<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10643
---------------------
HALLWOOD REALTY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
-----------------------
DELAWARE 75-2313955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS
SUITE 1500
DALLAS, TEXAS 75219-4298
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
THE REGISTRANT IS A LIMITED PARTNERSHIP AND ISSUES UNITS REPRESENTING OWNERSHIP
OF LIMITED PARTNER INTERESTS.
NUMBER OF UNITS OUTSTANDING AT NOVEMBER 8, 1999: 1,672,556 UNITS.
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Page 1
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HALLWOOD REALTY PARTNERS, L.P.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations, Liquidity and Capital Resources 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Items 1 to 6 Other Information 14
Signature 15
</TABLE>
Page 2
<PAGE> 3
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate:
Land $ 57,151 $ 56,441
Buildings and improvements 269,654 262,588
Tenant improvements 16,690 17,692
--------- ---------
343,495 336,721
Accumulated depreciation and amortization (163,998) (160,942)
--------- ---------
Real estate, net 179,497 175,779
Cash and cash equivalents 14,044 14,497
Accounts receivable 1,957 1,456
Lease commissions, net 9,860 7,186
Loan reserves and escrows 8,107 6,986
Loan costs, net 3,782 3,923
Prepaid expenses and other assets 4,044 4,196
--------- ---------
Total assets $ 221,291 $ 214,023
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 163,699 $ 162,078
Accounts payable and accrued expenses 4,890 4,435
Prepaid rent and security deposits 2,892 2,703
Payable to affiliates, net 1,541 173
--------- ---------
Total liabilities 173,022 169,389
--------- ---------
Partners' capital:
Limited partners - 1,672,556 units outstanding 47,786 44,188
General partner 483 446
--------- ---------
Total partners' capital 48,269 44,634
--------- ---------
Total liabilities and partners' capital $ 221,291 $ 214,023
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 3
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HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Property operations $ 14,899 $ 14,275 $ 43,267 $ 41,503
Interest 241 240 684 606
-------- -------- -------- --------
Total revenues 15,140 14,515 43,951 42,109
-------- -------- -------- --------
EXPENSES:
Property operations 6,014 5,858 17,418 16,599
Interest 3,416 3,193 10,182 9,511
Depreciation and amortization 2,985 2,994 8,965 9,082
General and administrative 1,486 743 3,751 2,466
-------- -------- -------- --------
Total expenses 13,901 12,788 40,316 37,658
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 1,239 1,727 3,635 4,451
Extraordinary item -
Loss on early extinguishments of debt -- -- -- (1,876)
-------- -------- -------- --------
NET INCOME $ 1,239 $ 1,727 $ 3,635 $ 2,575
======== ======== ======== ========
ALLOCATION OF NET INCOME:
Limited partners $ 1,226 $ 1,710 $ 3,598 $ 2,549
General partner 13 17 37 26
-------- -------- -------- --------
Total $ 1,239 $ 1,727 $ 3,635 $ 2,575
======== ======== ======== ========
NET INCOME PER UNIT AND
POTENTIAL UNIT:
Earnings per unit - basic
Income before extraordinary item $ .73 $ 1.02 $ 2.15 $ 2.63
Loss on early extinguishments of debt -- -- -- (1.11)
-------- -------- -------- --------
Net income $ .73 $ 1.02 $ 2.15 $ 1.52
======== ======== ======== ========
Earnings per unit - assuming dilution
Income before extraordinary item $ .70 $ .98 $ 2.07 $ 2.53
Loss on early extinguishments of debt -- -- -- (1.07)
-------- -------- -------- --------
Net income $ .70 $ .98 $ 2.07 $ 1.46
======== ======== ======== ========
WEIGHTED AVERAGE UNITS USED IN
COMPUTING NET INCOME PER UNIT
AND POTENTIAL UNIT:
Basic 1,673 1,673 1,673 1,673
======== ======== ======== ========
Assuming dilution 1,740 1,743 1,740 1,741
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
Page 4
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HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,635 $ 2,575
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,965 9,082
Loss on early extinguishments of debt -- 1,876
Amortization of mortgage principal forgiveness -- (1,269)
Effective rent adjustments (543) (300)
Changes in assets and liabilities:
Receivables (501) (232)
Lease commission payments (3,148) (1,734)
Prepaid expenses and other assets (117) 176
Accounts payable and other liabilities (1,378) (756)
-------- --------
Net cash provided by operating activities 6,913 9,418
-------- --------
INVESTING ACTIVITIES:
Property and tenant improvements (3,633) (3,403)
Property development cost (2,781) --
Property acquisition (2,352) --
-------- --------
Net cash used in investing activities (8,766) (3,403)
-------- --------
FINANCING ACTIVITIES:
Mortgage principal proceeds 3,862 41,500
Mortgage principal refinanced -- (35,046)
Mortgage prepayment penalties -- (1,655)
Mortgage principal payments (2,241) (2,158)
Loan reserves -- (550)
Loan fees and expenses (221) (1,150)
-------- --------
Net cash provided by financing activities 1,400 941
-------- --------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (453) 6,956
BEGINNING CASH AND CASH EQUIVALENTS 14,497 6,665
-------- --------
ENDING CASH AND CASH EQUIVALENTS $ 14,044 $ 13,621
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash during the period $ 9,763 $ 10,399
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Construction payable for property development cost $ 2,159 $ --
======== ========
</TABLE>
See notes to consolidated financial statements.
