<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, 2000
[ ] 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 9, 2000: 1,589,948 UNITS.
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<PAGE> 2
HALLWOOD REALTY PARTNERS, L.P.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 3
Consolidated Statements of Income for the Three
Months and Nine Months Ended September 30, 2000 and 1999 4
Consolidated Statement of Partners' Capital for the Nine
Months ended September 30, 2000 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations, Liquidity and Capital Resources 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Items 1 to 6 Other Information 16
Signature 17
</TABLE>
PAGE 2
<PAGE> 3
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate:
Land $ 60,236 $ 58,378
Buildings and improvements 292,688 282,013
Tenant improvements 22,796 17,924
--------- ---------
375,720 358,315
Accumulated depreciation and amortization (169,960) (165,501)
--------- ---------
Real estate, net 205,760 192,814
Cash and cash equivalents 14,859 8,332
Accounts receivable 2,984 2,287
Lease commissions, net 11,000 10,653
Loan reserves and escrows 5,701 7,073
Loan costs, net 3,999 3,607
Prepaid expenses and other assets 6,662 5,620
--------- ---------
Total assets $ 250,965 $ 230,386
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 194,491 $ 171,312
Accounts payable and accrued expenses 4,307 6,013
Prepaid rent, security deposits and other 4,502 2,578
Payable to affiliates, net 234 1,787
--------- ---------
Total liabilities 203,534 181,690
--------- ---------
COMMITMENTS AND CONTINGENCIES
Partners' capital:
Limited partners - 1,589,948 and 1,672,556 units
outstanding, respectively 46,957 48,209
General partner 474 487
--------- ---------
Total partners' capital 47,431 48,696
--------- ---------
Total liabilities and partners' capital $ 250,965 $ 230,386
========= =========
</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,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Property operations $16,923 $14,899 $48,905 $43,267
Interest 248 241 638 684
------- ------- ------- -------
Total revenues 17,171 15,140 49,543 43,951
------- ------- ------- -------
EXPENSES:
Property operations 6,876 6,014 19,379 17,418
Interest 3,940 3,416 11,116 10,182
Depreciation and amortization 3,361 2,985 9,758 8,965
General and administrative 976 786 3,381 2,441
Litigation costs 1,359 700 3,267 1,310
------- ------- ------- -------
Total expenses 16,512 13,901 46,901 40,316
------- ------- ------- -------
NET INCOME $ 659 $ 1,239 $ 2,642 $ 3,635
======= ======= ======= =======
ALLOCATION OF NET INCOME:
Limited partners $ 653 $ 1,226 $ 2,616 $ 3,598
General partner 6 13 26 37
------- ------- ------- -------
Total $ 659 $ 1,239 $ 2,642 $ 3,635
======= ======= ======= =======
NET INCOME PER UNIT AND
POTENTIAL UNIT:
Basic $ .41 $ .73 $ 1.61 $ 2.15
======= ======= ======= =======
Assuming dilution $ .40 $ .70 $ 1.55 $ 2.07
======= ======= ======= =======
WEIGHTED AVERAGE UNITS USED
IN COMPUTING NET INCOME PER
UNIT AND POTENTIAL UNIT:
Basic 1,590 1,673 1,630 1,673
======= ======= ======= =======
Assuming dilution 1,637 1,740 1,685 1,740
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
PAGE 4
<PAGE> 5
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Limited
Partnership
General Limited Units
Partner Partners Total Outstanding
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL, JANUARY 1, 2000 $ 487 $ 48,209 $ 48,696 1,672,556
Exercise and issuance of unit options 8 806 814 17,200
Purchase of units (47) (4,674) (4,721) (99,808)
Net income 26 2,616 2,642 --
---------- ---------- ---------- ----------
PARTNERS' CAPITAL, SEPTEMBER 30, 2000 $ 474 $ 46,957 $ 47,431 1,589,948
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
PAGE 5
<PAGE> 6
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,642 $ 3,635
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,758 8,965
Non-qualified unit option compensation 601 --
Effective rent adjustments (602) (543)
Changes in assets and liabilities:
Receivables (697) (501)
Lease commission payments (3,706) (3,148)
Prepaid expenses, loan reserves and other assets 1,458 (117)
Accounts payable and other liabilities 2,784 (1,378)
-------- --------
Net cash provided by operating activities 12,238 6,913
-------- --------
INVESTING ACTIVITIES:
Property and tenant improvements (6,942) (3,633)
Property development cost (8,731) (2,781)
Property acquisition (7,791) (2,352)
-------- --------
Net cash used in investing activities (23,464) (8,766)
-------- --------
FINANCING ACTIVITIES:
Mortgage principal proceeds 38,123 3,862
Mortgage principal refinanced (12,621) --
Mortgage principal payments (2,323) (2,241)
Purchase of units (4,721) --
Exercise and issuance of unit options 213 --
Loan fees and expenses (918) (221)
-------- --------
Net cash provided by financing activities 17,753 1,400
-------- --------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 6,527 (453)
BEGINNING CASH AND CASH EQUIVALENTS 8,332 14,497
-------- --------
ENDING CASH AND CASH EQUIVALENTS $ 14,859 $ 14,044
======== ========
</TABLE>
See notes to consolidated financial statements.
