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:
JUNE 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
(Address of principal offices)
64105
(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 June 30, 2000, the Registrant had 23,400 shares of preferred stock and
1,261,316 shares of common stock outstanding. The aggregate book value of all
shares of the Registrant, based on the June 30, 2000 unaudited financial
statements was $14,251,828.
MASTER REALTY PROPERTIES, INC.
JUNE 30, 2000 FORM 10-Q
INDEX
Part I: Financial Information
Financial Statements
A.Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31,
1999 3-4
B.Condensed Consolidated Statements of Operations for the Three Months Ended
June 30, 2000 and 1999. 5
C.Condensed Consolidated Statements of Operations for the Six Months Ended
June 30, 2000 and 1999. 6
D.Condensed Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2000 and 1999 7
E.Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 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 21-22
Signatures 23
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, 2000 and December 31, 1999
June 30, December 31,
2000 1999
ASSETS
CASH $497,806 $390,089
RESTRICTED CASH 1,083,722 261,495
MORTGAGE NOTES RECEIVABLE,
net of allowance for loan losses 722,775 722,775
NOTE RECEIVABLE 232,119 235,225
PROPERTY HELD FOR INVESTMENT 1,007,651 1,007,651
INVESTMENT IN REAL ESTATE
PARTNERSHIPS 579,803 692,137
ACCOUNTS RECEIVABLE - OTHER 1,077,831 1,041,709
ACCOUNTS RECEIVABLE RELATED PARTY 1,215,599 760,490
PROPERTY AND EQUIPMENT, at cost
less accumulated depreciation 38,150,179 39,777,094
OTHER ASSETS 1,144,642 1,135,325
---------- ---------
TOTAL ASSETS 45,712,127 46,023,990
========== ==========
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Continued)
June 30, 2000 and December 31, 1999
June 30, December 31,
2000 1999
LIABILITIES
NOTES PAYABLE $30,283,112 $30,285,413
OTHER LIABILITIES 863,654 1,082,471
TOTAL LIABILITIES 31,146,766 31,367,884
---------- ----------
MINORITY INTEREST IN SUBSIDIARIES 313,533 310,873
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY
CAPITAL CONTRIBUTED
Convertible preferred stock,
par value $.01, liquidation
preference up to 5% of the
Company's net assets,
authorized 1,000,000 shares. 234 284
Common stock, par value $.01,
authorized 8,500,000 shares. 12,613 12,158
Capital in excess of par 42,171,856 41,869,842
Retained Deficit (27,932,875) (27,537,051)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 14,251,828 14,345,233
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 45,712,127 46,023,990
============ ============
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30, 2000, and 1999
June 30,
2000 1999
-------------- -------------
REVENUES
Rental Income $ 970,482 $ 942,420
Hotel Income 418,500 496,000
Interest and fees on mortgage loans 9,843 14,625
Other income 14,041 31,341
----------- -----------
TOTAL REVENUES 1,412,866 1,484,386
----------- -----------
EXPENSES
Loan Servicing Fees 3,581 3,913
Rental expenses 437,552 415,384
General and administrative expenses 96,438 128,385
Legal and accounting 67,505 70,708
Payroll and employee benefits 146,761 168,951
Depreciation and amortization 401,463 352,980
Interest expense 569,269 693,897
---------- ---------
TOTAL EXPENSES 1,722,569 1,834,218
---------- ---------
MINORITY INTEREST IN LOSS (INCOME) OF
CONSOLIDATED SUBSIDIARIES (1,554) 6,596
---------- ---------
NET LOSS $ (308,149) (356,428)
========== =========
LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $(0.2240) $(0.2591)
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Months Ended June 30, 2000, and 1999
June 30,
2000 1999
----------- ----------
REVENUES
Rental Income $1,916,086 $1,854,290
Hotel Income 837,000 1,021,694
Interest and fees on mortgage loans 20,021 39,659
Other income 151,814 56,855
---------- ----------
TOTAL REVENUES 2,924,921 2,972,498
--------- ----------
EXPENSES
Loan Servicing Fees 7,163 7,828
Rental expenses 856,120 812,370
General and administrative expenses 202,927 218,920
Legal and accounting 154,057 140,453
Payroll and employee benefits 296,624 321,241
Depreciation and amortization 690,644 691,126
Interest expense 1,115,870 1,364,499
---------- ---------