Page 5
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
1 ORGANIZATION AND ACCOUNTING POLICIES
Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited
partnership, operates in the commercial real estate business segment. HRP's
activities include the acquisition, ownership and operation of its
commercial real estate assets. The limited partners' interests, or units,
are traded on the American Stock Exchange under the symbol "HRY". As of
September 30, 1999, there were 1,672,556 units outstanding.
Hallwood Realty, LLC ("Realty" or the "General Partner"), a Delaware limited
liability company and wholly-owned subsidiary of The Hallwood Group
Incorporated ("Hallwood"), is HRP's general partner and is responsible for
asset management of HRP and its real estate properties. Hallwood Commercial
Real Estate, LLC ("HCRE"), another wholly-owned subsidiary of Hallwood,
provides property management services for HRP's real estate properties.
The accompanying unaudited consolidated financial statements of Hallwood
Realty Partners, L.P. have been prepared in accordance with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnote disclosures required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a
fair presentation have been included. These financial statements should be
read in conjunction with the audited consolidated financial statements and
related disclosures thereto included in Form 10-K for the year ended
December 31, 1998. HRP had no items of other comprehensive income in the
periods presented.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets, liabilities,
revenues, and expenses as of and for the reporting periods. Actual results
may differ from these estimates. Operating results for the nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
Statement of Financial Accounting Standards No. 133 "Accounting of
Derivative Instruments and Hedging Activities" was issued in June 1998 and
the original effective date for periods beginning after June 15, 1999 has
been extended one year to June 15, 2000. HRP is currently not planning on
early adoption and has not had an opportunity to evaluate the impact of the
provisions on its consolidated financial statements relating to future
adoption.
2 TRANSACTIONS WITH RELATED PARTIES
Realty and HCRE are compensated for services provided to HRP and its real
estate properties and are set forth in the following table for the periods
presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
ENTITY SEPTEMBER 30, SEPTEMBER 30,
PAID OR -------------------- --------------------
REIMBURSED 1999 1998 1999 1998
---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Asset management fee Realty $ 130 $ 125 $ 379 $ 369
Reimbursements of costs (a) Realty 571 523 1,877 1,681
Property management fee HCRE 433 411 1,248 1,198
Lease commissions (b) HCRE 1,050 276 3,884 1,312
Construction fees HCRE 285 93 478 198
</TABLE>
(a) These costs are mostly recorded as general and administrative expenses
and represent reimbursement to Realty, at cost, for partnership level
salaries, employee and director insurance, and certain overhead costs.
HRP pays the balance of its account with Realty on a monthly basis.
(b) As of September 30, 1999, $1,230,000 of the 1999 lease commissions
accrued are scheduled to be paid in the year 2000. See Note 4.