PAGE 6
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(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. Units representing limited partnership
interests are traded on the American Stock Exchange under the symbol "HRY".
As of September 30, 2000, there were 1,589,948 units outstanding.
Hallwood Realty, LLC ("Realty" or the "General Partner"), a Delaware limited
liability company and indirectly 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 indirectly wholly-owned
subsidiary of Hallwood, provides property management, leasing and
construction supervision 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
accounting principles generally accepted in the United States of America 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, 1999. HRP had no items of other
comprehensive income in the periods presented.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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, 2000 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000. Certain reclassifications have been made to prior
periods' amounts to conform to the classifications used in the current
periods. The reclassifications had no effect on the previously reported net
income.
HRP has reviewed Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" and does not believe its adoption will have a
significant impact on its financial position and results of operations.
2 TRANSACTIONS WITH RELATED PARTIES
Realty and HCRE are compensated for services provided to HRP and its real
estate properties, as 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 2000 1999 2000 1999
---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Asset management fee Realty $ 149 $ 130 $ 429 $ 379
Acquisition fee Realty -- -- 74 --
Reimbursement of costs (a) Realty 610 571 1,906 1,877
Property management fee HCRE 487 433 1,408 1,248
Lease commissions HCRE 426 1,050 1,425 3,884
Construction fees HCRE 121 285 677 478
</TABLE>
(a) These costs are mostly recorded as general and administrative expenses and
represent reimbursement to Realty, at cost, for partnership level salaries
and compensation, bonuses, employee and director insurance, and certain
overhead costs. HRP pays the balance of its account with Realty on a monthly
basis.
PAGE 7
<PAGE> 8
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
3 STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information -
Cash interest payments were $10,408,000 (net of capitalized interest of
$522,000) and $9,763,000 in the nine months ended September 30, 2000
and 1999, respectively.
Supplemental disclosure of noncash investing and financing activities -
The Partnership had a construction payable for property development
cost at Corporate Square of $2,641,000 as of December 31, 1999.
4 COMPUTATION OF NET INCOME PER UNIT
Basic net income per unit is computed by dividing net income attributable to
the limited partners' interests by the weighted average number of units
outstanding. Net income 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,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average units outstanding - basic 1,590 1,673 1,630 1,673
Weighted average units issued from options 69 86 77 86
Repurchase of units from unit option proceeds (22) (19) (22) (19)
------ ------ ------ ------
Weighted average units outstanding - assuming dilution 1,637 1,740 1,685 1,740
====== ====== ====== ======
</TABLE>
5 PROPERTY DEVELOPMENT
During the second quarter of 2000, HRP completed new construction of a
6-story office building containing approximately 151,000 net rentable square
feet that was commenced in the second quarter of 1999. It was 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 for all six floors was executed in 1999 and the tenant began
paying rent August 2000.
As of September 30, 2000, the building construction, tenant improvements,
lease commissions and loan costs totaled approximately $18,700,000
(excluding the original land cost). HRP incurred and accrued in 1999, in
connection with the leasing of the entire project, $2,982,000 of lease
commissions, of which half was paid in 1999 and half was paid in June 2000.
