SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1999 ------------- Commission File Number 1-9240 ------ TRANSCONTINENTAL REALTY INVESTORS, INC. --------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Nevada 94-6565852 ------ ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10670 North Central Expressway, Suite 300, Dallas, Texas 75231 -------------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) (214) 692-4700 ------------------------------ (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No ___. --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.01 par value 3,880,014 - ---------------------------- -------------------------------- (Class) (Outstanding at July 31, 1999) 1
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- The accompanying Consolidated Financial Statements have not been audited by independent certified public accountants, but in the opinion of the management of Transcontinental Realty Investors, Inc. (the "Company"), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Company's consolidated financial position, consolidated results of operations and consolidated cash flows at the dates and for the periods indicated, have been included. TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS June 30, December 31, 1999 1998 -------- ------------ (dollars in thousands, except per share) Assets ------ Notes and interest receivable Performing........................................ $ 1,374 $ 1,429 Nonperforming..................................... 382 950 -------- -------- 1,756 2,379 Less - allowance for estimated losses.............. (293) (886) -------- -------- 1,463 1,493 Foreclosed real estate held for sale............... 1,356 1,356 Real estate held for investment, net of accumulated depreciation ($60,841 in 1999 and $61,241 in 1998).................................. 359,362 347,389 Investment in real estate entities................. 1,563 3,458 Cash and cash equivalents.......................... 21,194 10,505 Other assets (including $1,855 in 1999 and $1,325 in 1998 from affiliates).......................... 17,220 18,002 -------- -------- $402,158 $382,203 ======== ======== The accompanying notes are an integral part of these Consolidated Financial Statements. 2
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS June 30, December 31, 1999 1998 ------------ ------------ (dollars in thousands, except per share) Liabilities and Stockholders' Equity ------------------------------------ Liabilities Notes and interest payable.......................... $ 295,461 $ 282,688 Other liabilities (including $658 in 1999 and $62 in 1998 to affiliates)............................. 8,835 8,383 --------- --------- 304,296 291,071 Stockholders' equity Preferred Stock Series A; $.01 par value; authorized, 6,000 shares; issued and outstanding 5,829 shares in 1999 and 1998 (liquidation preference $583)................ - - Common stock, $.01 par value, authorized, 10,000,000 shares; issued and outstanding, 3,880,014 shares in 1999 and 3,878,463 in 1998...................... 39 39 Paid-in capital..................................... 218,105 218,087 Accumulated distributions in excess of accumulated earnings............................... (120,282) (126,994) --------- --------- 97,862 91,132 --------- --------- $ 402,158 $ 382,203 ========= ========= The accompanying notes are an integral part of these Consolidated Financial Statements. 3
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------ ------------------------- 1999 1998 1999 1998 ------- ------- ------- ------- (dollars in thousands, except per share) Income <S> <C> <C> <C> <C> Rents.......................... $20,073 $17,339 $39,166 $33,393 Interest....................... 38 175 140 393 ------- ------- ------- ------- 20,111 17,514 39,306 33,786 Expenses Property operations............ 10,158 8,874 20,478 17,283 Interest....................... 6,203 5,609 12,433 10,944 Depreciation................... 2,962 2,606 5,846 5,129 Advisory fee to affiliate...... 740 689 1,455 1,303 Net income fee to affiliate... 641 - 659 - General and administrative.... 571 486 1,203 1,065 ------- ------- ------- ------- 21,275 18,264 42,074 35,724 ------- ------- ------- ------- <Loss> from operations.......... (1,164) (750) (2,768) (1,938) Equity in income of investees... 479 450 504 432 Gain on sale of real estate..... 8,283 2,132 10,151 2,132 ------- ------- ------- ------- Net income...................... 7,598 1,832 7,887 626 Preferred dividend requirement (7) - (14) - ------- ------- ------- ------- Net income applicable to Common shares................. $ 7,591 $ 1,832 $ 7,873 $ 626 ======= ======= ======= ======= Earnings Per Share Net income applicable to Common shares............... $1.96 $.47 $2.03 $.16 ======= ======= ======= ======= Weighted average Common shares used in computing earnings per share................... 3,879,946 3,871,436 3,879,209 3,879,080 ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 4
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> Accumulated Distributions Common Stock in Excess of ------------------- Paid-in Accumulated Stockholders' Shares Amount Capital Earnings Equity --------- -------- ----------- -------------- ------------- (dollars in thousands, except per share) <S> <C> <C> <C> <C> <C> Balance, January 1, 1999......................... 3,878,463 $ 39 $ 218,087 $ (126,994) $ 91,132 Sale of Common Stock under dividend reinvestment plan............................................ 1,551 18 18 Common dividends ($.30 per share)................. - - - (1,161) (1,161) Preferred dividends($2.50 per share).............. - - - (14) (14) Net income........................................ - - - 7,887 7,887 --------- -------- ----------- -------------- ------------- Balance, June 30, 1999............................ 3,880,014 $ 39 $218,105 $ (120,282) $ (97,862) ========= ======== =========== ============== ============= </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 5
