SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended:
SEPTEMBER 30, 2000
OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 33-22805
MASTER REALTY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 48-1056392
(State of jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
410 W. 8th Street
Kansas City, Missouri 64105
(Address of principal offices) (Zip Code)
Registrant's telephone number, including area code: (816) 474 9333
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 for the preceding 12 months (or 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
As of September 30, 2000, the Registrant had 19,875
shares of preferred stock and 1,269,838 shares of common stock
outstanding. The aggregate book value of all shares of the Registrant,
based on the September 30, 2000 unaudited financial statements was
$14,432,975.
MASTER REALTY PROPERTIES, INC.
SEPTEMBER 30, 2000 FORM 10-Q INDEX Part I: Financial Information Financial
Statements
A. Condensed Consolidated
Balance Sheets as of September 3-4
30, 2000 and December 31, 1999
B. Condensed Consolidated Statements
of Operations for the Three Months Ended
September 30, 2000 and 1999. 5
C. Condensed Consolidated
Statements of Operations for
the Nine Months Ended September
30, 2000 and 1999. 6
D. Condensed Consolidated
Statements of Changes in
Stockholders' Equity for the
Nine Months Ended September 30,
2000 and 1999 7
E. Condensed Consolidated Statements
of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999. 8
Notes to the Condensed
Consolidated Financial
Statements 9-20
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 21-23
Signatures 24
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, 2000 and December 31, 1999
September 30, December 31,
2000 1999
A S S E T S
CASH $ 339,996 $ 390,089
RESTRICTED CASH 352,388 261,495
MORTGAGE NOTES RECEIVABLE, net of
allowance for loan losses 722,775 722,775
NOTE RECEIVABLE 235,502 235,225
PROPERTY HELD FOR INVESTMENT 1,007,651 1,007,651
INVESTMENT IN REAL ESTATE PARTNERSHIPS 569,803 692,137
ACCOUNTS RECEIVABLE - OTHER 1,269,006 1,041,709
ACCOUNTS RECEIVABLE RELATED PARTY 1,276,598 760,490
PROPERTY AND EQUIPMENT, at cost less
accumulated depreciation 38,364,372 39,777,094
OTHER ASSETS 1,237,033 1,135,325
----------- -----------
TOTAL ASSETS $45,375,124 $46,023,990
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Continued) September 30, 2000 and December 31, 1999
September 30 December 31
2000 1999
L I A B I L I T I E S
NOTES PAYABLE $29,614,031 $30,285,413
OTHER LIABILITIES 1,013,176 1,082,471
---------- -----------
TOTAL LIABILITIES 30,627,207 31,367,884
MINORITY INTEREST IN SUBSIDIARIES
314,942 310,873
COMMITMENTS AND CONTINGENCIES (Note 13)
S T O C K H O L D E R S' E Q U I T Y
CAPITAL CONTRIBUTED
Convertible preferred stock, par value
$.01, liquidation
preference up to 5 percent of the Company's net assets
authorized 1,000,000 shares 206 284
Common stock, par value
authorized 8,500,000 shares 12,727 12,158
Capital in excess of par 42,272,653 41,869,842
Retained Deficit (27,852,611) (27,537,051)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 14,432,975 14,345,233
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,375,124 $46,023,990
=========== ============
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, 2000, and 1999
2000 1999
REVENUES
Rental Income $1,016,847 $ 944,214
Hotel Income 418,500 483,061
Interest and fees on mortgage loans 11,203 16,431
Other income 327,715 (491)
---------- ----------
TOTAL REVENUES 1,774,265 1,443,215
---------- ----------
Loan Servicing Fees 3,579 3,910
Rental expenses 519,688 444,798
General and administrative 97,010 117,551
Legal and accounting 17,331 71,667
Payroll and employee benefits 141,799 137,506
Depreciation and amortization 342,651 282,507
Interest expense 573,352 324,144
--------- ---------
TOTAL EXPENSES 1,695,410 1,382,083
MINORITY INTEREST IN LOSS (INCOME) OF
CONSOLIDATED SUBSIDIARIES (1,409) 10,182
NET INCOME BEFORE
EXTRAORDINARY ITEM $80,264 $ 50,950
EXTRAORDINARY ITEM - Loss on
Asset Disposition - (809,652)
---------- ---------
NET INCOME (LOSS) $80,264 (758,802)
========== =========
INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $0.0583 $(0.6209)
MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Nine Months Ended September 30, 2000, and 1999
2000 1999
REVENUES
Rental Income $2,932,933 $2,798,504
Hotel Income 1,255,500 1,504,755
Interest and fees on mortgage loans 31,224 56,090
Other income 479,529 56,364
---------- ---------
TOTAL REVENUES 4,699,186 4,415,713
EXPENSES
Loan Servicing Fees 10,742 11,738
Rental expenses 1,375,808 1,257,168
General and administrative 299,937 336,471
Legal and accounting 171,388 212,120
Payroll and employee benefits 438,423 458,747
Depreciation and amortization 1,033,295 973,633
Interest expense 1,689,222 1,688,643
--------- ---------
TOTAL EXPENSES 5,018,815 4,938,520
--------- ---------
MINORITY INTEREST IN LOSS
(INCOME) OF CONSOLIDATED SUBSIDIARIES (4,069) 10,182
NET LOSS BEFORE --------- ----------
EXTRAORDINARY ITEM (315,560) (532,989)
EXTRAORDINARY ITEM - Loss on Asset
Disposition - (809,652)
---------- ------------
NET LOSS $(315,560) $(1,342,641)
LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $(0.2294) $(1.0987)
MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (UNAUDITED)
Nine Months Ended September 30, 2000 and 1999
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine Months Ended September 30, 2000 and 1999