An interim-construction loan was secured in August 1999 that funded
$12,621,000 of the costs ($6,998,000 in 1999 and $5,623,000 in 2000). On
August 31, 2000, HRP secured permanent financing of $21,500,000. The loan's
monthly payment is based on a twenty-year amortization period and matures
August 15, 2020 and has a fixed interest rate of 7.97%. The loan proceeds
repaid the interim-construction loan and replenished working capital for the
completed project.
PAGE 8
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HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
6 MORTGAGES PAYABLE
In January 2000, HRP obtained financing of $5,500,000 in connection with the
acquisition of Fountain View Business Center (three 3-story office buildings
in San Diego, California). The loan contains two notes and has a monthly
payment based on a twenty-year amortization, matures in ten years and has a
fixed interest rate of 8.17%.
In May 2000, HRP closed on a new mortgage generating $2,500,000 of loan
proceeds and is secured by Riverbank Plaza, which was acquired in August
1999 in a cash transaction. The loan's monthly payment is based on a
twenty-year amortization, matures in ten years and has a fixed interest rate
of 8.29%. The loan proceeds were for general working capital purposes.
On July 27, 2000, HRP sold its interest rate swap agreement for $1,597,000.
HRP had entered into an interest rate swap agreement to reduce its exposure
to changes in interest rates, which was designated as a hedge against
variable interest exposure relating to a $25,000,000 mortgage loan, secured
by Allfirst Building, which matures April 30, 2006. This interest rate swap
agreement, which was settled monthly, effectively fixed the loan's interest
rate at 6.78%, as opposed to the mortgage loan interest rate of LIBOR plus
1.30% (or 7.94% at the time of the swap agreement sale). The proceeds were
designated for general working capital purposes. For financial reporting
purposes, the proceeds are being amortized over the life of the loan into
interest expense. As of September 30, 2000 the unamortized balance, included
on the balance sheet in prepaid rent, security deposits and other, was
$1,551,000.
Also on July 27, 2000 and in connection with the sale of the swap agreement,
HRP purchased an interest rate cap for Allfirst Building's mortgage loan for
$288,000, which will cap HRP's exposure to changes in interest rates at 10%.
As of September 30, 2000, Allfirst Building's interest rate was 7.93%.
On August 4, 2000, HRP received $3,000,000 of loan proceeds from a
promissory term note secured by a future advance mortgage on Joy Road
Distribution Center in Detroit, Michigan. The principal payments amortize
the loan over 24 months. The loan matures July 31, 2002 and has a variable
interest rate of either prime plus 0.50% or LIBOR plus 3.0% (9.65% as of
September 30, 2000). The balance as of September 30, 2000 was $2,875,000.
The loan proceeds were for general working capital purposes.
Also on August 4, 2000, HRP closed on a $2,000,000 revolving line of credit.
The line of credit matures July 31, 2001, has a variable interest rate of
either prime plus 0.50% or LIBOR plus 3.0%, and requires monthly interest
payments but no principal amortization. As of September 30, 2000, HRP had
not borrowed against this facility.
On August 31, 2000, HRP secured permanent financing for the completed
development project at Corporate Square - see Note 5 for further
information.
7 CAPITAL TRANSACTIONS
As part of the resignation of Brian Troup as an officer and director of
Hallwood and HRP's general partner on December 21, 1999, Hallwood
transferred 82,608 units of HRP that it owned to a trust controlled by Mr.
Troup. On May 12, 2000, Mr. Troup exercised his unit options to purchase
17,200 HRP units at the option plan's exercise price of $11.875 per unit,
which generated $601,000 of non-cash compensation. Also on May 12, 2000, HRP
purchased and retired all of Mr. Troup's above-mentioned 99,808 units at
$46.825 per unit (the average of the closing market prices of the units for
the twenty trading days prior to the purchase). As a result of these
transactions, HRP's outstanding units have decreased from 1,672,556 to
1,589,948.
PAGE 9
<PAGE> 10
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
8 LITIGATION
Reference is made to Note 10 to the audited consolidated financial
statements contained in Form 10-K for the year ended December 31, 1999.
