HALLWOOD REALTY PARTNERS L P - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED JUNE 30, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 1-10643

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HALLWOOD REALTY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)

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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 twelve (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 ninety (90)
days.
Yes X No
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THE REGISTRANT IS A LIMITED PARTNERSHIP AND ISSUES UNITS REPRESENTING OWNERSHIP
OF LIMITED PARTNER INTERESTS.

NUMBER OF UNITS OUTSTANDING AT JULY 29, 2002: 1,589,948

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Page 1

HALLWOOD REALTY PARTNERS, L.P.

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Page 2

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)

See notes to consolidated financial statements.

Page 3

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)

See notes to consolidated financial statements.

Page 4

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)

See notes to consolidated financial statements.

Page 5

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
(UNAUDITED)

See notes to consolidated financial statements.

Page 6

HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See notes to consolidated financial statements.

Page 7

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2002 and 2001
(unaudited)

1 ORGANIZATION AND ACCOUNTING POLICIES

Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware
limited partnership, operates in the commercial real estate industry.
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 June 30, 2002 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, including decision-making responsibility for financing,
refinancing, acquiring and disposing of properties. In addition,
Realty provides general operating and administrative services to HRP.
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, 2001.

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 three and/or six months ended
June 30, 2002 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002.

In August 2001, SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" was issued. The provisions of this
statement were effective beginning on January 1, 2002. The impact of
adopting SFAS No. 144 will be limited to the requirement that the
results of operations of disposed properties be classified as
discontinued operations. This will result in the reclassification of
historical operating results for property dispositions that occur in
the future.

2 TRANSACTIONS WITH RELATED PARTIES

Realty and HCRE are compensated for services provided to HRP and its
real estate properties and Realty is reimbursed for certain costs and
expenses. The following table sets forth such compensation and
reimbursements paid by HRP (in thousands):

(a) These costs are mostly recorded as general and administrative expenses
and represent reimbursement to Realty, at cost, for administrative
level salaries and compensation, bonuses, employee and director
insurance, and allocated overhead costs. HRP pays its account balance
with Realty on a monthly basis.

Page 8

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2002 and 2001
(unaudited)

3 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:

4 STATEMENTS OF CASH FLOWS

Supplemental disclosure of cash flow information -

Cash interest payments were $7,122,000 (net of capitalized
interest of $256,000) and $7,815,000 in the six months ended
June 30, 2002 and 2001, respectively.

Supplemental disclosure of noncash investing and financing activities
are as follows -

As of June 30, 2002 and December 31, 2001, HRP had a
construction payable for property development costs at
Executive Park of $0 and $250,000, respectively.

5 PROPERTY DEVELOPMENT

In early 2001, HRP demolished a 1-story office building at its
Executive Park property in Atlanta, Georgia that contained 18,000 net
rentable square feet. In order to do so, HRP had to obtain a release
of the building from Executive Park's mortgage lien by substituting,
for such collateral, $608,000 of United States Treasury Bonds which
have various maturity dates through December 2007. In February 2001,
HRP began constructing a 5-story office building containing 125,000
net rentable square feet. As of June 30, 2002, HRP had incurred and
capitalized $15,366,000 of construction and development costs, which
includes all of the costs for the building and its parking garage
(excluding the existing land costs, lease commissions and tenant
improvements to be spent after a lease is executed, and loan fees once
financing is secured). The building and its parking garage, excluding
tenant finish-out, was completed at the beginning of April 2002. All
development costs have been paid with cash funds on hand, however once
the property is substantially leased, it is anticipated that loan
financing will be secured to replenish HRP's cash. Costs for lease
commissions, tenant improvements and loan fees are dependant upon the
terms of each lease and loan agreement and are yet to be determined.
HRP anticipates leasing substantially all of the building by late
2002.

Page 9

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2002 and 2001
(unaudited)

6 LITIGATION

On June 20, 1997, an action was filed against HRP, the General
Partner, its directors, and Hallwood by Gotham Partners, L.P. in the
Court of Chancery of the State of Delaware, styled Gotham Partners,
L.P. v. Hallwood Realty Partners, L.P., et al. (C.A. No. 15754). This
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.