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> For the Six Months Ended June 30, ------------------ 1999 1998 -------- -------- (dollars in thousands) <S> <C> <C> Cash Flows from Operating Activities Rents collected..................................... $ 38,911 $ 32,948 Interest collected.................................. 137 397 Interest paid....................................... (12,026) (9,984) Payments for property operations.................... (20,777) (16,806) Advisory and net income fee paid to affiliate....... (718) (2,094) General and administrative expenses paid............ (1,470) (1,245) Distributions from operating cash flow of equity investees................................. 403 60 Other............................................... 259 (2,025) -------- -------- Net cash provided by operating activities.......... 4,719 1,251 Cash Flows from Investing Activities Acquisition of real estate.......................... (22,556) (51,452) Real estate improvements............................ (9,889) (3,237) Proceeds from sale of real estate................... (24,864) 3,596 Deposits on pending purchases....................... 1,870 (505) Collections on notes receivable..................... 33 2,180 Distributions of equity investees' investing cash flow, net................................... 1,996 694 -------- -------- Net cash (used in) investing activities............ (3,682) (48,724) Cash Flows from Financing Activities Payments on notes payable......................... (27,092) (13,678) Proceeds from notes payable....................... 40,051 49,654 Deferred borrowing costs.......................... (759) (876) Reimbursements to affiliates...................... (1,405) (61) Repurchase of Common Stock........................ - (336) Sale of Common Stock under dividend reinvestment plan............................................. 18 79 Dividends to stockholders......................... (1,161) (4,949) -------- -------- Net cash provided by financing activities.......... 9,652 29,833 Net increase <decrease> in cash and cash equivalents......................................... 10,689 (17,640) Cash and cash equivalents, beginning of period....... 10,505 24,733 -------- -------- Cash and cash equivalents, end of period............. $ 21,194 $ 7,093 ======== ======== </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 6
TRANSCONTINENTAL REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued <TABLE> <CAPTION> For the Six Months Ended June 30, -------------------------- 1999 1998 ---------- ----------- (dollars in thousands) Reconciliation of net income to net cash <S> <C> <C> provided by operating activities Net income.............................................. $ 7,887 $ 626 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization.......................... 6,305 5,525 Gain on sale of real estate............................ (10,151) (2,132) Equity in (income) of investees........................ (504) (432) Distributions from operating cash flow of equity investees...................................... 403 60 Decrease in interest receivable........................ - 4 (Increase) decrease in other assets.................... 273 (2,262) Increase (decrease) in interest payable................ (55) 564 Increase (decrease) in other liabilities............... 561 (702) -------- ------- Net cash provided by operating activities............ $ 4,719 $ 1,251 ======== ======= Schedule of noncash investing and financing activities Notes payable from purchase of real estate............. $ - $ 2,970 </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. 7
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION - ------------------------------ The Company, a Nevada corporation, is successor to a California business trust that was organized on September 6, 1983. The Company invests in real estate through direct equity ownership and partnerships and also invests in mortgage loans on real estate, including first and junior mortgage loans. The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the six month period ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the Consolidated Financial Statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K"). NOTE 2. REAL ESTATE - -------------------- In February 1999, the Company sold the 368 unit Mariner's Pointe Apartments in St. Petersburg, Florida, for $6.7 million, receiving net cash of $2.6 million after paying off $3.9 million in mortgage debt and the payment of various closing costs, including a real estate brokerage commission of $204,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of Basic Capital Management, Inc. ("BCM"), the Company's advisor. A gain of $1.9 million was recognized on the sale. In March 1999, the Company purchased the 264 unit Vista Hills Apartments in El Paso, Texas, for $5.2 million, paying $1.6 million in cash and obtaining mortgage financing of $3.6 million. The mortgage bears interest at a variable rate, currently 7.625% per annum, requires monthly payments of principal and interest of $26,897 and matures in April 