Page 6
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
3 COMPUTATION OF NET INCOME PER UNIT
Basic earnings per unit is computed by dividing net income attributable to
the limited partners' interests by the weighted average number of units
outstanding. Earnings per unit assuming dilution is computed by dividing net
income attributable to the limited partners' interests by the weighted
average number of units and potential units outstanding. Options to acquire
units were issued during 1995 and are considered to be potential units. The
number of potential units is computed using the treasury stock method which
assumes that the increase in the number of units is reduced by the number of
units which could have been repurchased by HRP with the proceeds from the
exercise of these options. The following table illustrates the amounts used
to calculate the weighted average number of units outstanding:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average units outstanding - basic 1,673 1,673 1,673 1,673
Issuance of units from options 86 86 86 86
Repurchase of units from unit option proceeds (19) (16) (19) (18)
------ ------ ------ ------
Weighted average units outstanding - assuming dilution 1,740 1,743 1,740 1,741
====== ====== ====== ======
</TABLE>
4 PROPERTY DEVELOPMENT
During the second quarter of 1999, HRP began construction of a 6-story
office building containing approximately 151,000 net rentable square feet.
It is being constructed on 6.1 acres of land that was acquired in May 1997
within the Corporate Square complex in Atlanta, Georgia. A 20-year lease
with the General Services Administration ("GSA") for five of the floors has
been executed with occupancy anticipated to take place by July 2000. The
building, tenant improvements, lease commissions and loan costs are
estimated to be $19,000,000 (excluding the land). In August 1999, HRP paid
off the outstanding loan balance of $475,000 that was secured by the land
and closed on interim-construction loan financing that will fund up to
$13,762,000 of the costs. The amount outstanding under the
interim-construction loan as of September 30, 1999 was $3,862,000. The
interim-construction loan calls for interest payments only with an interest
rate of LIBOR plus 170 basis points (7.125% as of September 30, 1999). HRP
anticipates repaying the interim- construction loan at its maturity in
August 2000 from proceeds of a $19,000,000 to $20,000,000 permanent loan. As
of September 30, 1999, HRP has incurred and capitalized $4,940,000 of the
construction costs. HRP has paid $1,230,000, or half, of the lease
commissions incurred; the remaining half will be paid when the tenant takes
occupancy of the space. In November 1999, the GSA lease was amended to
include the remaining floor of the building and accordingly, HRP incurred a
lease commission of $502,000, of which half will be paid in the fourth
quarter of 1999 and half when the tenant takes occupancy of the space.
5 PROPERTY ACQUISITION
In August 1999, HRP acquired two 3-story office buildings in San Diego,
California (Rancho Mission Plaza) containing approximately 40,300 net
rentable square feet on 1.6 acres of land for $2,352,000 in cash. Prior to
the acquisition, management determined certain improvements were required
and therefore $558,000 has been budgeted for the needed improvements.
Currently, the property is 51% leased and occupied. HRP is in negotiations
to fully lease the buildings with occupancy to coincide with the completion
of the property improvements, which are anticipated to be completed by April
2000.
Page 7
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
6 LITIGATION
Reference is made to Note 9 to the audited consolidated financial statements
contained in Form 10-K for the year ended December 31, 1998. Beginning in
1997, HRP has been involved in two lawsuits with Gotham Partners, L.P. The
first complaint seeks access to certain books and records of HRP, a list of
the limited partners and reimbursement of the plaintiff's expenses. The
second complaint alleges claims of breach of fiduciary duties, breach of
HRP's partnership agreement, fraud, and as to Hallwood, aiding and abetting
these alleged breaches. On June 27, 1997, the parties entered into a
Stipulation and Order under which HRP provided to plaintiff copies of
certain of the documents requested. The other claims in the two actions
remain outstanding and the parties are proceeding with discovery.
HRP's management believes that the claims are without merit and intend to
defend the cases vigorously, but because of their early stages, cannot
predict the outcome of the claims or any possible effect an adverse outcome
might have. HRP is from time to time involved in various legal proceedings
and claims which arise in the ordinary course of business. These matters are
generally covered by insurance. Management believes that the resolution of
these matters will not have a material adverse effect on HRP's financial
position, cash flow or operations.
7 SUBSEQUENT EVENT
In October 1999, HRP acquired a 5-building industrial park in Dearborn,
Michigan (Gulley Road Industrial Park) containing approximately 154,000 net
rentable square feet on 11 acres of land. The property is 100% occupied. The
purchase price of approximately $8,179,000 included the assumption of an
outstanding mortgage of $5,149,000. The loan fully amortizes over the next
eleven and a half years, matures in May 2011, and has an interest rate of
7.375%.