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
SHARES AMOUNT SHARES AMOUNT
Balances, 12-31-98 35,925 $359 1,187,804 $11,878
Debenture Conversion
to Stock 14,956 150
------- ------- ---------- -------
Balances, September 30, 1999 35,925 359 1,202,760 12,028
======= ======= ========== =======
Balances, December 31, 1999 28,425 284 1,215,809 12,158
Debenture Conversion to Stock 49,082 491
Preferred converted
to Common (7,800) (78) 7,800 78
Net income for the period
-------- ------- --------- ------
Balances, Sept. 30, 2000 23,400 206 1,269,916 12,727
======= ====== ========= ======
CAPITAL
IN EXCESS UNDISTRIBUTED TOTAL
OF PAR EARNINGS STOCKHOLDERS'
VALUE (DEFICIT) EQUITY
Balances, 12-31-98 $41,760,211 $(27,134,491) $14,637,957
Adjustment to reverse
stock split (41) (41)
Debenture Conversion
to Stock 111,004 111,154
Net income for the period (1,342,641) (1,342,642)
---------- ----------- -----------
Balances, Sept. 30, 1999 41,871,174 (28,477,132) 13,406,429
========== ============ ==========
Balances, 12-31-1999 $41,869,842 $(27,537,051) $14,345,233
Debenture Conversion to Stock 365,811 366,302
Adjustment to Reverse
Stock split 37,000 37,000
Preferred converted to Common -
Net income for the period (315,560) (315,560)
----------- ------------- -------------
Balances, Sept 30, 2000 $42,272,653 $(27,852,611) $(14,432,975)
=========== ============= =============
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 2000 and 1999
2000 1999
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(315,560) $(1,342,641)
Adjustments to reconcile net
income to net cash
Provided by (used in) operating
activities
Minority interest 4,069 8,661
Depreciation and amortization 1,033,295 973,633
Accounts receivable (743,405) 378,936
Other assets, net (329,465) (1,380,623)
Other liabilities (230,824) 143,012
Interest payable 161,529 43,847
NET CASH USED IN ---------- ----------
OPERATING ACTIVITIES (420,361) (1,205,175)
CASH FLOWS FROM ---------- ----------
Decrease mortgage notes receivable - 555,000
Net change in real estate
Partnerships 122,334 (389,988)
Net change in note receivables (277) 269,375
Net change in fixed assets 607,184 2,489,565
NET CASH PROVIDED BY --------- -----------
INVESTING ACTIVITIES 729,241 2,923,952
CASH FLOWS FROM FINANCING ACTIVITIES --------- -----------
Costs of Debentures converted
To Stock (7) (565)
Proceeds retained from stock split 37,000 -
Net change in notes payable (305,073) (2,819,596)
NET CASH USED IN --------- ----------
FINANCING ACTIVITIES (268,080) (2,820,161)
--------- ----------
NET INCREASE IN CASH 40,800 (1,101,384)
CASH, BEGINNING OF PERIOD 651,584 1,795,718
--------- ----------
CASH, END OF PERIOD $ 692,384 694,334
========== ===========
PART I
This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934, including, without
limitation, statements containing the words "believes," "anticipates",
"expects" and words of similar import. Such forward-looking statements
related to future events, the future financial performance of the Company,
and involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company or industry results to be materially
different from any future results, performance or achievements expressed
or implied by such forward looking statements. Readers should
specifically consider the various factors identified in this report which
could cause actual results to differ. The Company disclaims any
obligation to update any such factors or to publicly announce the result
of any revisions to any of the forward-looking statement contained herein
to reflect future events or developments.
MASTER REALTY PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of significant accounting policies In the opinion
of management, the accompanying unaudited condensed consolidated
interim financial statements reflect all adjustments
(consisting of only normal and recurring adjustments) necessary to
present fairly the financial position of Master Realty Properties,
Inc. and Subsidiaries as of September 30, 2000 and December 31, 1999,
and the results of their operations and cash flows for the nine month
periods ended September 30, 2000 and 1999. The results of operations
for such interim periods are not necessarily indicative of the results
for the full year. The accompanying unaudited condensed consolidated
interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
reporting and with instructions to Form 10-Q and accordingly do
not include all disclosures required by generally accepted
accounting principles. The 1999 condensed consolidated
financial statements were derived from Master Realty Properties,
Inc. and Subsidiaries audited consolidated financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
(2) Restricted cash and escrows
The Company entered into a Cash Management, Collateral and Security
Agreement (Cash Collateral Agreement), on December 19, 1997, as part of
the First Mortgage Note and Mezzanine Note transactions. As a result, all
cash received from the operations of the collateral pledged for the First
Mortgage Note, after December 19, 1997, is deposited into a central
operating account. A monthly sweep of this account
is used to fund, in priority, certain reserves and sub-accounts
created pursuant to the Cash Collateral Agreement. All
remaining funds, if any, are paid to the Company. The following
reserves were established under this agreement.