2004. A real estate brokerage commission of $173,000 was paid to Carmel Realty and a real estate acquisition fee of $52,000 was paid to BCM. Also in March 1999, the Company purchased the Dominion land, a 14.39 acre parcel of unimproved land in Dallas, Texas, for $3.6 million, paying $1.2 million in cash and obtaining mortgage financing of $2.4 million. The mortgage bears interest at 15% per annum, requires quarterly payments of interest only and matures in March 2000. A real estate brokerage commission of $56,000 was paid to Carmel Realty and a real estate acquisition fee of $36,000 was paid to BCM. In May 1999, the Company purchased the Red Cross land, a 2.89 acre parcel of unimproved land in Dallas, Texas, for $7.6 million, paying $2.7 million in cash and obtaining mortgage financing of $4.3 million. The mortgage bears interest at a variable rate, currently 12.50% per 8
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 2. REAL ESTATE (Continued) - -------------------- annum, requires monthly payments of interest only and matures in October 2000. A real estate brokerage commission of $70,000 was paid to Carmel Realty and a real estate acquisition fee of $76,000 was paid to BCM. Also in May 1999, the Company sold the 109,497 sq. ft. 74 New Montgomery Office Building in San Francisco, California, for $19.3 million, receiving $12.1 million after paying off $6.5 million of mortgage debt and the payment of various closing costs, including a real estate brokerage commission of $410,000 to Carmel Realty. A gain of $8.3 million was recognized on the sale. In June 1999, the Company purchased the 90,000 sq. ft. 4135 Beltline Road Office Building in Addison, Texas, for $4.5 million, paying $1.0 million in cash and obtaining mortgage financing of $3.5 million. The mortgage bears interest at a variable rate, currently 9.5% per annum, requires monthly payments of interest only and matures in June 2001. A real estate brokerage commission of $154,000 was paid to Carmel Realty and a real estate acquisition fee of $45,000 was paid to BCM. NOTE 3. NOTES AND INTEREST RECEIVABLE - -------------------------------------- In March 1999, the Company accepted $33,000 for the early discounted payoff of four mortgage notes receivable with a combined principal balance of $55,000 and secured by undeveloped residential lots in Greensboro, North Carolina. No loss was incurred in excess of the reserves previously established. In June 1999, seven mortgage notes receivable with an aggregate principal balance of $570,000 were written off as uncollectible. No loss was recognized in excess of the reserve previously established. NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES - ---------------------------------------------------------- Set forth below are summarized results of operations of the real estate entities the Company accounts for using the equity method for the six months ended June 30, 1999 (dollars in thousands): Rents and interest income............................. $9,903 Depreciation.......................................... (1,562) Property operations................................... (4,422) Interest expense...................................... (3,076) ------ Net income............................................ $ 843 ====== The Company owns a combined 63.7% general and limited partner interest in Tri- City Limited Partnership ("Tri-City"), which, at January 1, 1999, owned three commercial properties in Texas. In June 1999, Tri-City sold the 48,696 sq. ft. Summit at Bridgewood Shopping Center in Ft. Worth, Texas, for $3.3 million, receiving net cash of $3.1 million after the payment of various closing costs, including a real estate brokerage 9
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 4. INVESTMENTS IN EQUITY METHOD REAL ESTATE ENTITIES (Continued) - --------------------------------------------------------- commission of $119,000 to Carmel Realty. The Company received a distribution of $2.0 million of such net cash. Tri-City recognized a gain of $587,000 on the sale of which the Company's equity share was $374,000. NOTE 5. NOTES AND INTEREST PAYABLE - ---------------------------------- In January 1999, the maturity date of the $4.9 million mortgage secured by the 242 unit Summerstone Apartments in Houston, Texas, was extended from December 1998 to July 1999. All other terms of the mortgage remained unchanged. See NOTE 8. "SUBSEQUENT EVENTS." In March 1999, the Company refinanced the matured mortgage debt secured by the 74,603 sq. ft. Lexington Center Office Building in Colorado Springs, Colorado, in the amount of $4.3 million, receiving net cash of $136,000 after paying off $4.0 million in mortgage debt and the payment of various closing costs. The new mortgage bears interest at a variable rate, currently 7.75% per annum, requires monthly payments of principal and interest of $32,479 and matures in April 2004. A mortgage brokerage and equity refinancing fee of $43,000 was paid to BCM. In April 1999, the Company refinanced the matured mortgage debt secured by the 97,846 sq. ft. Texstar Industrial Warehouse in Arlington, Texas, in the amount of $1.3 million, receiving net cash of $100,000 after paying off $1.2 million in mortgage debt and the payment of various closing costs. The new mortgage bears interest at 8.5% per annum, requires monthly payments of principal and interest of $11,282 and matures in April 2004. A mortgage brokerage and equity refinancing fee of $13,000 was paid to BCM. Also in April 1999, the Company refinanced the mortgage