Page 8
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HALLWOOD REALTY PARTNERS, L.P.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
RESULTS OF OPERATIONS
THIRD QUARTER OF 1999 COMPARED TO THE THIRD QUARTER OF 1998
REVENUE FROM PROPERTY OPERATIONS increased $624,000, or 4.4%, for the third
quarter of 1999, compared to the 1998 third quarter. The following table
illustrates the components of the change, in thousands:
<TABLE>
<S> <C>
Rental income, net $526
Other property income 98
----
Net increase $624
====
</TABLE>
Overall, net rental income increased primarily due to higher rental rates,
partially offset by a slight decline in average occupancy between the comparable
periods from 93.5% to 93.4%. Other property income increased primarily due to
the receipt of non-recurring parking revenues and due to an increase in tenants'
utility cost reimbursements.
INTEREST INCOME was consistent with the prior year quarter, increasing $1,000.
PROPERTY OPERATING EXPENSES increased $156,000, or 2.7%, for the third quarter
of 1999, compared to the same period in 1998. The increase is comprised
primarily of the following components:
o Real estate taxes increased $185,000 primarily due to higher taxable
values at Executive Park, Corporate Square and Bellevue Corporate
Plaza.
o Combined, all other operating costs decreased $29,000, or less than 1%,
between the periods.
INTEREST EXPENSE increased $223,000, or 7.0%, for the third quarter of 1999 as
compared to the same period in 1998. The 1998 period included $421,000 of
non-cash amortization of Allfirst Building's (formerly named First Maryland
Building) loan forgiveness, which was eliminated in November 1998 as the result
of the retirement and refinancing of that loan. Partially offsetting this was a
reduction in cash mortgage interest of $207,000, primarily as the result of
reduced contractual interest rates from 1998 loan refinancings, and due to
higher miscellaneous interest of $9,000.
DEPRECIATION AND AMORTIZATION EXPENSE was consistent with the prior year
quarter, decreasing $9,000, or 0.3%.
GENERAL AND ADMINISTRATIVE EXPENSES increased $743,000, or 100%, for the third
quarter of 1999, as compared to the same period in 1998, primarily as a result
of an increase of $669,000 in litigation costs (see Note 6 to the consolidated
financial statements). All other costs increased $74,000 as the result of higher
personnel and occupancy costs.
Page 9
<PAGE> 10
HALLWOOD REALTY PARTNERS, L.P.
RESULTS OF OPERATIONS - CONTINUED
FIRST NINE MONTHS OF 1999 COMPARED TO THE FIRST NINE MONTHS OF 1998
REVENUE FROM PROPERTY OPERATIONS increased $1,764,000, or 4.3%, for the first
nine months of 1999, compared to the first nine months of 1998. The following
table illustrates the components of the change, in thousands:
<TABLE>
<S> <C>
Rental income, net $1,213
Other property income 551
------
Net increase $1,764
======
</TABLE>
Overall, net rental income increased primarily due to higher rental rates,
partially offset by a small decline in average occupancy between the comparable
periods from 93.6% to 92.7%. Other property income increased primarily due to
the receipt of non-recurring parking revenue, an increase in tenant utility
reimbursements, and increases in various tenant services.
INTEREST INCOME increased $78,000 as a result of additional earnings on
overnight investments due to higher average cash balances available for
investment between the periods.
PROPERTY OPERATING EXPENSES increased $819,000, or 4.9%, for the first nine
months of 1999, compared to the same period in 1998. The increase is comprised
primarily of the following components:
o Real estate taxes increased $723,000 due to non-recurring refunds of
$388,000 received in the 1998 period for prior years' taxes and due to
increases in current year taxable values at Executive Park, Corporate
Square and Bellevue Corporate Plaza.
o Snow removal costs increased $178,000 due to a mild 1998 winter.
o Combined, all other operating costs decreased $82,000, or less than 1%,
between the periods.