September 30, December 31,
2000 1999
Debt service reserve $ 176,200 $160,492
Capital expenditure reserve 17,004 77,611
Impound costs sub-account 159,184 23,392
-------- -------
Total restricted cash and escrows $ 352,388 $261,495
======== ========
Debt service reserve - This account was created to fund the First
Mortgage Note debt service to the extent necessary. Withdrawals from
this account occur only when there are insufficient funds in the
central operating account to fully fund the First Mortgage Note debt
service.
Capital expenditure reserve - This account was created to fund the
payment of replacement expenditures, furniture, fixtures and equipment
replacement expenditures and leasing expenditures. Funding is provided in
monthly deposits from the central operating account. Withdrawals may be
made from this account for approved expenditures.
Impound costs sub-account - This account was established to pay impound
costs. These impound costs are defined as all taxes of the First
Mortgage Note borrowers and insurance (if insurance not otherwise provided
for by the Company) for the pledged collateral of the First Mortgage
Note. Funding is provided in monthly deposits from the central
operating account. Withdrawals may be made from this account
for approved costs.
The Cash Collateral Agreement is secured by a pledge of the central
operating account and all income derived from the investment of that
account. The First Mortgage Note and Mezzanine Note are also
cross-collateralized and crossdefaulted with the Cash Collateral
Agreement.
(3) Mortgage note receivable
September 30, December 31,
2000 1999
Mortgage note receivable,
partially-earning $1,774,738 $1,774,738
Allowance for losses (1,051,963) (1,051,963)
---------- -----------
Net mortgage note receivable $722,775 $722,775
========== ===========
As of December 31, 1999 and September 30, 2000, mortgage note
receivable consists of one mortgage note collateralized by
an Office Building located in the Historic Garment District
of Downtown Kansas City, Missouri. The Company has initiated
procedures to buy out the Partnership holding the collateral
and convert its note to equity. The buyout is subject to
approval of the Land Clearance for Redevelopment Authority
of Kansas City who holds a lien on the property in favor of
Soho Office Center Project Series 1996 Bonds in the original
amount of $2,655,000. The Company has applied for approval,
and expects to receive such approval during 2000. The Company
expects to close the transaction on December 31, 2000. Due
to the probable conversion of the note to an equity interest
in the underlying collateral, no estimate has been
made of the scheduled maturities of the mortgage note
receivable over the next five years and thereafter.
Due to the uncertainty of future collections and possible
foreclosures, it is not practicable to estimate the
scheduled maturities of mortgage notes receivable over
the next five years and thereafter.
(4) Property held for investment
September 30, December 31,
2000 1999
Non-earning, land in New Mexico $901,688 $901,688
Vacant residential building lots -
Missouri 105,963 105,963
-------- -------
Total property held for investment $1,007,651 $1,007,651
========== ==========
The carrying amount of the land in New Mexico is based on an estimate
of value established at the time the contractual right to the
property was acquired in foreclosure on collateral for a note
receivable. The estimate was based on prior appraisals, studies of
the development possibilities for the property, and local economic
conditions. The land is in a remote part of New Mexico and access
to the property is limited. There is limited real estate sales
activity in this region to determine the likelihood of realizing
the carrying value of this investment. Because of these factors,
it is possible that the estimate of the realizable value of this land
may change materially. The building lots consist of eight lots on the
west side of downtown Kansas City and one lot in Independence,
Missouri.
(5) Investment in real estate entities
Investment in real estate partnerships and limited liability
companies accounted for on the equity method consists of the
following:
Ownership Percentage
Ownership at September 30,
Name Interest 2000 1999
--------- --------- --------------------
OPP IX, Limited Partnership Limited - 25.12
OPP X, Limited Partnership Limited - 2.3
Historic Suites of America - KC Limited 19.8 19.8
Wellington, L.L.C. Member 19.8 -
B & F Properties, L.P. General 0.0099 -
MRP Historic Development General 33.3 -
EBT Limited Partnership General .01 -
Campbell Paint, L.P. General .01 -
R & S Partners, L.P. General .01 -
MRP Freighthouse, L.L.C. General .01 -
During November 1999, the Company sold its investments in OPP
IX and OPP X Limited Partnerships to the Company's President
for an amount approximating the Company's carrying value for the
investments. The aggregate sales proceeds was $191,173. No gain
or loss was incurred on the sale.
During May 1999, the Company acquired a 19.8percent ownership interest
in Wellington L.L.C., a limited liability company, for a capital
contribution of $401,250. Wellington L.L.C. holds a 99.0% limited
partnership interest in Foxridge L.P. (Foxridge). Foxridge
currently owns an apartment complex known as the "Wellington Club
Apartments" located in Johnson County, Kansas.
During November 1999, the Company entered into a Limited
Partnership agreement with B & F Properties, L.P. The Company
received an allocation of Missouri Historic Tax Credits from the
Partnership which it sold for a gain of $918,167. Subsequent to
year end the Company contributed the cash to the partnership in
the form of a capital contribution. This capital contribution
will give the Company a General Partner interest of 0.0099. The
Company will receive 0.0099 of available cash flow in Years
1 through 5, and 89.999 percent thereafter. The limited partners have
an option after the first five years to have B & F Properties, L.P.
redeem their partnership interests in accordance with the buy
out formula specified in the partnership agreement.