A five-day trial was held in January 2001. On July 18, 2001, the
Delaware Court of Chancery rendered its opinion. In its decision, the
court determined that an option plan and a sale of units to Hallwood
in connection with a reverse split of units implemented by HRP in 1995
were in compliance with HRP's partnership agreement. The court also
found that the sale of units to Hallwood in connection with a 1995
odd-lot offer by HRP did not comply with certain procedures required
by the HRP partnership agreement. The court ruled that the defendants
other than HRP pay a judgment to HRP in the amount of $3,417,423, plus
pre-judgment interest from August 1995. The judgment amount represents
what the court determined was an underpayment by Hallwood.

In August 2001, plaintiff and certain defendants appealed the Court of
Chancery's judgment to the Delaware Supreme Court. Those appeals are
pending. Oral arguments were heard on February 12, 2002, and a
rehearing en banc was held on March 26, 2002. In October 2001, HRP
received the $3,417,423 judgment together with $2,987,576 of
pre-judgment and post-judgment interest, subject to an arrangement
that it be returned in full or part if the judgment is modified or
reversed on appeal. If the appellate court reverses the judgment, any
subsequent ruling by the trial court on remand may be more or less
favorable to HRP. As a result of the appeals and the uncertainty of
their outcome, HRP recorded the judgment and interest as "Deferred
Litigation Proceeds" on its balance sheet.

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
1115) 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. The
complaint further alleged that defendants, by acquiring more than 15%
of the outstanding HRP units, have triggered certain rights under its
Unit Purchase Rights Agreement, for which HRP was seeking declaratory
relief. HRP sought various forms of relief, including declaratory
judgments, divestiture, corrective disclosures, a "cooling-off" period
and damages, including costs and disbursements. On November 16, 2000,
the court granted HRP's motion to add as defendants Gotham Holdings
II, L.L.C., Hallwood Investors, L.P., Liberty Realty Partners, L.P.
and EFO/Liberty, Inc. and to remove EFO Realty, Inc. as a defendant.
Discovery was completed in December 2000 and trial was held in
February 2001. On February 23, 2001, the court rendered a decision in
favor of the defendants and on February 28, 2001, the court ordered
the complaint dismissed. HRP filed a Notice of Appeal on March 29,
2001 with respect to the February 28, 2001 dismissal of the complaint
and other matters. All parties filed briefs with the Second Circuit.
Oral arguments were heard on March 4, 2002. On April 11, 2002, the
U.S. Court of Appeals for the Second Circuit upheld the lower court's
ruling in favor of defendants. On April 25, 2002, HRP filed with the
court a Petition for Rehearing and Rehearing en banc with respect to
the April 11, 2002 decision. On June 3, 2002, the Second Circuit
denied that petition.

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

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

SECOND QUARTER OF 2002 COMPARED TO THE SECOND QUARTER OF 2001

REVENUE FROM PROPERTY OPERATIONS for the second quarter of 2002 decreased
$255,000, or 1.4%, compared to the 2001 second quarter. The following table
illustrates the components of the change, in thousands:

Rental income, net $ 119
Other property income (374)
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Net decrease $ (255)
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Net rental income increased primarily due to an overall increase in rental rates
offset by a decrease in average occupancy between periods from 92.9% to 87.0%.
(Average occupancy for the second quarter of 2002 was 89.1% excluding the new,
but unoccupied, building at Executive Park, which was completed effective April
1, 2002 - see Note 5 to the Consolidated Financial Statements for more
information.) Other property income decreased primarily due to a reduction in
tenant expense recoveries.

INTEREST INCOME decreased by $138,000, or 48.1%, as a result of decreased
earnings on overnight cash investments due to significantly lower interest rates
available between the periods.

PROPERTY OPERATING EXPENSES for the second quarter of 2002 increased $177,000,
or 2.8%, compared to the same period in 2001. The increase is comprised
primarily of the following components:

o Operating costs, excluding utilities, increased $289,000, or
about 4.5% between the periods, and include general
increases in real estate taxes, property level salaries,
property and liability insurance premiums, and security
costs.

o Utilities decreased $112,000 primarily due to overall lower
electrical and/or natural gas usage.