INTEREST EXPENSE increased $671,000, or 7.1%, for the first nine months of 1999
as compared to the same period in 1998. The 1998 period included $1,269,000 of
non-cash amortization of Allfirst Building's (formerly named First Maryland
Building) loan forgiveness, which was eliminated in November 1998 as the result
of the retirement and refinancing of that loan. Partially offsetting this was a
reduction in cash mortgage interest of $600,000, primarily as the result of
reduced contractual interest rates from 1998 loan refinancings, and due to
higher miscellaneous interest of $2,000.
DEPRECIATION AND AMORTIZATION EXPENSE decreased $117,000, or 1.3%, primarily due
to write off of fully amortized tenant improvements in late 1998.
GENERAL AND ADMINISTRATIVE EXPENSES increased $1,285,000, or 52.1%, for the
first nine months of 1999, as compared to 1998's first nine months, primarily as
a result of an increase of $1,216,000 in litigation costs (see Note 6 to the
consolidated financial statements).
LOSS ON EARLY EXTINGUISHMENT OF DEBT of $1,876,000 in the 1998 period represents
prepayment penalties of $1,655,000 incurred with the early payoff of loans
secured by Executive Park and Seattle Business Parks, along with the write off
of $221,000 of unamortized loan costs associated with the retired loans.
Page 10
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HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES
HRP operates in the commercial real estate business segment. HRP's activities
include the acquisition, ownership and operation of its commercial real estate
assets. While it is the General Partner's intention to operate HRP's existing
real estate investments and to acquire and operate additional real estate
investments, Realty also continually evaluates each of HRP's real estate
investments in light of current economic trends and operations to determine if
any should be considered for disposal.
As of September 30, 1999, HRP owned thirteen real estate properties located in
six states containing 5,199,000 net rentable square feet. HRP seeks to maximize
the value of its real estate by making capital and tenant improvements, by
executing marketing programs to attract and retain tenants, and by controlling
or reducing, where possible, operating expenses.
HRP's cash position decreased $453,000 during the first nine months of 1999 from
$14,497,000 as of December 31, 1998 to $14,044,000 as of September 30, 1999. The
sources of cash during the period were $6,913,000 of cash provided by operating
activities and $3,862,000 of mortgage principal proceeds from a new construction
loan. The uses of cash during the period were $3,633,000 of property and tenant
improvements, $2,781,000 of property development costs, $2,352,000 of property
acquisition costs, $2,241,000 of mortgage principal payments, and $221,000 of
loan fees and expenses.
Substantially all of the buildings in eleven of HRP's real estate properties
were encumbered by and pledged as collateral under non-recourse mortgages as of
September 30, 1999. HRP has no mortgage loans maturing or requiring balloon
principal payments until the year 2003. Based upon loan amortizations in effect,
HRP is required to pay approximately $643,000 of principal payments during the
remainder of 1999.
For 1999, HRP's revised capital budget (excluding construction project and the
acquisitions discussed in the following paragraphs) for property and tenant
improvements is approximately $6,633,000 and for lease commissions is about
$2,127,000. In the first nine months of 1999, HRP incurred $3,633,000 of
property and tenant improvements and $1,918,000 of lease commissions of these
budgeted amounts.
During the second quarter of 1999, HRP began construction of a 6-story office
building containing approximately 151,000 net rentable square feet. It is being
constructed on 6.1 acres of land that was acquired in May 1997 within the
Corporate Square complex in Atlanta, Georgia. A 20-year lease with the General
Services Administration ("GSA") for five of the floors has been executed with
occupancy anticipated to take place by July 2000. The building, tenant
improvements, lease commissions and loan costs are estimated to be $19,000,000
(excluding the land). In August 1999, HRP paid off the outstanding loan balance
of $475,000 that was secured by the land and closed on interim-construction loan
financing that will fund up to $13,762,000 of the costs. The amount outstanding
under the interim-construction loan as of September 30, 1999 was $3,862,000. The
interim-construction loan calls for interest payments only with an interest rate
of LIBOR plus 170 basis points (7.125% as of September 30, 1999). HRP
anticipates repaying the interim-construction loan at its maturity in August
2000 from proceeds of a $19,000,000 to $20,000,000 permanent loan. As of
September 30, 1999, HRP has incurred and capitalized $4,940,000 of the
construction costs. HRP has paid $1,230,000, or half, of the lease commissions
incurred; the remaining half will be paid when the tenant takes occupancy of the
space. In November 1999, the GSA lease was amended to include the remaining
floor of the building and accordingly, HRP incurred a lease commission of
$502,000, of which half will be paid in the fourth quarter of 1999 and half when
the tenant takes occupancy of the space.