During 1999, the Company acquired a 33.33 percent General Partnership
Interest in MRP Historic Development Company for a capital contribution
of $100. The partnership was formed for the purpose of owning,
developing, managing, leasing, and operating real estate property.
The initial property and project for the partnership is the
development and management of the property owned by B & F Properties
L.P. known as Soho IV Apartments. The Company has recorded its
pro-rata 33.33 portion of development fees accrued on this project
and owed to the Partnership. The Company's equity in earnings
of the Partnership for the year ended December 31, 1999 was recorded
as other income in the amount of $289,280.
In March 2000 the Company entered into a limited partnership
Agreement with EBT Limited Partnership as the Partnership's
General Partner. The Partnership is redeveloping a historic
building at 16th and Walnut in the downtown crossroads
district of Kansas City, Missouri. The Company will be
allocated state historic tax credits which the Company has
contracted to sell. The proceeds from this sale will be
contributed to the capital of the partnership. The limited
partners have an option after five years to have the Company
acquire their partnership interest based on a buy out formula.
In April 2000 the Company entered into a limited partnership agreement
with Campbell Paint, L.P. as the Partnership's General Partner. The
Partnership is redeveloping a historic building at 16th and Walnut
in the downtown crossroads district of Kansas City, Missouri.
The Company will be allocated state historic tax credits which
the Company has contracted to sell. The proceeds from this sale
will be contributed to the capital of the partnership. The limited
partners have an option after five years to have the Company acquire
their partnership interest based on a buy out formula.
In April 2000 the Company entered into a limited partnership agreement
with R & S Partners, L. P. as the Partnership's General Partner.
The Partnership is redeveloping a historic building at 9th and
Broadway in the downtown Kansas City, Missouri. The Company will
be allocated state historic tax credits which the Company has
contracted to sell. The proceeds from this sale will be contributed
to the capital of the partnership. The limited partners have an
option after five years to have the Company acquire their partnership
interest based on a buy out formula.
In August 2000 the Company entered into a limited partnership agreement
with MRP Freighthouse L.P. as the Partnership's General Partner.
The Partnership is redeveloping a historic building at 2029 Wyandotte
in the Freighthouse District of Kansas City, Missouri. The Company
will be allocated state historic tax credits which the Company
has contracted to sell. The proceeds from this sale will be contributed
to the capital of the partnership. The limited partners have an option
after five years to have the Company acquire their partnership interest
based on a buy out formula.
(6) Accounts receivable - related party
Amounts due from Embassy Hotel Management, Inc. are in
connection with the leases and funds advanced for operations of the
following hotel properties:
September December
30, 31,
2000 1999
Ramada Inn- Phoenix, Arizona $468,168 $280,417
Ramada Inn - Euless, Texas 585,146 392,453
Historic Suites - Kansas City, 173,484 87,620
Embassy Hotel Management 49,800 -
---------- --------
Total $1,276,598 $760,490
========== ========
(7) Property and equipment
September December
30, 31,
2000 1999
Cost
Land and land improvements $6,871,160 $6,326,999
Building and building improvements 32,002,038 31,950,335
Furniture and equipment 3,030,203 2,805,469
Assets not yet in service 1,993,775 3,411,986
---------- ----------
Total cost 43,897,176 44,494,789
Accumulated depreciation (5,532,804) (4,717,695)
---------- ------------
Net property, plant and equipment $38,364,372 $39,777,094
========== ===========
Expenditures for maintenance, repairs and improvements which do
not materially extend the useful life of the asset are expensed.
The aggregate depreciation charged to operations for the period
ended September 30, 2000 and 1999 was $815,109 and $716,547
respectively.
(8) Notes payable
September 30, December 31,
2000 1999
Salomon Brothers mortgage note $18,885,124 $19,119,204
Salomon Brothers Mezzanine note 749,771 939,802
Convertible subordinated debentures 919,114 1,383,446
ITLA mortgage note - 4,900,000
Morgan Guarantee Trust Mortgage note 6,384,495 -
Hillcrest Bank Note #3 1,210,157 558,872
Hillcrest Bank Note #4 - 480,000
Hillcrest Bank Note #5 - 480,000
Hillcrest Bank Note #6 127,037 450,000
Hillcrest Bank Note #7 - 800,000
Hillcrest Bank Note #8 80,000 -
Unsecured alternative treatment note - 1,017,444
Unsecured note 559,846 -
Unsecured non-interest bearing
note payable 51,692 61,906
FNB of Medicine Lodge note 500,000 -
Real estate tax note 48,710 67,521
Hotel Van loans 58,666 27,218
Lease Commission note 39,419 -
----------- -----------
Total notes payable $29,614,031 $30,285,413
=========== ===========
Salomon Brothers mortgage note - Mortgage note payable (First
Mortgage Note) of December 19, 1997 with monthly principal and
interest payments of $145,397 based on an interest rate of
7.5 percent and a 25-year amortization period. The initial payment
of accrued interest only through January 31, 1997 was paid on
February 1, 1998. The outstanding principal and interest are due
at maturity on January 1, 2008. The nonrecourse First Mortgage Note
is collateralized by commercial, residential and hotel properties
in Kansas City, Missouri, a hotel in Phoenix, Arizona and a hotel
in Euless, Texas. This note is also cross-collateralized and
cross-defaulted with the Mezzanine Note and the Cash Collateral
Agreement.