debt secured by the 106,257 sq. ft. Waterstreet Office Building in Boulder, Colorado, in the amount of $13.3 million receiving net cash of $5.4 million after paying off $7.9 million in mortgage debt and the payment of various closing costs. The new mortgage bears interest at 7.76% per annum, requires monthly payments of principal and interest of $95,375 and matures in April 2009. A mortgage brokerage and equity refinancing fee of $133,000 was paid to BCM. Further in April 1999, the Company refinanced the matured mortgage debt secured by the 70,295 sq. ft. Sadler Square Shopping Center in Amelia Island, Florida, in the amount of $2.9 million, receiving net cash of $500,000 after paying off $2.4 million in mortgage debt and the payment of various closing costs. The new mortgage bears interest at 7.96% per annum, requires monthly payments of principal and interest of $22,382 and matures in April 2009. A mortgage brokerage and equity refinancing fee of $29,000 was paid to BCM. 10
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. OPERATING SEGMENTS - -------------------------- Significant differences among the accounting policies of the Company's operating segments as compared to the Company's consolidated financial statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of the operating segments and allocates resources to each of them based on their operating income and cash flow. The Company based reconciliation of expenses that are not reflected in the segments is $1.2 million of administrative expenses in the six months ended June 30, 1999, and $1.1 million in 1998. There are no intersegment revenues and expenses and the Company conducts all of its business in the United States. Presented below is the operating income of each of the Company's reportable operating segments, for the six months ended June 30, 1999, and each segment's assets at June 30. <TABLE> <CAPTION> Commercial Properties Apartments Hotels Land Total ---------- ---------- ------- ------- -------- <S> <C> <C> <C> <C> <C> 1999 - --------- Rents............... $ 15,935 $ 19,299 $ 3,460 $ 472 $ 39,166 Property operating expenses........... 6,360 11,297 2,476 345 20,478 -------- -------- ------- ------- -------- Operating income.... $ 9,575 $ 8,002 $ 984 $ 127 $ 18,688 ======== ======== ======= ======= ======== Depreciation........ $ 3,139 $ 2,408 $ 299 $ - $ 5,846 Interest on debt.... 5,258 5,739 734 702 12,433 Real estate improvements....... 3,131 6,092 666 - 9,889 Assets.............. 145,100 161,580 18,243 34,439 359,362 Commercial Properties Apartments Total ---------- ---------- ------- Sales price........ $ 19,300 $ 6,700 $26,000 Cost of sale....... 11,017 4,832 15,849 -------- -------- ------- Gain on sale....... $ 8,283 $ 1,868 $10,151 ======== ======== ======= </TABLE> 11
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 6. OPERATING SEGMENTS - --------------------------- Commercial Properties Apartments Hotels Land Total -------- -------- ------- ------- -------- 1998 - --------- Rents............... $ 14,882 $ 16,806 $ 1,306 $ 399 $ 33,393 Property operating expenses........... 6,365 10,003 823 92 17,283 -------- -------- ------- ------- -------- Operating income.... $ 8,517 $ 6,803 $ 483 $ 307 $ 16,110 ======== ======== ======= ======= ======== Depreciation........ $ 3,062 $ 1,925 $ 142 $ - $ 5,129 Interest on debt.... 5,212 5,021 308 403 10,944 Real estate improvements....... 2,144 951 94 48 3,237 Assets.............. 160,314 136,522 5,429 22,066 324,331 Commercial Properties Land Total ---------- -------- ------- Sales price........ $ 3,800 $ - $ 3,800 Cost of sale....... 3,800 - 3,800 -------- ------- ------- Gain on sale....... $ - $ 2,132* $ 2,132 ======== ======= ======= - ----------------- * In April 1998, the Company recognized the previously deferred gain on a prior years' land sale, on collection of the mortgage note receivable secured by the land parcel. NOTE 7. COMMITMENTS AND CONTINGENCIES - ------------------------------------- The Company is involved in various lawsuits arising in the ordinary course of business. The Company's management is of the opinion that the outcome of these lawsuits will have no material impact on the Company's financial condition. NOTE 8. SUBSEQUENT EVENTS - ------------------------- In July 1999, the Company purchased the 57,493 sq. ft. Chesapeake Center Office Building in San Diego, California, for $5.2 million. The Company paid $2.2 million in cash, assumed the existing mortgage of $2.5 million and obtained seller financing of the remaining $500,000 of the purchase price. The mortgage bears interest at 8.875% per annum, requires monthly payments of principal and interest of $24,076 and matures in August 2005. The seller financing bears interest at 7.25% per annum, requires quarterly payments of interest only and matures in July 2002. The Company paid a real estate brokerage commission of $174,000 to Carmel Realty and a real estate acquisition fee of $52,000 to BCM. Also in July 1999, the Company refinanced the matured mortgage debt secured by the 242 unit Summerstone Apartments in Houston, Texas, in the amount of $5.3 million, receiving net cash of $347,000 after paying off $4.9 million in mortgage debt and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $53,000 to 12