Beginning in 1997, HRP has been involved in two lawsuits that were brought
by Gotham Partners, L.P. in the Delaware Court of Chancery. The first suit
sought access to certain books and records of HRP and was subsequently
settled. The second action alleges claims of breach of fiduciary duties,
breach of HRP's partnership agreement, and fraud in connection with certain
transactions involving HRP's units in the mid 1990's. Hallwood is alleged to
have aided and abetted the alleged breaches. On June 21, 2000, after
completing fact discovery, all parties moved for summary judgment on several
issues. In September and October, 2000, the Delaware court issued three
separate written opinions resolving the summary judgment motions. In the
opinions, the court ruled that trial would be required as to all issues,
except that (i) Gotham was found to have standing to pursue its derivative
claims; (ii) defendants were entitled to judgment dismissing the fraud
claim; (iii) the general partner was entitled to judgment dismissing the
breach of fiduciary duty claims brought against it; and (iv) the general
partner's outside directors were entitled to judgment dismissing all claims
brought against them. The action will now proceed to trial, which is
currently scheduled for January 2001. HRP's management believes that the
claims are without merit and intend to defend against the claims vigorously,
but cannot predict the outcome of the claims or any possible effect an
adverse outcome might have.
On February 15, 2000, HRP filed a lawsuit in the United States District
Court for the Southern District of New York styled Hallwood Realty Partners,
L.P. v. Gotham Partners, L.P. et al (Civ. No. 00 CV 115) alleging violations
of the Securities Exchange Act of 1934 by certain purchasers of its units,
including Gotham Partners, L.P., Gotham Partners, III, L.P., Private
Management Group, Inc., Interstate Properties, Steven Roth and EFO Realty,
Inc., by virtue of those purchasers' misrepresentations and/or omissions in
connection with filings required under the Securities Exchange Act of 1934.
HRP seeks various forms of relief, including declaratory judgments,
divestiture, corrective disclosures, a "cooling-off" period and damages,
including costs and disbursements. In late March 2000, all defendants filed
motions to dismiss for failure to state a claim and failure to plead fraud
with sufficient particularity. On May 3, 2000, these motions were denied in
their entirety, allowing the case to proceed. Defendant Private Management
Group, Inc. also filed a motion to dismiss for lack of proper jurisdiction,
or in the alternative, to transfer. This motion was denied on July 10, 2000.
On October 6, 2000, HRP filed a motion for leave to file an amended
complaint (a) to add as defendants Gotham Holdings II, L.L.C., Hallwood
Investors, L.P., Liberty Realty Partners, L.P. and EFO/Liberty, Inc., as
discovery has revealed that each of the proposed additional defendants is an
actual or beneficial owner of HRP Units, (b) to remove EFO Realty, Inc. as a
defendant, and (c) to make certain minor corrections and clarifications to
HRP's original allegations, all consistent with discovery to date. No party
opposed the motion. Discovery has been proceeding and is set to be completed
by December 8, 2000.
HRP is from time to time involved in various other 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.
PAGE 10
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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 2000 COMPARED TO THE THIRD QUARTER OF 1999
REVENUE FROM PROPERTY OPERATIONS increased $2,024,000, or 13.6%, for the third
quarter of 2000, compared to the 1999 third quarter. The following table
illustrates the components of the change, in thousands:
<TABLE>
<S> <C>
Rental income, net $ 1,879
Other property income 145
-------
Net increase $ 2,024
=======
</TABLE>
Overall, net rental income increased due to higher rental rates and the addition
of three real estate properties to HRP's portfolio since August 1999 and the
addition of one development property, partially offset by a decline in average
occupancy between the comparable periods from 93.4% to 88.5%.
INTEREST INCOME increased by $7,000 as a result of increased earnings on
overnight investments due to slightly higher interest rates between the periods.
PROPERTY OPERATING EXPENSES increased $862,000, or 14.3%, for the third quarter
of 2000, compared to the same period in 1999. The increase is comprised
primarily of the following components:
o Operating cost increases of $550,000 with respect to the addition of
three real estate properties since August 1999 and the addition of one
development property.
o Group health insurance premiums increased $86,000.
o Repair and maintenance costs increased $80,000 for comparable
properties between periods primarily due to heating/air conditioning
system repairs, as well as certain building repairs.
o Professional fees increased $23,000 primarily due to costs for research
and analysis of potential property development projects.
o Management fees increased $21,000 for comparable properties between
periods due to an increase in net rental income.
o Combined, all other operating costs increased $102,000, or less than
2%, between the periods.