Salomon Brothers Mezzanine note - Mortgage note payable (Mezzanine
Note) of December 19, 1997 with interest payable monthly based upon the
one-month London Interbank Offered Rate (LIBOR) plus 4.95 percent.
The interest rate at December 31, 1997 was 10.92 percent with the
initial payment due February 1,1998. Monthly principal payments begin
in January 1999 based upon a monthly calculation using the
outstanding principal balance, the interest rate from the
preceding month and a 48-month amortization period less the
months elapsed since January 1, 1999. The outstanding principal
and interest are due at maturity on January 1, 2003. The Mezzanine Note
is secured by the pledge of the Company's general partner interest
in New Historic Suites Partners, L.P. and a full payment guaranty
by the Company. The Mezzanine Loan Agreement requires that the
monthly aggregated Adjusted Property Net Cash Flow for
the properties securing the First Mortgage Note to at least equal the
monthly calculation of the Debt Service Coverage Threshold.
The Debt Service Coverage Threshold is defined as 1.05 times
the sum of the annual debt service on the First Mortgage
Loan plus the debt service payable on the Mezzanine Loan at an
assumed principal and interest constant of 27 percent.
This note is cross-collateralized and cross-defaulted with the
First Mortgage Note and the Cash Collateral Agreement.
Convertible subordinated debentures - Convertible Subordinated Debentures
issued January 1994. The securities were issued in the initial aggregate
principal amount of $9,127,752, and bear interest at the rate of 6
percent per annum. Interest accrues semiannually on January 1 and
July 1 of each year. The outstanding balance as of September 30,
2000 and December 31, 1999 consists of principal of $609,553 and
$982,704 and accrued interest of $309,561 and $400,742,
respectively. Although the securities mature December 2003,
the securities are subordinate and junior in right of payment
to all senior indebtedness of the Company (which includes all
collateralized debt of the Company). Senior indebtedness is to
be paid in full before holders of the securities are to be paid
any principal or interest. As a result, management does not
anticipate that the securities will be paid at the date of maturity.
At any time prior to maturity, the securities are convertible
into shares of common stock of the Company, unless the
securities are called for redemption. The number of shares
issuable upon conversion is based on the Company's book value
of $7.4667/share (after reverse and forward stock split)as
of the December 31, 1993 financial statements. Related accrued
interest expense is not subject to conversion to common
stock and the liability is eliminated upon conversion of the
debenture principal. Accrued interest eliminated upon conversion
of debentures during the period ended September 30, 2000 and
September 30, 1999 amounted to $116,578 and $31,828, respectively.
ITLA mortgage note - Mortgage note payable (first mortgage note)
with monthly interest only payments based on a 8.75 percent for the first
twelve months and then monthly principal and interest payments with
interest determined quarterly based on LIBOR plus 3.75 percent and
principal payments based on a 25 year amortization period.
This note was paid in full in June, 2000.
Morgan Guarantee Trust Mortgage Note - Mortgage note payable of
September 2000 with monthly principal and interest payments of
$47,423.20 based on an interest rate of 8.12 percent and a 30
year amortization. This note matures on July 1, 2030. This note
is collateralized by commercial, residential and parking
properties in the Garment District of Kansas City, Missouri.
Hillcrest Bank note #3 - Line of credit, with maximum aggregate
principal amount of $480,000, with interest at the Wall Street Prime
Interest Rate plus 1 percent. Monthly payments of interest are required
until maturity on October 1, 2000, at which time any unpaid accrued
interest and principal are due. The note is collateralized by a
commercial property located in Rivermarket area Kansas City,
Missouri, a vacant lot, assignment of rents, furniture and fixtures,
and a full payment guaranty by the Company. On October 1, the note
was increased to $1,210,157. The proceeds from this note will be
used for construction costs on the collateralized building.
Hillcrest Bank note #4 - Line of credit, with maximum aggregate
principal amount of $480,000 with interest at Wall Street prime interest
plus 1 percent. Monthly payments on interest only are required until
maturity at April 1, 2000. This note is collateralized by a building
located in downtown Kansas City, Missouri. This note was paid in full
in March 2000 as part of a transfer of the building to a development
partnership.
Hillcrest Bank note #5 - Line of credit, with maximum aggregate
principal amount of $480,000 with interest at Wall Street prime interest
plus 1 percent. Monthly payments on interest only are required until
maturity at May 1, 2000. This note is collateralized by a building
located in Kansas City, Missouri. This note was paid in
full in May 2000 as part of a transfer of the building to a
development partnership.
Hillcrest Bank note #6 - Line of credit, with maximum aggregate
principal amount of $450,000 with interest at the Wall Street Prime
Interest Rate plus 1 percent. Monthly payments on interest only are
Required until maturity at May 1, 2000. This recourse note was
Collateralized by an earnout agreement related to the ITLA mortgage
note due at the earlier of the payout of the earnout or May 2000.
Subsequent to December 31, 1999, the Company paid down $290,000
on this obligation and the terms changed to a 3 year amortization
period through December 2002.
Hillcrest Bank note #7 - Line of credit, with maximum aggregate
principal amount of $800,000 with interest at Wall Street prime interest
plus 1 percent. Monthly payments of interest only are required until
maturity at September 1, 2000. This note was collateralized by a
building located in downtown Kansas City, Missouri. This note was
paid in full in May 2000 as part of a transfer of the building to
a developmental partnership.