TRANSCONTINENTAL REALTY INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE 8. SUBSEQUENT EVENTS (Continued) - ------------------------- BCM. The new mortgage bears interest at 7.67% per annum, requires monthly payments of principal and interest of $37,535 and matures in August 2009. Further in July 1999, the Company sold the .925 acre Republic land parcel in Dallas, Texas, for $1.8 million, receiving net cash of $443,000 after paying off $1.2 million of mortgage debt and the payment of various closing costs, including a real estate brokerage commission of $75,000 to Carmel Realty. A gain will be recognized on the sale. In July 1999, the Company sold the 216,131 sq. ft. Parke Long Industrial Warehouse in Chantilly, Virginia, for $15.1 million, receiving net cash of $6.4 million after paying off $7.6 million of mortgage debt and the payment of various closing costs, including a real estate brokerage commission of $347,000 to Carmel Realty. A gain will be recognized on the sale. In July 1999, Tri-City sold the 53,472 sq. ft. MacArthur Mills Office Building in Carrollton, Texas, for $3.9 million, receiving net cash of $2.3 million after paying off $1.3 million of mortgage debt and the payment of various closing costs, including a real estate brokerage commission of $137,000 to Carmel Realty. The Company received a distribution of $1.5 million of such net cash. Tri-City will recognize a gain on the sale. -------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Introduction - ------------ The Company invests in real estate through direct ownership and partnerships and invests in mortgage loans, including first, wraparound and junior mortgage loans. The Company is the successor to a business trust that was organized on September 6, 1983, and commenced operations on January 31, 1984. Liquidity and Capital Resources - ------------------------------- Cash and cash equivalents aggregated $21.2 million at June 30, 1999, compared with $10.5 million at December 31, 1998. The Company's principal sources of cash have been and will continue to be from property operations, proceeds from property sales, the collection of mortgage notes receivable and borrowings. The Company anticipates that its cash on hand, as well as cash generated from property operations, the sale of properties and the refinancing of certain of its mortgage debt will be sufficient to meet all of the Company's cash requirements including debt service obligations and expenditures for property maintenance and improvements. 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) - ------------------------------- Net cash provided by operating activities increased to $4.7 million for the six months ended June 30, 1999, from $1.3 million for the six months ended June 30, 1998. The primary factors affecting the Company's cash flow from operations are discussed in the following paragraphs. The Company's cash flow from property operations (rents collected less payments for expenses applicable to rental income) increased to $18.1 million in 1999, from $16.1 million in 1998. Of this increase, $1.5 million was due to the Company having acquired 25 properties during 1998 and 1999 and $1.4 million was due to an increase in rental rates and a decrease in vacancies at the Company's commercial properties. These increases were partially offset by a decrease of $1.2 million due to six properties being sold during 1998 and 1999. Interest collected decreased to $137,000 in 1999, from $397,000 in 1998. The decrease was due to eight mortgage notes receivable being collected in full in 1998 and 1999, the foreclosure of the collateral securing one note receivable in 1998 and the foreclosure of another note receivable expected to occur in the third quarter of 1999. Interest paid increased to $12.0 million in 1999, from $10.0 million in 1998. This increase was due to the acquisition of 23 properties subject to debt, refinancings of properties where the debt balance was increased and financings obtained on two previously unencumbered properties during 1998 and 1999. The increase was partially offset by a decrease of $682,000 due to the sale of six properties in 1998 and 1999. Advisory and net income fee payments decreased to $718,000 in 1999, from the $2.1 million paid in 1998. The decrease was due to the payment in 1998 of the accrued fourth quarter 1997 net income fee of $1.0 million, no such fee being earned by the advisor in 1998, and an additional $458,000 was due to an increase in the advisory fee refund for 1998 received in the first quarter of 1999. Under its advisory agreement with BCM, all or a portion of the annual advisory fee must be refunded by the advisor if the operating expenses of the Company exceed certain limits specified in the advisory agreement. General and administrative expenses paid increased to $1.5 million in 1999, from $1.2 million in 1998. This increase was mainly due to an increase in legal and other professional fees. Distributions received from equity joint ventures' operating cash flow increased to $403,000 in 1999, from $60,000 in 1998. This increase is mainly due to a decrease in operating expense at Tri-City's properties. In February 1999, the Company sold the Mariner's Point Apartments in St. Petersburg, Florida, receiving net cash of $2.6 million after paying off $3.9 million in mortgage debt and the payment of various closing costs. See NOTE 2. "REAL ESTATE." 