TOTAL EXPENSES 3,323,405 3,556,437
---------- ---------
MINORITY INTEREST IN LOSS (INCOME) OF
CONSOLIDATED SUBSIDIARIES (2,660) 5,403
---------- ---------
NET LOSS $(395,824) $(589,342)
========== ==========
LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $(0.2877) $(0.4284)
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Six Months Ended June 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, June 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 40,482 405
Preferred converted
to Common (5,025) (50) 5,025 50
Net income for the period
-------- ------- --------- ------
Balances, June 30, 2000 23,400 234 1,261,316 12,613
======= ====== ========= ======
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 (962) (962)
Debenture Conversion
to Stock 111,004 111,154
Net income for the period (589,342) (589,342)
---------- ----------- -----------
Balances, June 30, 1999 41,870,253 (27,723,833) 14,158,807
========== ============ ==========
Balances, 12-31-1999 41,869,842 (27,537,051) 14,345,233
Debenture Conversion to Stock 302,014 302,419
Preferred converted to Common -
Net income for the period (395,824) (395,824)
----------- ------------- -------------
Balances, June 30, 2000 $42,171,856 $(27,932,875) $(14,251,828)
=========== ============= =============
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 2000 and 1999
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(395,824) $589,342)
Adjustments to reconcile net income
to net cash Provided by (used in)
operating activities
Minority interest 2,660 3,881
Depreciation and amortization 690,644 691,126
Accounts receivable (491,231) (6,286)
Other assets, net (176,334) (876,883)
Other liabilities, (334,323) 28,442
Interest payable 115,506 350,892
-------- --------
NET CASH USED IN
OPERATING ACTIVITIES (588,902) (398,170)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in real estate partnerships 112,334 (2,213)
Net change in note receivables 3,106 (12,365)
Net change in fixed assets 1,103,288 (2,318,662)
NET CASH PROVIDED BY (USED IN) ---------- -----------
INVESTING ACTIVITIES 1,218,728 (2,333,240)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Costs of Debentures converted to Stock (7) (1,486)
Net change in notes payable 300,125 3,190,802
NET CASH PROVIDED BY ---------- ----------
FINANCING ACTIVITIES 300,118 3,189,316
---------- ----------
NET INCREASE IN CASH 929,944 457,906
CASH, BEGINNING OF PERIOD 651,584 1,795,718
---------- ----------
CASH, END OF PERIOD $1,581,528 $2,253,624
========== ==========
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 June 30, 2000 and December 31, 1999, and the results
of their operations and cash flows for the six-month periods ended June 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
and under a separate loan agreement related to the refinancing of a separate
apartment project.
June 30, December 31,
2000 1999
Debt service reserve $165,013 $160,492
Escrowed Loan Proceeds 765,000 -
Capital expenditure reserve 28,938 77,611
Impound costs sub-account 124,771 23,392
------- -------
Total restricted cash and escrows $1,083,722 $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.
Escrowed Loan Proceeds - The Company escrowed $765,000 as part of the
refinancing of one of its apartment complexes. The escrow is expected to
be released in August 2000 when the Company expects to meet all of the escrow
release terms.
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
cross-defaulted with the Cash Collateral Agreement.
(3) Mortgage note receivable
June 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 June 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. 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
June 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 %
Ownership at June 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 20.0 -
B & F Properties, L.P. General 0.0099 -
MRP Historic Development Company General 33.3 -
EBT Limited Partnership General .01 -
Campbell Paint, L.P. General .01 -
R & S Partners, L.P. 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 20% 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% 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% 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.