Hillcrest Bank note #8 - Line of credit with maximum principal
amount of $80,000 with interest at Wall Street prime plus 1 percent
Monthly payments of interest only are due until maturity at
March 1, 2001. This note is collateralized by a building in downtown
Kansas City, Missouri.
Unsecured note - 9 percent unsecured note payable to previous
participants in the alternative treatment plan, with interest
only payable quarterly until maturity in August 2000. This note
was paid in full in August 2000.
Unsecured note - Prime rate plus 1 percent unsecured note payable
totaling $559,846 due December 31, 2001. Interest is payable
quarterly.
Unsecured non-interest bearing note payable - Note
due September 2000, payable in an installment of $75,000 on
January 31, 1996 and 60 monthly payments of $7,333 with the
remaining unpaid principal due at maturity. Interest has been
imputed at a rate of 9 percent
FNB of Medicine Lodge note - A mortgage note payable with interest
only at prime rate due May 30, 2001. This note is collateralized
by a commercial real estate project in Independence, Missouri.
Real estate tax note - Unsecured note payable consisting of an
agreement with the taxing authorities for delinquent real estate
taxes on a foreclosed property with interest imputed at 9 percent
and monthly payments of $3,220 until maturity on August 15,
2002.
Hotel van loans - 9.25, 8.75 and 8 percents notes payable,
collateralized by vehicles, payable in aggregate monthly installments
of $1,445 through May 2001, $646 through September 2001 and $871
through March 2003, respectively.
Lease Commissions note - 9.5 percent unsecured note payable with monthly
principle and interest payments of $839 and a balloon payment of $33,390
due September 1, 2001.
(9) Other liabilities
Other liabilities consists of the following:
September 30, December 31,
2000 1999
Interest Payable $ 183,724 $179,249
Accounts payable 384,335 556,477
Accrued bonus pool - 68,744
Other liabilities 445,117 278,001
--------- --------
Totals $1,013,176 $1,082,471
========== ==========
(10) Common and Preferred Stock and Paid in Capital.
Stockholder rights plan: During 1999 the Board of Trustees adopted
a stockholder rights plan. Under this plan each shareholder was
given the right to purchase additional shares of stock at a
price below market value. The number of shares allowed to be
purchased by each shareholder and the purchase price is defined in
this agreement. The rights become exercisable if a triggering event,
as defined in the agreement, occurs. Certain stockholders, as
defined in the agreement, are precluded from participating in this
plan. The rights under the plan will expire if not utilized by
October 31, 2009. The dilutive effect of this plan cannot be
determined due to significant variables at this time.
(11) Extraordinary item
During September 1999, the Company entered into an agreement with
its lender to transfer hotel property in Wichita, Kansas in
full settlement of the nonrecourse debt collateralized by the
property. The Company acquired the troubled property in October
1997 with the intent of improving the operating performance
of the property. Certain adverse market conditions, including a
switch from a Holiday Inn to a Ramada Inn during 1998 contributed
to a continued decline in the operating performance of the
property. The carrying amount of the collateral exceeded its fair
value by an estimated $5,654,395, and, accordingly, a loss on the
asset transfer was included in net operating income for 1999. The
carrying amount of the loan payable at the date of foreclosure
exceeded the fair value of the collateral by an estimated
$4,789,488, and, accordingly, an extraordinary gain, was recognized
in 1999.
(12) Business segment information
Description of the types of activities for reportable segments
The Company has three reportable segments: hotel leasing,
residential/mixed use properties, and assets held for restructure
The hotel leasing segment realizes rent income on Hotel
properties leased to operators. The residential/mixed use
properties segment realizes income from residential and commercial
real estate properties. The assets held for restructure are assets
recovered as collateral on notes receivable for which the Company
has no long-term objective of owning and operating.
Revenue from segments below the quantitative thresholds are reported
as all other. Those activities are predominantly non-recurring
gains and losses. The assets in all other are predominantly
administrative assets, intangible assets, and assets held for
long-term capital appreciation.
Measurement of segment profit or loss and segment assets The
accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
The Company does not have intersegment sales and transfers.
Factors management used to identify the enterprise's reportable
segments - The Company's reportable segments are strategic business
units that are in distinct markets consistent with the Company's
longrange strategic business plan. They are managed separately
because each business requires different management practices.