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) - ------------------------------- In March 1999, the Company purchased (1) the Vista Hills Apartments in El Paso, Texas, for $5.2 million, consisting of $1.6 million in cash and mortgage financing of $3.6 million; and, (2) the Dominion land in Dallas, Texas, for $3.6 million, consisting of $1.2 million in cash and mortgage financing of $2.4 million. See NOTE 2. "REAL ESTATE." Also in March 1999, the Company received $33,000 on the early discounted payoff of four mortgage note receivables. See NOTE 3. "NOTES AND INTEREST RECEIVABLE." Further in March 1999, the Company refinanced the mortgage debt secured by the Lexington Center Office Building in Colorado Springs, Colorado, receiving net cash of $136,000 after paying off $4.0 million in mortgage debt and the payment of various closing costs. See NOTE 5. "NOTES AND INTEREST PAYABLE." In April 1999, the Company refinanced the mortgage debt secured by (1) the Texstar Industrial Warehouse in Arlington, Texas, receiving net cash of $100,000 after paying off $1.2 million in mortgage debt and the payment of various closing costs; (2) the Waterstreet Office Building in Boulder, Colorado, receiving net cash of $5.4 million after paying off $7.9 million in mortgage debt and the payment of various closing costs; and, (3) the Sadler Square Shopping Center in Amelia Island, Florida, receiving net cash of $500,000 after paying off $2.4 million in mortgage debt and the payment of various closing costs. See NOTE 5. "NOTES AND INTEREST PAYABLE." In May 1999, the Company sold the 74 New Montgomery Office Building in San Francisco, California, receiving net cash of $12.1 million after paying off $6.5 million in mortgage debt and the payment of various closing costs. See 2. "REAL ESTATE." Also in May 1999, the Company purchased the Red Cross land in Dallas, Texas, for $7.6 million, consisting of $3.3 million in cash and mortgage financing of $4.3 million. See NOTE 2. "REAL ESTATE." In June 1999, the Company purchased the 4135 Beltline Road Office Building in Addison, Texas, for $4.5 million, consisting of $1.0 million in cash and mortgage financing of $3.5 million. See NOTE 2. "REAL ESTATE." In the first six months of 1999, the Company paid quarterly dividends to Common stockholders of $.30 per share, or a total of $1.2 million, and $2.50 per share or a total of $14,000 to Preferred stockholders and 1,551 shares of Common Stock were sold through the dividend reinvestment program for a total of $18,000. The Company's Board of Directors has approved the repurchase of a total of 687,000 shares of the Company's Common Stock. Through June 30, 1999, a total of 409,765 shares had been repurchased at a total cost of $3.3 million. During the first six months of 1999, no shares were repurchased. 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Liquidity and Capital Resources (Continued) - ------------------------------- Management reviews the carrying values of the Company's properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable, impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The mortgage note receivable review includes an evaluation of the collateral property securing each note. The property review generally includes: (1) selective property inspections; (2) a review of the property's current rents compared to market rents; (3) a review of the property's expenses; (4) a review of maintenance requirements; (5) a review of the property's cash flow; (6) discussions with the manager of the property; and, (7) a review of properties in the surrounding area. Results of Operations - --------------------- The Company had net income of $7.6 million and $7.9 million in the three and six months ended June 30, 1999, as compared to net income of $1.8 million and $626,000 in the corresponding periods in 1998. Net income in the three and six months ended June 30, 1999, included $8.3 million and $10.2 million of gains on the sale of real estate. Net income in the three and six months ended June 30, 1998, included gains on sale of real estate of $2.1 million. Fluctuations in this and other components of revenue and expense between the 1998 and 1999 periods are discussed below. Rents in the three and six months ended June 30, 1999, increased to $20.1 million and $39.2 million from $17.3 million and $33.4 million in 1998. Of these increases, $591,000 and $1.9 million were due to an increase in rental rates and an increase in occupancy at the Company's commercial properties and $2.9 million and $5.2 million were due to the acquisition of 25 properties in 1998 and 1999. These increases were partially offset by decreases of $1.4 million and $2.0 million due to the sale of six properties in 1998 and 1999. Rents are expected to continue to increase due to properties acquired in 1998 and 1999. Interest income decreased to $38,000 and $140,000 in the three and six months ended June 30, 1999, compared to $175,000 and $393,000 in 1998. The decrease was due to the collateral securing one mortgage note receivable being foreclosed in 1998 and the collateral securing one note receivable expected to be foreclosed in the third quarter of 1999. Interest income for the remaining quarters of 1999 is expected to be insignificant. Property operations expense in the three and six months ended June 30, 1999 increased to $10.2 million and $20.5 million from $8.9 million and $17.3 million in 1998. Of these increases, $2.0 million and $3.2 million were due to the acquisition of 25 properties in 1998 and 1999, 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Results of Operations (Continued) - --------------------- partially offset by a decrease of $668,000 and $725,000 due to the sale of six properties during 1998 and 1999. Property operating expenses are expected to continue to increase due to properties acquired in 1998 and 1999. Interest expense increased to $6.2 