. Through March 31, 2000, a total of 409,765 shares had
been repurchased at a total cost of $3.3 million. No shares have been
repurchased under this program since May 1998.
Management reviews the carrying values of TCI'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
TCI had net income of $4.3 million in the three months ended March 31, 2000,
including gains on sale of real estate totaling $9.0 million, compared to net
income of $289,000 in the corresponding period in 1999, including a $1.9 million
gain on the sale of real estate. Fluctuations in this and other components of
revenues and expense between the 2000 and 1999 periods are discussed below.
Rents in the three months ended March 31, 2000, increased to $34.0 million
compared to $19.1 million in 1999. An increase of $1.1 million was due to the
purchase of two income producing properties in 2000 and seven income producing
properties in 1999 and an increase of $16.1 million was due to the properties
obtained in the merger with CMET. These increases were partially offset by a
decrease of $2.4 million due to the sale of two income producing properties in
2000 and eight income producing properties in 1999.
Property operations expense in the three months ended March 31, 2000 increased
to $18.4 million from $10.3 million in 1999. Of this increase, $718,000 was due
to the purchase of two income producing properties in 2000 and seven income
producing properties in 1999 and $8.9 million was due to the properties obtained
in the merger with CMET. These increases were partially offset by a decrease of
$1.1 million due to the sale of two income producing properties during 2000 and
eight income producing properties in 1999.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Rents and property operating expenses are both expected to increase in 2000 due
to properties obtained in the merger with CMET, and also from anticipated
increases in apartment rental rates, increased commercial property occupancy and
from a full year of operations of the properties acquired during 1999 and in the
first quarter of 2000. See NOTE 2. "ACQUISITION OF CONTINENTAL MORTGAGE AND
EQUITY TRUST."
Interest and other income increased to $404,000 in the three months ended March
31, 2000, compared to $102,000 in 1999. Of this increase, $15,000 is due to the
two mortgage notes receivable obtained in the merger with CMET and $208,000 is
due to TCI having provided purchase money financing in conjunction with two
property sales in 1999. Interest income for the remaining quarters of 2000 is
expected to approximate that of the first quarter of 2000.
Interest expense increased to $11.2 million in the three months ended March 31,
2000, from $6.2 million in 1999. Of this increase, $4.6 million was due to the
properties obtained in the merger with CMET, $779,000 was due to the debt
incurred or assumed on 13 properties acquired in 1999 and 2000 and $319,000 was
due to refinancings where the debt balance was increased. These increases were
partially offset by a decrease of $864,000, due to the sale of two income
producing properties in 2000 and six income producing properties subject to debt
in 1999. Interest expense for the remainder of 2000 is expected to increase due
to anticipated property refinancings and the properties purchased in the first
quarter of 2000 on a leveraged basis.
Depreciation increased to $5.3 million in the three months ended March 31, 2000,
from $2.9 million in 1999. Of this increase, $256,000 was due to the
acquisition of nine income producing properties in 1999 and 2000, $1.8 million
was due to the properties obtained in the merger with CMET and $635,000 was due
to the completion of construction of an apartment in 1999. These increases were
partially offset by a decrease of $531,000 due to the sale of two income
producing properties in 2000 and eight income producing properties in 1999.
Depreciation is expected to continue to increase during the remainder of 2000
due to a full year of depreciation of properties acquired or completed in 1999
and the income producing properties purchased in the first quarter of 2000.
Advisory fee increased to $1.2 million in the three months ended March 31, 2000,
from $715,000 in 1999. This increase was due to an increase in TCI's gross
assets, the basis for such fee. Advisory fees are expected to continue to
increase with increases in TCI's gross assets, including the assets obtained in
the merger with CMET.
Net income fee was $352,000 in the three months ended March 31, 2000, as
compared to $18,000 in the three months ended March 31, 2000. The net income fee
is payable to TCI's advisor based on 7.5% of TCI's net income.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
General and administrative expenses increased to $2.7 million in the three
months ended March 31, 2000, from $632,000 in 1999. This increase was mainly
due to an increase in legal fees, other professional fees, partially due to the
merger with CMET and increased franchise taxes.