The following table illustrates information concerning segment
profit or loss and segment assets:
Period ended September 30, 2000
Residential Assets
Hotel mixed use For
Leasing Properties Restructure
Revenues from external
Customers $1,255,500 $2,932,933 $ -
Interest revenue 1,242 52 10,238
-------- -------- -------
Total revenues $1,256,742 $2,932,985 $10,238
======== ======== =======
Percentage of segment
revenues to total 27 63 0
Interest expense 742,371 737,854 -
Depreciation and
Amortization 456,828 527,700 -
Other expenses 3,275 1,315,410 -
Segment profit (loss) 54,268 352,021 10,238
Percentage of segment
profit (loss) to total -17 -112 -3
September 30, 2000
Segment assets $18,877,991 $19,464,634 $4,116,190
Percentage of segment
assets to total 42 43 9
Expenditures for
segment assets 13,749 974,181 128,050
Period Ended September 30, 2000
All
Other Total
Revenues from external
Customers $479,529 $4,667,962
Interest revenue 19,692 31,224
-------- ----------
Total revenues $499,221 $4,699,186
======== ==========
Percentage of segment
revenues to total 10 100
Interest expense 208,997 1,689,222
Depreciation and
Amortization 48,767 1,033,295
Other expenses 973,544 2,292,229
Segment profit (loss) (732,087) (315,560)
Percentage of segment
profit (loss) to total 232 100
September 30, 2000
Segment assets $2,916,309 $45,375,124
Percentage of segment
assets to total 6 100
Expenditures for
segment assets 545,526 1,661,506
In addition to the above measures for business segments,
the Company monitors Funds from Operations (FFO) as defined
by National Association of Real Estate Investment
Trusts (NAREIT). Real Estate Investment Trusts use
FFO as a standard measure of operating performance.
FFO is defined by NAREIT as net income (computed in
accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation and amortization,
and after adjustments for unconsolidated partnerships
and joint ventures. The calculation of FFO for the
Company for each operating segment is as follows:
Period Ended September 30, 2000
Residential Assets
Hotel mixed use For
Leasing Properties Restructure
Net income (loss) $ 54,268 $352,021 $10,238
Add: Minority interest 4,069 - -
Add: Depreciation and amortization
of real estate assets 456,828 527,700 -
Less: Accrued Interest foregone
On converted debentures - - -
-------- -------- -------
Funds from operations $515,165 $879,721 $10,238
======== ======== =======
Period Ended September 30, 2000
All
Other Total
Net income $(732,087) $(315,560)
Add: Minority interest - 4,069
Add: Depreciation and amortization
of real estate assets 48,767 1,033,295
Less: Accrued Interest forgone on
converted debentures (104,393) (104,393)
--------- ----------
Funds from operations $(787,713) $617,411
========== ==========
Commitments and contingencies
Guaranty:
The Company is contingently liable as a guarantor on
Industrial Revenue Bonds (IRB's) (Soho Office Center Project)
Series 1996 between the Land Clearance for Redevelopment
Authority of Kansas City (the Issuer) and Soho Office Center,
L.P. (the borrower) in the amount of $2,655,000. The Series
1996 bonds were reissued to pay amounts due to the Company
on Series 1984 Bonds. The Company entered into the Guarantor
Agreement to effectuate the transaction whereby these funds
would be available to the Company. The Company has pledged
collateral to secure the guaranty. The collateral consists
of the Company's Deed of Trust and Security Agreement executed
by the borrower in favor of the Company on the Series 1984
Bonds, and assignment on a ratable basis of General Partnership
Interest of River Market Venture, Inc. (a wholly owned
subsidiary of the Company) in River Market Venture I, L.P.
The Company is completing negotiations to acquire Soho
Office Center project.
Minimum rents:
The Company receives income on commercial and residential
properties under noncancelable operating lease agreements
expiring through 2001 in connection with its rental
operations. Future minimum rental payments under these
leases as of December 31, 1998 are as follows:
Years Ended December 31,
2000 $2,167,143
2001 1,098,960
2002 983,010
2003 561,761
2004 463,656
Thereafter 882,382
----------
Total $6,156,912
==========
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands, unless otherwise stated)
Background:
The following discussion compares historical results of operation for the
nine months ended September 30, 2000 and 1999. The discussion should be
ead in conjunction with the "Selected Financial Data," and the financial
statements and notes thereto included elsewhere in this report.
The Company
The Company is a public real estate investment trust that is primarily
engaged in the acquisition, development and operation of mixed use
apartment/commercial properties and the acquisition and development of
hotel properties. The Company operates these properties either directly
or through subsidiaries or partnerships.
Results of Operations
Nine Month Period Ended September 30, 2000 Compared with Nine Month Period
Ended September 30, 1999.
Rental Properties
Revenue from rental properties increased by $134,429 from $2,798,504 at
September 30, 1999 to $2,932,933 at September 30, 2000. This increase was
due to the increases in rental rates in all of the Properties and the
addition of 14 apartment units in September 1999.
Rental expenses increased from $1,257,168 at September 30, 1999 to
$1,375,808 at September 30, 2000. This increase of $118,640 was due
to increased real estate taxes on one property which came off tax
abatement in 1999 and the addition of 14 apartment units in
September 1999.
Funds from operations from rental properties was $891,010 at September 30,
2000 compared to $999,487 September 30, 1999.
Hotel Properties
Revenues from hotel lease income decreased by $249,255 from $1,504,755 at
September 30, 1999 to $1,255,500 for September 30, 2000. This decrease
was due to the elimination of percentage rent and the disposition of
the Company's hotel in Wichita, Kansas. The Company disposed of the
Wichita hotel in September, 1999. The Company acquired this hotel as
part of a workout between the lender and its former borrower.
The Company implemented new management and funded capital improvements
to reposition the hotel. However, a significant decline in room demand
in Wichita due to the relocation of two companies' international
headquarters devastated the Wichita hotel market. The Company had
no choice but to negotiate a transfer of the hotel back to the lender.
The disposition of the property resulted in a loss on the asset transfer
of $5,654,395 and an extraordinary gain on the debt discharge of
$4,789,488 in 1999.