In August 1999, HRP acquired two 3-story office buildings in San Diego,
California (Rancho Mission Plaza) containing approximately 40,300 net rentable
square feet on 1.6 acres of land for $2,352,000 in cash. Prior to the
acquisition, management determined certain improvements were required and
therefore $558,000 has been budgeted for the needed improvements. Currently, the
property is 51% leased and occupied. HRP is in negotiations to fully lease the
buildings with occupancy to coincide with the completion of the property
improvements, which are anticipated to be completed by April 2000.
In October 1999, HRP acquired a 5-building industrial park in Dearborn, Michigan
(Gulley Road Industrial Park) containing approximately 154,000 net rentable
square feet on 11 acres of land. The property is 100% occupied. The purchase
price of approximately $8,179,000 included the assumption of an outstanding
mortgage of $5,149,000. The loan fully amortizes over the next eleven and a half
years, matures in May 2011, and has an interest rate of 7.375%.
Page 11
<PAGE> 12
HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) -
Each quarter Realty reviews HRP's capacity to make cash distributions. HRP has
not made any cash distributions since February, 1992. For the foreseeable
future, HRP anticipates that mortgage principal payments, tenant and capital
improvements, lease commissions, and litigation costs will be funded by net cash
from operations. The primary sources of capital to fund any future acquisitions
will be proceeds from the sale or financing of one or more of its real estate
properties.
YEAR 2000 PLAN -
HRP realizes that many of the world's information systems and/or computer
programs currently do not have the ability to recognize four digit date code
fields and accordingly, they do not have the ability to distinguish a year that
begins with "20" instead of the familiar "19". If not corrected, many computer
applications could fail, become unstable, stop working altogether, or create
erroneous or incorrect results. Therefore, many companies and organizations are
spending considerable resources to update and modify their systems for Year 2000
compliance.
HRP developed a program to review and modify, where necessary, its computers,
computer programming and building systems to process transactions and/or operate
in the Year 2000 and beyond. HRP identified that its four primary business
systems vulnerable to Year 2000 issues are: (1) General Ledger/Accounts
Payable/Accounts Receivable Systems - These systems were modified by the vendor
at no cost to HRP during the third quarter of 1998 and are now Year 2000
compliant. (2) Commercial Lease Administration - The system used by HRP is Year
2000 compliant. (3) K-1 Processing - HRP maintains data used to process its
partners Schedule K-1's for tax reporting purposes in an environment that is not
Year 2000 compliant. A compliant system will be installed in the fourth quarter
of 1999 at minimal cost. (4) Payroll - Year 2000 compliant software was
purchased and installed in the fourth quarter of 1998 at minimal cost.
In July 1999, HRP completed a real estate property survey of its significant
service providers and other external parties to determine their compliance with
the Year 2000 issue and what impact, if any, their efforts will have on HRP's
business and operations. This real estate property survey included the
identification of certain on-site, non-information technology systems that could
be vulnerable to Year 2000 issues. These non-information technology systems
included, but were not limited to, access gates, alarms, elevators, heating and
air conditioning systems, irrigation systems, security systems, thermostats, and
utility meters and switches. During early November 1999, HRP completed the
remaining Year 2000 upgrades and replacements found in the real estate property
survey. Total costs, including information and non-information technology
systems, did not exceed $100,000.
Although HRP believes that it will not have any detrimental effects on its
operations from Year 2000 compliance issues, there can be no assurance that the
systems of other companies, on which HRP's systems may rely, will be converted
timely, or converted in a manner that is compatible with HRP's systems, or that
any such failures by such other companies would not have a material adverse
effect or risk to HRP. HRP plans to devote all necessary resources to resolve
any such unforseen issues in a timely manner. HRP has utilized and will continue
to utilize, as necessary, external and internal resources to reprogram, upgrade,
replace and/or test its systems for Year 2000 modifications. In the event of a
complete failure of our information technology systems, HRP would be able to
continue the affected functions either manually or through the use of non-Year
2000 compliant systems. The primary costs associated with such a necessity would
probably include increased time delays associated with posting of information,
and increased personnel to manually process the information. HRP does not
currently have a contingency plan in place and believes, based upon current
knowledge, that one is not needed.