million and $12.4 million in the three and six months ended June 30, 1999, from $5.6 million and $10.9 million in 1998. Of these increases, $956,000 and $2.1 million were due to the debt incurred or assumed on 23 of the 25 properties acquired in 1998 and 1999 and $86,000 and $227,000 due to refinancings where the debt balance was increased and financing obtained on unencumbered properties. These increases were partially offset by decreases of $347,000 and $634,000 due to the sale of six properties in 1998 and 1999. Interest expense for the remainder of 1999 is expected to increase due to properties acquired in 1998 and 1999. Depreciation increased to $3.0 million and $5.8 million in the three and six months ended June 30, 1999, from $2.6 million and $5.1 million in 1998. Of these increases, $436,000 and $854,000 were due to the acquisition of 20 income producing properties in 1998 and 1999 and $210,000 and $432,000, due to depreciation of prior years capital and tenant improvements. These increases were partially offset by decreases of $290,000 and $569,000 due to six properties being sold during 1998 and 1999. Depreciation is expected to continue to increase during the remainder of 1999 as a result of the properties acquired in 1998 and 1999. Advisory fee increased to $740,000 and $1.5 million in the three and six months ended June 30, 1999, from $641,000 and $1.3 million in 1998. These increases were due to an increase in the Company's gross assets, the basis for such fee. Advisory fees are expected to continue to increase with increases in the Company's gross assets. Net income fee increased to $641,000 and $659,000 in the three and six months ended June 30, 1999 as compared to $48,000 in the three and six months ended June 30, 1998. The net income fee is payable to the Company's advisor based on 7.5% of the Company's net income. No such fee was incurred in the first quarter of 1998. General and administrative expenses increased to $571,000 and $1.2 million in the three and six months ended June 30, 1999, from $486,000 and $1.1 million in 1998. These increases were mainly due to an increase in legal and other professional fees. Equity in earnings of investees increased to $479,000 and $504,000 in the three and six months ended June 30, 1999, from $414,000 and $432,000 in 1998. The increases were mainly due to a decrease in property operating expenses at one of the commercial properties in the Tri-City joint venture. 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Results of Operations (Continued) - --------------------- In the three and six months ended June 30, 1999, the Company recognized gains of $8.3 million and $10.1 million from the sale of Mariner's Pointe Apartments and 74 New Montgomery Office Building. In the six months ended June 30, 1998, a previously deferred gain of $2.1 million was recognized on the sale of real estate in the first quarter of 1998. Such gain had been deferred on a prior years sale on one of the Company's properties until the financing provided by the Company was collected. Tax Matters - ----------- As more fully discussed in the Company's 1998 Form 10-K, the Company has elected and, in the opinion of management, qualified to be taxed as a Real Estate Investment Trust ("REIT"), as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, (the "Code"). To continue to qualify for federal taxation as a REIT under the Code, the Company is required to hold at least 75% of the value of its total assets in real estate assets, government securities, cash and cash equivalents at the close of each quarter of each taxable year. The Code also requires a REIT to distribute at least 95% of its REIT taxable income, plus 95% of its net income from foreclosure property, all as defined in Section 857 of the Code, on an annual basis to stockholders. Inflation - --------- The effects of inflation on the Company's operations are not quantifiable. Revenues from apartment operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties, and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, the Company's earnings from short-term investments, the cost of new financings as well as the cost of variable interest rate debt will be affected. Environmental Matters - --------------------- Under various federal, state and local environmental laws, ordinances and regulations, the Company may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials. Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on the Company's business, assets or results of operations. 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS (Continued) --------------------- Year 2000 - --------- BCM, the Company's advisor, has informed management that its computer hardware operating system and computer software have been certified as year 2000 compliant. Further, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM, that performs property management services for the Company's properties, has informed management that effective January 1, 1999, it began using year 2000 compliant computer hardware and property management software for the Company's commercial properties. With regard to the Company's apartments, Carmel, Ltd. has informed management that its subcontractors are also using year 2000 compliant computer hardware and property management software. The Company has not incurred, nor does it expect to incur, any costs related to its computer hardware and accounting and property management software being modified, upgraded or replaced in order to make them year 2000 compliant. Such