INTEREST EXPENSE increased $524,000, or 15.3%, for the third quarter of 2000 as
compared to the same period in 1999, as as a result of an increase in mortgage
interest of $466,000 (due to a higher average mortgage balance, in the
aggregate, between the periods) and, due to a lesser extent, an increase in loan
cost amortization of $58,000.
DEPRECIATION AND AMORTIZATION EXPENSE increased $376,000, or 12.6%, primarily
due to an increase in building cost depreciation as a result of the addition of
three real estate properties to HRP's portfolio since August 1999 and the
addition of one development property.
GENERAL AND ADMINISTRATIVE EXPENSES increased $190,000, or 24.2%, for the third
quarter of 2000, as compared to the same period in 1999, primarily due to higher
professional fees incurred with proposed acquisitions, travel, and miscellaneous
legal fees.
LITIGATION COSTS were $1,359,000 and $700,000 for the third quarter of 2000 and
1999, respectively, and are related to the lawsuits described in Note 8 to the
consolidated financial statements.
PAGE 11
<PAGE> 12
HALLWOOD REALTY PARTNERS, L.P.
RESULTS OF OPERATIONS - CONTINUED
FIRST NINE MONTHS OF 2000 COMPARED TO THE FIRST NINE MONTHS OF 1999
REVENUE FROM PROPERTY OPERATIONS increased $5,638,000, or 13.0%, for the first
nine months of 2000, compared to the first nine months of 1999. The following
table illustrates the components of the change, in thousands:
<TABLE>
<S> <C>
Rental income, net $ 5,042
Other property income 596
-------
Net increase $ 5,638
=======
</TABLE>
Overall, net rental income increased due to higher rental rates and the addition
of three real estate properties to HRP's portfolio since August 1999 and the
addition of one development property, partially offset by a decline in average
occupancy between the comparable periods from 92.7% to 89.6%.
INTEREST INCOME decreased by $46,000 as a result of reduced earnings on
overnight investments primarily due to lower average cash balances available for
investment between the periods, partially offset by slightly higher interest
rates.
PROPERTY OPERATING EXPENSES increased $1,961,000, or 11.3%, for the first nine
months of 2000, compared to the same period in 1999. The increase is comprised
primarily of the following components:
o Operating cost increases of $1,065,000 with respect to the addition of
three real estate properties since August 1999 and the addition of one
development property.
o Professional fees increased $301,000 primarily due to costs for
research and analysis of potential property development projects.
o Repair and maintenance costs increased $337,000 for comparable
properties between periods primarily due to heating/air conditioning
system repairs, as well as landscaping and certain interior and
building repairs.
o Management fees increased $111,000 for comparable properties between
periods due to an increase in net rental income.
o Combined, all other operating costs increased $147,000, or less than
1%, between the periods.
INTEREST EXPENSE increased $934,000, or 9.2%, for the first nine months of 2000
as compared to the same period in 1999, as a result of an increase in mortgage
interest of $763,000 (due to a higher average mortgage balance, in the
aggregate, between the periods) and, due to a lesser extent, an increase in loan
cost amortization of $171,000.
DEPRECIATION AND AMORTIZATION EXPENSE increased $793,000, or 8.8%, primarily due
to an increase in building cost depreciation as a result of the addition of
three real estate properties to HRP's portfolio since August 1999 and the
addition of one development property.
GENERAL AND ADMINISTRATIVE EXPENSES increased $940,000, or 38.5%, for the first
nine months of 2000, as compared to the same period in 1999, primarily as a
result of $601,000 of non-cash compensation generated from the exercise of unit
options in May 2000, (see Note 7 to the consolidated financial statements). All
other costs increased $339,000 due to higher professional fees incurred with
proposed acquisitions, travel, and miscellaneous legal fees.