In the three months ended March 31, 2000, gains on sale of real estate totaling
$9.0 million were recognized, $57,000 on the sale of Hunters Bend Apartments,
$3.6 million on the sale of Westgate of Laurel Apartments and a $4.8 million
previously deferred gain on the sale of McKinney land.
In the three months ended March 31, 1999, TCI recognized a gain of $1.9 million
from the sale of Mariner's Pointe Apartments.
Tax Matters
As more fully discussed in TCI's 1999 Form 10-K, TCI 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. To continue to qualify for federal taxation as a REIT, TCI
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. As a REIT, TCI is also required to distribute at
least 95% of its REIT taxable income, plus 95% of its net income from
foreclosure property on an annual basis to stockholders.
Inflation
The effects of inflation on TCI's operations are not quantifiable. Revenues from
property 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, TCI'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, TCI 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.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Environmental Matters (Continued)
Management is not aware of any environmental liability relating to the above
matters that would have a material adverse effect on TCI's business, assets or
results of operations.
Year 2000
Even though January 1, 2000 has passed, and no adverse impact from the
transition to the year 2000 has been experienced, no assurance can be provided
that TCI's suppliers and tenants have not been affected in a manner that is not
yet apparent. As a result, management will continue to monitor TCI's year 2000
compliance and the year 2000 compliance of TCI's suppliers and tenants.
----------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Olive Litigation. In February 1990, TCI, together with CMET, Income Opportunity
Realty Investors, Inc. and National Income Realty Trust, three real estate
entities with, at the time, the same officers, directors or trustees and advisor
as TCI, entered into a settlement (the "Settlement") of a class and derivative
action entitled Olive et al. v. National Income Realty Trust et al. relating to
the operation and management of each of the entities (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 that TCI's Board of Directors retain a
management/compensation consultant or consultants to evaluate the fairness of
TCI's advisory contract with Basic Capital Management, Inc. and any contract of
its affiliates with TCI, CMET and IORI, including, but not limited to, the
fairness to TCI, CMET and IORI of such contracts relative to other means of
administration. In 1998, the Board engaged a management/compensation consultant
to perform the evaluation which was completed in September 1998.
In 1999, plaintiffs' counsel asserted that the Board did not comply with the
provision requiring such engagement and requested that the Court exercise its
retained jurisdiction to determine whether there was a breach of this provision
of the Olive amendment. Although several
17
<PAGE>
ITEM 1. LEGAL PROCEEDINGS (Continued)
status conferences have been held on this matter, there has been no Court order
resolving whether there was any breach of the Olive Amendment.
In January 2000, the Board engaged another management/compensation consultant to
perform the required evaluation again. This evaluation was completed in April
2000 and was provided to plaintiffs' counsel. The Board believes that any
alleged breach of the Olive Amendment has been fully remedied by the Board's
engagement of the second consultant.
The provisions of the Settlement and Olive Amendment terminated on April 28,
1999.
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.
18
<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: May 15, 2000 By: /s/ Karl L. Blaha
-------------------------- --------------------------------
Karl L. Blaha
President
Date: May 15, 2000 By: /s/ Thomas A. Holland
-------------------------- --------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<PAGE>
TRANSCONTINENTAL REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Three Months ended March 31, 2000
Exhibit Page
Number Description Number
- ------- --------------------------------------------------- ------
27.0 Financial Data Schedule 21
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 31,639
<SECURITIES> 0
<RECEIVABLES> 10,854
<ALLOWANCES> 537
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 699,747
<DEPRECIATION> 89,998
<TOTAL-ASSETS> 709,812
<CURRENT-LIABILITIES> 0
<BONDS> 506,897
0
0
<COMMON> 86
<OTHER-SE> 181,311
<TOTAL-LIABILITY-AND-EQUITY> 709,812
<SALES> 0
<TOTAL-REVENUES> 34,041
<CGS> 0
<TOTAL-COSTS> 18,396
<OTHER-EXPENSES> 5,253
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,192
<INCOME-PRETAX> 4,356
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,356
<EPS-BASIC> .50
<EPS-DILUTED> .50
</TABLE>