costs have been or will be borne by either BCM, Carmel, Ltd. or the property management subcontractors of Carmel, Ltd. Management has completed its evaluation of the Company's computer controlled building systems, such as security, elevators, heating and cooling, etc., to determine what systems are not year 2000 compliant. Management believes that necessary modifications to such systems are insignificant and do not require significant expenditures as such enhanced operating systems are readily available. The Company has or will have in place the year 2000 compliant systems that will allow it to operate. The risks the Company faces are that certain of its vendors will not be able to supply goods or services and that financial institutions and taxing authorities will not be able to accurately apply payments made to them. Management believes that other vendors are readily available and that financial institutions and taxing authorities will, if necessary, apply monies received manually. The likelihood of the above having a significant impact on the Company's operations is negligible. ---------------------- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ------------------------- Olive Litigation. In February 1990, the Company, together with Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI") and National Income Realty Trust, three real estate entities with, at the time, the same officers, directors or trustees and advisor as the Company, entered into a settlement (the "Settlement") of a class and derivative action entitled Olive et al. v. 19
ITEM 1. LEGAL PROCEEDINGS (Continued) - ------------------------- National Income Realty Trust et al. relating to the operation and management of each of the entities (the "Olive Litigation"). On April 23, 1990, the Court granted final approval of the terms of the Settlement. On January 27, 1997, the parties entered into an Amendment to the Settlement effective January 9, 1997 (the "Olive Amendment"). The Olive Amendment provided for the settlement of additional matters raised by plaintiffs' counsel in 1996. The Court issued an order approving the Olive Amendment on July 3, 1997. The Olive Amendment provided for the addition of four new unaffiliated members to the Company's Board of Directors and set forth new requirements for the approval of any transactions with certain affiliates until April 28, 1999. In addition, the Company, CMET, IORI and their stockholders released the defendants from any claims relating to the plaintiffs' allegations. Under the Olive Amendment, all shares of the Company owned by any affiliates were required to be voted at all stockholder meetings of the Company held until April 28, 1999 in favor of all new members of the Company's Board of Directors added under the Olive Amendment. The Olive Amendment also required that, until April 28, 1999, all shares of the Company owned by any affiliates in excess of forty percent (40%) of the Company's outstanding shares were to be voted in proportion to the votes cast by all non-affiliated stockholders of the Company. The provisions of the Settlement and the Olive Amendment terminated on April 28, 1999. ITEM 5. OTHER INFORMATION - ------------------------- Proposed Merger with Continental Mortgage and Equity Trust - ---------------------------------------------------------- On September 25, 1998, the Company and CMET jointly announced the agreement of their respective Boards, for the Company to acquire CMET. Under the proposal the Company would acquire all of CMET's outstanding shares of beneficial interest in a tax free exchange, for shares of its Common Stock. The Company will issue 1.181 shares of its Common Stock for each outstanding share of beneficial interest of CMET. Upon the exchange of shares, CMET would merge into the Company. The share exchange and merger are subject to a vote of shareholders of both entities. Approval requires the vote of a majority of the shareholders holding a majority of CMET's outstanding shares of beneficial interest and, if a proposed amendment to the Company's Articles of Incorporation is approved, the vote of a majority of the Company's outstanding shares of Common Stock. As of July 31, 1999, BCM, the Company's advisor, and its affiliates held shares representing approximately 60.1% of the outstanding shares of CMET and approximately 46.6% of the outstanding shares of the Company. A date for the special meeting of the shareholders to vote on the merger proposal has been set for September 28, 1999. The Company has the same Board and advisor as CMET. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits: Exhibit Number Description - ------- --------------------------------------------------------- 27.0 Financial Data Schedule, filed herewith. (b) Reports on Form 8-K as follows: None. 21
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANSCONTINENTAL REALTY INVESTORS, INC. Date: August 16, 1999 By: /s/ Randall M. Paulson ------------------------- -------------------------------- Randall M. Paulson President Date: August 16, 1999 By: /s/ Thomas A. Holland ------------------------- -------------------------------- Thomas A. Holland Executive Vice President and Chief Financial Officer Principal Financial and Accounting Officer) 22
TRANSCONTINENTAL REALTY INVESTORS, INC. EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q For the Six Months ended June 30, 1999 Exhibit Page Number Description Number - ------- --------------------------------------------------- ------ 27.0 Financial Data Schedule 24 23