LITIGATION COSTS were $3,267,000 and $1,310,000 for the first nine months of
2000 and 1999, respectively, and are related to the lawsuits described in Note 8
to the consolidated financial statements.
PAGE 12
<PAGE> 13
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, 2000, HRP owned fifteen real estate properties located in
six states containing 5,595,000 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 has increased $6,527,000 from $8,332,000 as of December 31,
1999 to $14,859,000 as of September 30, 2000. The sources of cash during the
nine month period were $12,238,000 of cash provided by operating activities;
$38,123,000 of mortgage loan proceeds; and $213,000 from the exercise and
issuance of unit options. The uses of cash during the period were $12,621,000 of
mortgage principal repayments from mortgage proceeds; $7,791,000 of property
acquisition costs; $8,731,000 of property development costs; $6,942,000 of
property and tenant improvements; $4,721,000 of costs to purchase units;
$2,323,000 of scheduled mortgage principal payments; and $918,000 of loan fees
and expenses.
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 or developments will be proceeds from the sale, financing or
refinancing of one or more of its real estate properties.
HRP has estimated commitments for tenant and capital improvements of
approximately $4,700,000 for projects either in progress or for projects
budgeted over the next six months. Additionally, HRP estimates that it will
spend about $800,000 for the remainder of 2000 on lease commissions.
Each quarter Realty reviews HRP's capacity to make cash distributions. HRP has
not made any cash distributions since February, 1992.
MORTGAGES -
In May 2000, HRP closed on a new mortgage generating $2,500,000 of loan proceeds
and is secured by Riverbank Plaza, which was acquired in August 1999 in a cash
transaction. The loan's monthly payment is based on a twenty-year amortization,
matures in ten years and has a fixed interest rate of 8.29%. The loan proceeds
were for general working capital purposes.
On July 27, 2000, HRP sold its interest rate swap agreement for $1,597,000. HRP
had entered into an interest rate swap agreement to reduce its exposure to
changes in interest rates, which was designated as a hedge against variable
interest exposure relating to a $25,000,000 mortgage loan, secured by Allfirst
Building, which matures April 30, 2006. This interest rate swap agreement, which
was settled monthly, effectively fixed the loan's interest rate at 6.78%, as
opposed to the mortgage loan interest rate of LIBOR plus 1.30% (or 7.94% at the
time of the swap agreement sale). The proceeds were designated for general
working capital purposes. For financial reporting purposes, the proceeds are
being amortized over the life of the loan into interest expense. As of September
30, 2000 the unamortized balance, included on the balance sheet in prepaid rent,
security deposits and other, was $1,551,000.
Also on July 27, 2000 and in connection with the sale of the swap agreement, HRP
purchased an interest rate cap for Allfirst Building's mortgage loan for
$288,000, which will cap HRP's exposure to changes in interest rates at 10%. As
of September 30, 2000, Allfirst Building's interest rate was 7.93%.
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HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) -
MORTGAGES (CONTINUED) -
On August 4, 2000, HRP received $3,000,000 of loan proceeds from a promissory
term note secured by a future advance mortgage on Joy Road Distribution Center
in Detroit, Michigan. The principal payments amortize the loan over 24 months.
The loan matures July 31, 2002 and has a variable interest rate of either prime
plus 0.50% or LIBOR plus 3.0% (9.65% as of September 30, 2000). The balance as
of September 30, 2000 was $2,875,000. The loan proceeds were for general working
capital purposes.
Also on August 4, 2000, HRP closed on a $2,000,000 revolving line of credit. The
line of credit matures July 31, 2001, has a variable interest rate of either
prime plus 0.50% or LIBOR plus 3.0%, and requires monthly interest payments but
no principal amortization. As of September 30, 2000, HRP had not borrowed
against this facility.
Substantially all of the buildings in HRP's real estate properties were
encumbered by and pledged as collateral under non- recourse mortgages
aggregating $194,491,000 as of September 30, 2000. HRP has no mortgage loans
maturing or requiring balloon principal payments until 2003. Based upon loan
amortizations in effect, HRP is required to pay approximately $1,171,000 of
principal payments during the remainder of 2000.