INTEREST EXPENSE for the second quarter of 2002 increased $53,000, or 1.4%,
compared to the same period in 2001, due to changes in the estimated fair value
of an interest rate cap, partially offset by lower mortgage interest, which
decreased primarily due to a lower interest rate for HRP's only variable rate
mortgage secured by Allfirst Building. (For more information about the interest
rate cap and the variable rate mortgage, see Item 3 - Quantitative and
Qualitative Disclosures About Market Risk contained in this Form 10-Q.)

DEPRECIATION AND AMORTIZATION EXPENSE increased $93,000, or 2.5%, primarily due
to depreciation for the newly completed building at Executive Park .

GENERAL AND ADMINISTRATIVE EXPENSES for the second quarter of 2002 increased
$203,000, or 23.6%, compared to the same period in 2001, due to increases in
certain professional fees, general legal expenses, partnership level personnel
costs, and overhead costs.

LITIGATION COSTS were $148,000 and $639,000 for the second quarter of 2002 and
2001, respectively, and are related to the lawsuits described in Note 6 to the
Consolidated Financial Statements.

Page 11

HALLWOOD REALTY PARTNERS, L.P.

RESULTS OF OPERATIONS (CONTINUED)

FIRST SIX MONTHS OF 2002 COMPARED TO THE FIRST SIX MONTHS OF 2001

REVENUE FROM PROPERTY OPERATIONS for the first six months of 2002 decreased
$386,000, or 1.1%, compared to the first six months of 2001. The following table
illustrates the components of the change, in thousands:

Rental income, net $ 41
Other property income (427)
------------
Net decrease $ (386)
============

Net rental income increased primarily due to an overall increase in rental rates
offset by a decrease in average occupancy between periods from 91.6% to 88.3%.
(Average occupancy for the first six months of 2002 was 89.3% excluding the new,
but unoccupied, building at Executive Park, which was completed effective April
1, 2002 - see Note 5 to the Consolidated Financial Statements for more
information.) Other property income decreased primarily due to a reduction in
tenant expense recoveries.

GAIN FROM PROPERTY SALES of $4,220,000 in the first six months of 2001 is
comprised of the sale of one building at Seattle Business Parks for a gross
selling price of $3,287,000, resulting in a gain of $2,150,000; the sale of Joy
Road Distribution Center for a gross selling price of $5,326,000, resulting in a
gain of $1,917,000; and the sale of one building at Fairlane Commerce Park for a
gross selling price of $575,000, resulting in a gain of $153,000.

INTEREST INCOME decreased by $370,000, or 56.7%, as a result of decreased
earnings on overnight cash investments due to significantly lower interest rates
available between the periods.

PROPERTY OPERATING EXPENSES for the first six months of 2002 decreased $227,000,
or 1.7%, compared to the same period in 2001. The decrease is comprised
primarily of the following components:

o Utilities decreased $502,000 primarily due to overall lower
electrical and natural gas usage.

o Combined, all other operating costs increased $275,000, or
about 2% between the periods, and include general increases
in real estate taxes, property level salaries, property and
liability insurance premiums, and security costs.

INTEREST EXPENSE for the first six months of 2002 decreased $701,000, or 8.6%,
compared to the first six months of 2001, as a result of a decrease in mortgage
interest of $368,000 (primarily due to a lower interest rate for HRP's only
variable rate mortgage secured by Allfirst Building), the capitalization of
$256,000 of interest for construction of the development project at Executive
Park (as described in Note 5 to the Consolidated Financial Statements), and a
decrease in loan cost amortization and other interest costs of $77,000.

DEPRECIATION AND AMORTIZATION EXPENSE increased $243,000, or 3.3%, primarily due
to depreciation for the newly completed building at Executive Park.

GENERAL AND ADMINISTRATIVE EXPENSES for the first six months of 2002 increased
$84,000, or 4.3%, compared to the first six months of 2001, due to increases in
certain professional fees and overhead costs.