Page 12
<PAGE> 13
HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) -
FORWARD-LOOKING STATEMENTS -
In the interest of providing investors with certain information regarding HRP's
future plans and operations, certain statements set forth in this Form 10-Q
relate to management's future plans and objectives. Such statements are
forward-looking statements within the meaning of federal securities laws.
Although any forward-looking statements contained herein or otherwise expressed
by or on behalf of HRP are, to the knowledge and in the judgment of the officers
and directors of the General Partner, expected to prove true and come to pass,
management is not able to predict the future with absolute certainty. Although
HRP believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements will prove to be accurate.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause HRP's actual performance and financial results in future periods
to differ significantly from any projection, estimate or forecasted result.
These risks and uncertainties include, among other things, future economic,
competitive and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of HRP; other risks and uncertainties may be described, from time to
time, in HRP's periodic reports and filings with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to HRP's market risks during the nine months
ended September 30, 1999.
QUALITATIVE INFORMATION -
HRP's primary risk management strategy is to manage its exposure to adverse
changes in interest rates by issuing fixed rate debt, where possible. HRP
attempts to manage the exposure to adverse changes in the fair value of its
fixed rate debt by issuing fixed rate debt when business and markets conditions
are favorable. There is inherent rollover risk for borrowings as they mature and
are renewed at the then current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future interest rates
and HRP's future financing requirements. HRP does not hold or issue derivative
financial instruments for trading purposes. As part of HRP's financing activity,
a derivative security was used for the sole purpose of fixing the interest rate
of HRP's only variable rate debt instrument.
SPECIFIC AND QUANTITATIVE INFORMATION -
HRP's derivative instrument, which is matched directly against an outstanding
borrowing is a "pay fixed / receive variable" interest rate swap with a highly
rated counterparty in which the interest payments are calculated on a notional
amount. The notional amount does not represent amounts exchanged by the parties
and thus are not a measure of exposure to HRP through its use of the derivative.
HRP is exposed to credit-related gains or losses in the event of non-performance
by counterparties to this financial instrument; however, HRP does not expect any
counterparties to fail to meet their obligations. The interest rate swap is
described as follows:
<TABLE>
<CAPTION>
Variable Rate as of September 30, 1999
--------------------------------------
Fair Value of
Notional Amount Maturity Date Fixed Rate% % Based On Swap (a)
- --------------- -------------- ----------- ----- -------- -------------
<S> <C> <C> <C> <C> <C>
$25,000,000 April 30, 2006 6.78% 6.67% 30 day $ 1,400,000
LIBOR
</TABLE>
(a) The estimated amount that HRP would receive upon termination of its
interest rate swap agreement as of September 30, 1999 was based on a
quote received from the lender.
Page 13
<PAGE> 14
HALLWOOD REALTY PARTNERS, L.P.
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Item
----
<S> <C> <C>
1 Legal Proceedings None.
2 Changes in Securities and Use of Proceeds None.
3 Defaults upon Senior Securities None.
4 Submission of Matters to a Vote of Security Holders None.
5 Other Information None.
6 Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule Page 16
(b) Reports on Form 8-K None.
</TABLE>
Page 14
<PAGE> 15
HALLWOOD REALTY PARTNERS, L.P.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HALLWOOD REALTY PARTNERS, L.P.
------------------------------
(Registrant)
By: HALLWOOD REALTY, LLC
General Partner
Date: November 10, 1999 By: /s/ JEFFREY D. GENT
--------------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and Accounting Officer)
Page 15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,044
<SECURITIES> 0
<RECEIVABLES> 1,957
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 343,495
<DEPRECIATION> 163,998
<TOTAL-ASSETS> 221,291
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 47,786
<OTHER-SE> 483
<TOTAL-LIABILITY-AND-EQUITY> 221,291
<SALES> 0
<TOTAL-REVENUES> 43,951
<CGS> 0
<TOTAL-COSTS> 26,383
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,182
<INCOME-PRETAX> 3,635
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,635
<EPS-BASIC> 2.15
<EPS-DILUTED> 2.07
</TABLE>