Funds from operations from Hotels was $515,165 at September 30, 2000
compared to $575,514 at September 30, 1999.
Other Revenues and Expenses
The Company continued to receive interest income on its remaining real
estate loans. The decrease in the amount received of $24,866 from
September 30, 1999 to September 30, 2000 was due to the decline in
mortgage notes receivable of the Company.
The Company had a $36,534 decrease in general and administrative expenses
for September 30, 2000 compared to September 30, 1999
Interest expense decreased by $579 from $1,688,643 at September 30, 1999
to $1,689,222 at September 30, 2000.
Liquidity and Capital Resources
The Company had a deficit in cash flow from its operating and financing
activities which represented the payment of Company liabilities.
The Company had an increase in cash flows from its investing and financing
activities related to partnership and asset acquisitions and refinancing
proceeds.
Funds from Operations
FFO is defined by the National Association of Real Estate Investment Trusts
("NAREIT") as net income (loss) (computed in accordance with generally
accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, and distributions in excess of
earnings allocated to Minority Interest, plus depreciation/amortization of
assets unique to the real estate industry. Depreciation/amortization of
assets not unique to the industry, such as amortization of deferred
financing costs and non-real estate assets, is not added back. FFO does
not represent cash flow from operating activities in accordance with
generally accepted accounting principles (which, unlike FFO, generally
reflects all cash effects of transactions and other events in the
determination of net income) and should not be considered an alternative
to net income as an indication of the Company's performance or to cash
flow as a measure of liquidity or ability to make distributions.
The Company considers FFO a meaningful, additional measure of operating
performance because it primarily excludes the assumption that the value
of real estate assets diminishes predictably over time, and because
industry analysts have accepted it as a performance measure. Comparison
of the Company's presentation of FFO, using the NAREIT definition, to
similarly title measures for other REITs may not necessarily be meaningful
due to possible differences in the application of the NAREIT definition
used by such REITs.
The following reflects the FFO of the Company for the periods ended
September 30, 2000 and 1999.
September 30, 2000 September 30, 1999
Net loss $ (315,560) $ 1,342,642
Minority interest 4,069 (10,182)
Less partnership investment income - (10,188)
--------- ---------
Loss before minority interest (311,491) (1,363,712)
Add depreciation and amortization
of real estate assets 1,033,295 920,302
Less Non-Recurring Items:
Accrued interest expense forgone
on converted debentures (104,393) (31,828)
Add: Loss on Asset Disposition - 809,652
--------- --------
Funds from operations $617,411 $334,414
======== =========
REIT Termination
The shareholders, at the annual meeting April 29, 2000, voted to approve
the termination of the Company's tax status as a REIT subject to board of
trustee review and approval of the potential benefit to the Company of
certain transactions which would indirectly result in termination of real
estate investment trust status under the Internal Revenue Code. As of the
first of the year, the Company entered into significant rehabilitation tax
credit transactions directly and indirectly to rehabilitate four historic
buildings located in Kansas City, Missouri to be used primarily for rental
apartment use. The Company's full participation in these transactions would
generate fee income for calendar year 2000 and thereafter which is
substantially in excess of the fee income a real estate investment trust
is permitted to earn and maintain its tax status under I.R.C. Section
856(c). A committee of independent trustees reviewed the potential benefit
of full participation in such proposed development activities vis-.-vis the
loss of real estate investment trust status. Based on the review and
recommendation of the committee, the board of trustees formally ratified
and approved the Company's full participation in all such agreements at
the board of trustees meeting on August 16, 2000; said approvals dating
back to the appropriate date of the Company's initial participation in
such developments throughout the year. Full participation in the
development enterprise also contemplates a future contribution of
significant shares of common stock of the Company to the main
development entity as a contribution of capital to such entity based
on the value of assets contributed. It is projected that gross fee
income and other related income (before any related expenses) in the
range of $4,000,000 to $5,000,000 will be earned in 2000 and 2001
from participation in the development projects. It is not possible
to determine precisely the amount of income earned to date given the
separate reporting by each of the various development entities and the
dynamics of the calculation of fee income and other income earned and
the timing of such income. A significant amount of such income must
also be contributed to the development entities in the form of
a capital contribution. Significant additional development related
income is projected to be earned by the Company in subsequent years.
It is currently anticipated that all such taxable income will be offset
by utilization of the Company's existing net operating loss.
Cautionary Statement
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains various "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements represent the Company's expectations or beliefs
concerning future events, including statements regarding future fees and
other income to be earned in connection with development activity, rental
income and profit percentages, any statements regarding the continuation of
historical trends, and any statements regarding the sufficiency of the
Company's cash balances and cash generated from operating and financing
activities for the Company's future liquidity and capital resource needs.
In particular, development fee and other development related income is
subject to numerous risks including satisfactory and timely completion
of construction and rehabilitation of buildings, compliance with federal
and state laws, occupancy and rent-up requirements, financing and other
real estate contingencies. The Company cautions that these statements
are future qualified by important factors that could cause actual results
to differ materially from those in the forward-looking statements.
SIGNATURES
Pursuant to the requirements to 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.
Dated: November 15, 2000 MASTER REALTY PROPERTIES, INC.
By:
John J. Bennett, Chairman
(Principal Executive Officer)
Thomas H. Trabon, Executive Vice President
and Chief Financial Officer