LITIGATION COSTS were $365,000 and $3,329,000 for the first six months of 2002
and 2001, respectively, and are related to the lawsuits described in Note 6 to
the Consolidated Financial Statements.

Page 12

HALLWOOD REALTY PARTNERS, L.P.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL INFORMATION -

HRP operates in the commercial real estate industry. 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, operations, and other factors
to determine if any should be considered for disposal.

As of June 30, 2002, HRP owned fourteen real estate assets (the "Properties"),
located in six states containing 5,196,000 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.

This Form 10-Q 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, 2001.

CASH SOURCES, CASH USES AND COMMITMENTS -

HRP's cash position increased $2,730,000 during the first six months of 2002 to
$27,643,000 as of June 30, 2002. The source of cash during the period was
$9,845,000 of cash provided by operating activities. The uses of cash were
$3,351,000 for property and tenant improvements, $1,960,000 for property
development costs, and $1,804,000 for scheduled mortgage principal payments.

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. We believe that there will be sufficient
cash from operations to meet these needs because HRP had leases in place as of
December 31, 2001 to provide $55,261,000 of minimum rental payments during 2002.
HRP had $54,443,000 of minimum rental payments estimated for the prior year in
2001 (based on leases in place as of December 31, 2000), however the actual
rental payments recorded for 2001 were $60,494,000. For the six months ended
June 30, 2002 and 2001, HRP's actual rental payments recorded were $30,690,000
and $30,720,000, respectively. Our ability to fund operations in the future will
depend upon continued success in maintaining current occupancy levels, retaining
current tenants, and attracting new tenants, as well as sustaining or increasing
rental rates. 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 Properties.

In addition to the commitment described below with regards to the development
project at Executive Park, HRP has estimated and budgeted tenant and capital
improvements of $10,852,000 and lease commissions of $2,261,000 for 2002. For
the first six months of 2002, HRP incurred $3,351,000 of tenant and capital
improvements and $883,000 of lease commissions of these estimates.

PROPERTY DEVELOPMENT -

In early 2001, HRP demolished a 1-story office building at its Executive Park
property in Atlanta, Georgia that contained 18,000 net rentable square feet. In
order to do so, HRP had to obtain a release of the building from Executive
Park's mortgage lien by substituting for such collateral $608,000 of United
States Treasury Bonds, which have various maturity dates through December 2007.
In February 2001, HRP began constructing a 5-story office building containing
125,000 net rentable square feet. As of June 30, 2002, HRP had incurred and
capitalized $15,366,000 of construction and development costs, which includes
all of the costs for the building and its parking garage (excluding the existing
land costs, lease commissions and tenant improvements to be spent after a lease
is executed, and loan fees once financing is secured). The building and its
parking garage, excluding tenant finish-out, was completed at the beginning of
April 2002. All development costs have been paid with cash funds on hand,
however once the property is substantially leased, it is anticipated that loan
financing will be secured to replenish HRP's cash. Costs for lease commissions,
tenant improvements and loan fees are dependant upon the terms of each lease and
loan agreement and are yet to be determined. HRP anticipates leasing
substantially all of the building by late 2002.

Page 13

HALLWOOD REALTY PARTNERS, L.P.

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

LITIGATION & JUDGMENT -

On July 18, 2001, the Delaware Court of Chancery rendered its opinion for the
action styled Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., et al.
(C.A. No. 15754). The court ruled that the defendants other than HRP pay a
judgment to HRP in the amount of $3,417,423, plus pre-judgment interest from
August 1995. The judgment amount represents what the court determined was an
underpayment by Hallwood. In August 2001, plaintiff and certain defendants
appealed the Court of Chancery's judgment to the Delaware Supreme Court. Those
appeals are pending. (For more information about this litigation and the lawsuit
filed in United States District Court of the Southern District of New York, see
Note 6 to the Consolidated Financial Statements.)

In October 2001, HRP received the $3,417,423 judgment together with $2,987,576
of pre-judgment and post-judgment interest, subject to an arrangement that it be
returned in full or part if the judgment is modified or reversed on appeal. If
the appellate court reverses the judgment, any subsequent ruling by the trial
court on remand may be more or less favorable to HRP. As a result of the appeals
and the uncertainty of their outcome, HRP recorded the judgment and interest as
"Deferred Litigation Proceeds" on its balance sheet.