PROPERTY DEVELOPMENT -
During the second quarter of 2000, HRP completed new construction of a 6-story
office building containing approximately 151,000 net rentable square feet that
was commenced in the second quarter of 1999. It was 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 for
all six floors was executed in 1999 and the tenant began paying rent August
2000.
As of September 30, 2000, the building construction, tenant improvements, lease
commissions and loan costs totaled approximately $18,700,000 (excluding the
original land cost). HRP incurred and accrued in 1999, in connection with the
leasing of the entire project, $2,982,000 of lease commissions, of which half
was paid in 1999 and half was paid in June 2000.
An interim-construction loan was secured in August 1999 that funded $12,621,000
of the costs ($6,998,000 in 1999 and $5,623,000 in 2000). On August 31, 2000,
HRP secured permanent financing of $21,500,000. The loan's monthly payment is
based on a twenty-year amortization period and matures August 15, 2020 and has a
fixed interest rate of 7.97%. The loan proceeds repaid the interim-construction
loan and replenished working capital for the completed project.
ACQUISITION -
On January 26, 2000, HRP acquired three 3-story office buildings in San Diego,
California (Fountain View Business Center) containing approximately 89,000 net
rentable square feet on 4.3 acres of land. The property was 95% occupied at the
date of acquisition. The acquisition cost was approximately $7,800,000. HRP
obtained financing for $5,500,000 of the purchase price with a new loan with two
notes. The loan's monthly payment is based on a twenty-year amortization,
matures in ten years and has a fixed interest rate of 8.17%.
UNIT PURCHASE -
As part of the resignation of Brian Troup as an officer and director of Hallwood
and HRP's general partner on December 21, 1999, Hallwood transferred 82,608
units of HRP that it owned to a trust controlled by Mr. Troup. On May 12, 2000,
Mr. Troup exercised his unit options to purchase 17,200 HRP units at the option
plan's exercise price of $11.875 per unit, which generated $601,000 of non-cash
compensation. Also on May 12, 2000, HRP purchased and retired all of Mr. Troup's
above-mentioned 99,808 units at $46.825 per unit (the average of the closing
market prices of the units for the twenty trading days prior to the purchase).
As a result of these transactions, HRP's outstanding units have decreased from
1,672,556 to 1,589,948.
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HALLWOOD REALTY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) -
INFLATION -
Inflation did not have a significant impact on HRP in 1999 and for the nine
months ended September 30, 2000. Additionally, inflation is not anticipated to
have a material impact on HRP for the rest of 2000.
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, objectives and expectations. Such
statements are forward-looking statements. Although any forward-looking
statements contained in this Form 10-Q 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 materially from any projection, estimate or forecasted result. These
risks and uncertainties include, among other things, interest rates, occupancy
rates, lease rental rates, outcome of litigation, 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
On July 27, 2000, HRP sold its interest rate swap agreement for $1,597,000. HRP
had entered into an interest rate swap agreement to reduce its exposure to
changes in interest rates, which was designated as a hedge against variable
interest exposure relating to a $25,000,000 mortgage loan, secured by Allfirst
Building, which matures April 30, 2006. This interest rate swap agreement, which
was settled monthly, effectively fixed the loan's interest rate at 6.78%, as
opposed to the mortgage loan interest rate of LIBOR plus 1.30% (or 7.94% at the
time of the swap agreement sale). The proceeds were designated for general
working capital purposes.
Also on July 27, 2000 and in connection with the sale of the swap agreement, HRP
purchased an interest rate cap for Allfirst Building's mortgage loan for
$288,000, which will cap HRP's exposure to changes in interest rates at 10%. As
of September 30, 2000, Allfirst Building's interest rate was 7.93%.
PAGE 15
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HALLWOOD REALTY PARTNERS, L.P.
PART II - OTHER INFORMATION
<TABLE>
<S> <C> <C>
Item
1 Legal Proceedings
Reference is made to Item 8 - Note 10 of Form 10-K
for the year ended December 31, 1999 and Note 8 of
this Form 10-Q.
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 18
(b) Reports on Form 8-K None.
</TABLE>
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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 9, 2000 By: /s/ JEFFREY D. GENT
---------------- --------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
27 Financial Data Schedule
</TABLE>