(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:
June 30, December 31,
2000 1999
Ramada Inn- Phoenix, Arizona $ 459,168 $ 280,417
Ramada Inn - Euless, Texas 552,147 392,453
Historic Suites - Kansas City, Missouri 154,484 87,620
Embassy Hotel Management 49,800 -
---------- ----------
Total $1,215,599 $ 760,490
========== ==========
(7) Property and equipment
June 30, December 31,
2000 1999
Cost
Land and land improvements $6,816,160 $6,326,999
Building and building improvements 31,874,801 31,950,335
Furniture and equipment 2,966,824 2,805,469
Assets not yet in service 1,733,716 3,411,986
---------- ---------
Total Cost 43,391,501 44,494,789
Accumulated depreciation (5,241,322) (4,717,695)
---------- ----------
Net property, plant and equipment 38,150,179 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 June 30, 2000 and
1999 was $523,627 and $302,266 respectively.
(8) Notes payable
June 30, December 31,
2000 1999
Salomon Brothers mortgage note $18,963,350 $19,119,204
Salomon Brothers Mezzanine note 813,114 939,802
Convertible subordinated debentures 997,531 1,383,446
ITLA mortgage note - 4,900,000
Morgan Guarantee Trust Mortgage note 6,390,000 -
Hillcrest Bank Note #3 1,210,157 558,872
Hillcrest Bank Note #4 - 480,000
Hillcrest Bank Note #5 - 480,000
Hillcrest Bank Note #6 142,612 450,000
Hillcrest Bank Note #7 - 800,000
Hillcrest Bank Note #8 80,000 -
Unsecured alternative treatment note 1,017,195 1,017,444
Unsecured non-interest bearing note payable 51,692 61,906
FNB of Medicine Lodge note 500,000 -
Real estate tax note 54,956 67,521
Hotel van loans 62,505 27,218
--------- ---------
Total notes payable $30,283,112 $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% 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%. The interest rate at
December 31, 1997 was 10.92% 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%.
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% per
annum. Interest accrues semiannually on January 1 and July 1 of each year.
The outstanding balance as of June 30, 2000 and December 31, 1999 consists
of principal of $680,341 and $982,704 and accrued interest of $317,190 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 June 30, 2000 and
June 30, 1999 amounted to $92,539 and $31,828, respectively.
ITLA mortgage note - Mortgage note payable (first mortgage note) with monthly
interest only payments based on a 8.75% for the first twelve months and then
monthly principal and interest payments with interest determined quarterly
based on LIBOR plus 3.75% 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 June 2000
with monthly principal and interest payments of $47,423.20 based on an
interest rate of 8.12% 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%. 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%.
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%.
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%. 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%.
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%. 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% unsecured note payable to previous participants in the
alternative treatment plan, with interest only payable quarterly until
maturity in August 2000.
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%.
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
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% and monthly payments of $3,220 until
maturity on August 15, 2002.
Hotel van loans - 9.25%, 8.75% and 8% 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.