MORTGAGE LOANS -

Substantially all of the buildings in HRP's real estate properties were
encumbered and pledged as collateral by eleven non-recourse mortgage loans
aggregating $199,420,000 as of June 30, 2002. These mortgage loans have interest
rates ranging from 3.17% to 8.70% (with an effective average interest rate of
7.58%) and mature between 2005 and 2020. Other than Allfirst Building's mortgage
($25,000,000), all mortgages have fixed interest rates. Most of the mortgage
loans require monthly principal payments with balloon payments due at maturity.
Based upon loan amortizations in effect, HRP is required to pay approximately
$1,868,000 of principal payments during the remainder of 2002.

Since August 2000, HRP has had available a $2,000,000 revolving line of credit,
which matures on July 29, 2003. The line of credit 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. HRP has not borrowed against this
facility.

TRANSACTIONS WITH RELATED PARTIES -

For information about transactions with related parties, see Note 2 to the
Consolidated Financial Statements.

INFLATION -

Inflation did not have a significant impact on HRP during the three years ended
December 31, 2001 and for the six months ended June 30, 2002. Additionally,
inflation is not anticipated to have a material impact on HRP for the rest of
2002.

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 the risks identified in Item 1 - Business -
"Risks, Competition and Other Factors" contained in HRP's Form 10-K for the year
ended December 31, 2001.

Page 14

HALLWOOD REALTY PARTNERS, L.P.

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 the interest rate swap agreement in 1998 to reduce its exposure
to changes in interest rates for the loan secured by Allfirst Building. This
interest rate swap agreement effectively fixed the loan's cash 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 from the sale were
designated for general working capital purposes. For financial reporting
purposes, the proceeds are being amortized over the life of the loan as a
reduction to interest expense. During 2001, as the result of the adoption of
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" HRP
reclassified the remaining unamortized gain from liabilities to accumulated
other comprehensive income. The proceeds will continue to be amortized over the
life of Allfirst Building's mortgage payable as a reduction to interest expense.
As of June 30, 2002 and December 31, 2001, the unamortized balance, included on
the balance sheet as "Accumulated other comprehensive income", was $1,065,000
and $1,204,000, respectively.

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 limits HRP's exposure to changing interest rates to a maximum of
10%. This interest rate cap, which has a notional amount of $25,000,000, has
terms consistent with Allfirst Building's mortgage loan. Allfirst Building's
cash interest rate was 3.14% and 3.44% as of June 30, 2002 and December 31,
2001, respectively. The interest rate cap is a derivative and designated as a
cash flow hedge. Hedge effectiveness is measured based on using the intrinsic
value of the interest rate cap. All changes in the fair value of the time value
of the cap are recorded directly to earnings. With the January 1, 2001 adoption
of SFAS No. 133, HRP recorded the cumulative effect of the adoption as a
reduction to income of $192,000, or the amount of the difference between the
carrying value as of January 1, 2001 of $267,000 and the then estimated fair
value of $75,000, all of which represented change in time value. Thereafter, on
a quarterly basis, HRP has recorded changes in the estimated fair value of the
cap in interest expense. As of June 30, 2002 and December 31, 2001, the
estimated fair value of the interest rate cap was $110,000 and $68,000,
respectively.

Other than Allfirst Building's mortgage ($25,000,000), all mortgages have fixed
interest rates. Accordingly, changes in LIBOR or the prime rate do not
significantly impact the amount of interest paid by HRP. Assuming a 100 basis
point, or 1%, change in LIBOR, interest paid by HRP would increase or decrease
by approximately $250,000 on an annual basis.

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HALLWOOD REALTY PARTNERS, L.P.

PART II - OTHER INFORMATION

Item

1 Legal Proceedings

Reference is made to Item 8 - Note 10 of Form 10-K for the year ended
December 31, 2001 and Note 6 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 None.

(b) Reports on Form 8-K None.

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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: July 29, 2002 By: /s/ JEFFREY D. GENT
------------- --------------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and
Accounting Officer)

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