(9) Other liabilities
Other liabilities consists of the following:
June 30, December 31,
2000 1999
Interest Payable $137,701 $179,249
Accounts payable 311,004 556,477
Accrued bonus pool - 68,744
Other liabilities 414,949 278,001
-------- --------
Totals $863,654 $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 long-range strategic
usiness 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 June 30, 2000
Residential Assets
Hotel mixed use For
Leasing Properties Restructure
Revenues from external
Customers $837,000 $1,927,153 $ -
Interest revenue 1,071 11 6,831
-------- -------- -------
Total revenues $838,071 $1,927,164 $ 6,831
======== ======== =======
Percentage of segment
revenues to total 29 66 0
Interest expense 494,072 474,458 -
Depreciation and
Amortization 301,382 367,485 -
Other expenses 3,275 824,748 -
Segment profit (loss) 39,342 260,473 6,831
Percentage of segment
profit (loss) to total -10 -66 -2
June 30, 2000
Segment assets $18,919,286 $20,114,779 $2,915,000
Percentage of segment
assets to total 41 44 6
Expenditures for
segment assets 31,389 845,334 126,741
Period Ended March 31, 2000
All
Other Total
Revenues from external
Customers $140,747 $2,904,900
Interest revenue 12,108 20,021
-------- ----------
Total revenues $152,855 $2,924,921
======== ==========
Percentage of segment
revenues to total 5 100
Interest expense 147,340 1,115,870
Depreciation and
Amortization 21,777 690,644
Other expenses 686,208 1,514,231
Segment profit (loss) (702,470) (395,824)
Percentage of segment
profit (loss) to total 177 100
June 30, 2000
Segment assets $3,763,062 $45,712,127
Percentage of segment
assets to total 8 100
Expenditures for
segment assets 734,455 1,737,919
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 June 30, 2000
Residential Assets
Hotel mixed use For
Leasing Properties Restructure
Net income (loss) $ 39,342 $260,473 $ 6,831
Add: Minority interest 2,660 - -
Add: Depreciation and amortization
of real estate assets 301,382 367,485 -
Less: Accrued Interest foregone
On converted debentures - - -
-------- -------- -------
Funds from operations $343,384 $627,958 $ 6,831
======== ======== =======
Period Ended June 30, 2000
All
Other Total
Net income $(702,470) $(395,824)
Add: Minority interest - 2,660
Add: Depreciation and amortization
of real estate assets 21,777 690,644
Less: Accrued Interest forgone on
converted debentures (104,393) (104,393)
--------- ----------
Funds from operations $(785,086) $193,087
========== ==========
(13)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
==========
Year 2000 Management:
In order to address the computer industry's "Year 2000" problem, the Company
upgraded its accounting software and network server. Management incurred
limited costs for this upgrade. The Company determined that the company
that managed the Hotels were in compliance for "Year 2000" issues.
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
Six months ended June 30, 2000 and 1999. The discussion should be read 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
Six Month Period Ended June 30, 2000 Compared with Six Month Period
Ended June 30, 1999.
Rental Properties
Revenue from rental properties increased by $61,796 from $1,854,290 at
June 30, 1999 to $1,916,086 at June 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 $812,370 at June 30, 1999 to $856,120 at
June 30, 2000. This increase of $43,750 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 $603,783 at June 30, 2000
compared to $663,945 June 30, 1999.
Hotel Properties
Revenues from hotel lease income decreased by $184,694 from $1,021,694 at
June 30, 1999 to $837,000 for June 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 $343,384 at June 30, 2000
compared to $166,395 at June 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 $19,638 from
June 30, 1999 to June 30, 2000 was due to the decline in mortgage notes
receivable of the Company.
The Company had a $15,993 decrease in general and administrative expenses
for June 30, 2000 compared to June 30, 1999
Interest expense decreased by $248,629 from $1,364,499 at June 30, 1999
to $1,115,870 at June 30, 2000. This decrease was due to the disposition
of the Wichita hotel in September 1999.
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
June 30, 2000 and 1999.
June 30, 2000 June 30, 1999
Net loss $ (395,824) $ (589,342)
Minority interest 2,660 (5,403)
Less partnership investment income - (3,011)
--------- ---------
Loss before minority interest (393,164) (597,756)
Add depreciation and amortization
of real estate assets 690,644 623,417
Less Non-Recurring Items:
Accrued interest expense forgone
on converted debentures (104,393) (31,828)
--------- --------
Funds from operations $193,087 $ (6,167)
======== =========
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: August 15, 2000 MASTER REALTY PROPERTIES, INC.
By:
John J. Bennett, Chairman
(Principal Executive Officer)
Thomas H. Trabon, Executive Vice President
and Chief Financial Officer
