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 MARCH 31, 2003

[ ] 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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes [X] No [ ]

THE REGISTRANT IS A LIMITED PARTNERSHIP AND ISSUES UNITS REPRESENTING OWNERSHIP
OF LIMITED PARTNER INTERESTS.

NUMBER OF UNITS OUTSTANDING AT MAY 9, 2003: 1,593,948

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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 THREE MONTHS ENDED MARCH 31, 2003
(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 Months Ended March 31, 2003 and 2002
(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 March 31, 2003 there were 1,593,948 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, 2002.

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 months ended March 31, 2003
are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003.

Reclassifications, including a gross-up for parking, construction and
tenant service expenses that were previously netted against revenues,
have been made in the prior period to conform to the classifications
used in the current period. The reclassifications had no effect on
previously reported net income.

2 STATEMENTS OF CASH FLOWS

Supplemental disclosure of cash flow information -

Cash interest payments were $4,010,000 and $3,880,000 (net of
capitalized interest of $256,000) in the three months ended March 31,
2003 and 2002, respectively.

PAGE 8

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(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 (in
thousands):

4 TRANSACTIONS WITH RELATED PARTIES

Realty and HCRE are compensated for services provided to HRP and its
real estate properties and are reimbursed, at cost, for certain costs
and expenses. In particular, since HRP does not directly employ any
individuals, the compensation and other costs related to approximately
90 employees rendering services on behalf of HRP and its properties are
reimbursed by HRP to Realty and HCRE. HRP pays or settles its account
balances with Realty and HCRE on a monthly basis. The following table
sets forth such compensation and reimbursements paid by HRP (in
thousands):

(a) These costs are recorded as general and administrative
expenses and represent reimbursement to Realty for
administrative level employee and director compensation,
officer, officer and director liability insurance, and
allocated overhead costs.

(b) These costs are recorded as property operating expenses
and represent reimbursement to HCRE for property-level
employee compensation and related expenses.

PAGE 9

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(unaudited)

5 PARTNERS' CAPITAL TRANSACTION

In 1995, HRP issued options totaling 86,000 units to certain executives
of Realty and HCRE with an exercise price of $11.875 per unit. The
options were vested over a three year period ending in 1997 and they
expire on February 27, 2005. In February 2003, options for 4,000 units
were exercised by the estate of a deceased HCRE executive. As of March
31, 2003, a total of 21,200 options had been exercised, none have been
canceled and 64,800 options remained exercisable. No options have been
granted since 1995. As the only options of HRP fully vested in 1997,
there is no difference between the historical operations and pro forma
operations for the periods presented herein had the expense provisions
of Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" been adopted.

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. In October 2001, HRP received
the $3,417,423 judgment together with $2,987,576 of interest, subject
to an arrangement that it be returned in full or part if the judgment
is modified or reversed on appeal. Oral arguments were heard on
February 12, 2002, and a rehearing en banc was held on March 26, 2002.
On August 29, 2002, the Supreme Court affirmed the judgment of the
trial court that the remaining defendants other than HRP are jointly
and severally liable to HRP. The Supreme Court reversed the trial
court's determination of damages, and remanded the case to the trial
court to fashion appropriate relief. A hearing on the remand
proceedings was held before the Court of Chancery on October 25, 2002.
A further hearing on the remand is scheduled to take place in May 2003,
with a decision by the Court of Chancery to follow. Since the appellate
court reversed the judgment, any subsequent ruling by the trial court
on remand may be more or less favorable to HRP. As a result of the
uncertainty of the litigation's outcome, HRP recorded the judgment and
interest as "Deferred Litigation Proceeds" on its balance sheet.

On April 23, 2003, an action was filed against the General Partner, its
directors and HRP as nominal defendant by High River Limited
Partnership, which is wholly owned by Carl C. Icahn, in the Court of
Chancery of the State of Delaware, styled High River Limited
Partnership v. Hallwood Realty, LLC, et al. (C.A. No. 20276). The
action challenges the unit purchase rights agreement dated November 30,
1990, between HRP and Equiserve Trust Company, N.A., as rights agent,
as amended (the "Rights Plan"). High River claims in the suit that
defendants have wrongfully utilized the Rights Plan to prevent High
River and other third parties from purchasing 15 percent or more of the
units of the Partnership, while at the same time exempting the General
Partner and its affiliates and subsidiaries

PAGE 10

HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(unaudited)

6 LITIGATION (CONTINUED)

from the provisions of the Rights Plan. High River asserts that if
defendants make additional purchases of units, they could render
removal of the General Partner pursuant to the two-thirds removal
provision of the partnership agreement impossible, thereby impeding or
preventing the High River tender offer. The complaint seeks as relief
an order preventing defendants from treating the General Partner as
exempt from or otherwise not subject to the definition of Acquiring
Person under the Rights Agreement, or, alternatively, preventing
defendants from treating High River as an Acquiring Person under the
Rights Agreement or applying the Rights Agreement to the High River
tender offer.

On April 28, 2003, a putative class action lawsuit was filed against
the General Partner, its directors and HRP as nominal defendant by
three purported unitholders of HRP in the Court of Chancery of the
State of Delaware, styled I.G. Holdings, Inc., et al. v. Hallwood
Realty LLC, et al. (C.A. No. 20283). The action asserts that in
allegedly refusing to consider the High River tender offer, the
defendants are not acting in good faith and are deriving an improper
personal benefit in impeding a potential removal of the General Partner
or a sale of control of HRP, in breach of their fiduciary duties under
the partnership agreement. The complaint seeks as relief an order
requiring the General Partner to consider the High River tender offer,
an order preventing the General Partner or its affiliates from
acquiring units or otherwise improperly entrenching the General Partner
or impeding a transaction that would maximize value for the public
unitholders, an order directing the defendants to use the Rights Plan
fairly, and damages.

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 11

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

FIRST QUARTER OF 2003 COMPARED TO THE FIRST QUARTER OF 2002

REVENUE FROM PROPERTY OPERATIONS for the first quarter of 2003 increased
$21,000, or 0.1%, compared to the 2002 first quarter. The following table
illustrates the components of the change, in thousands:

Rental income, net $ (118)
Other property income 139
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Net increase $ 21
========

Net rental income decreased primarily due to a decline in average occupancy
between periods from 89.6% to 86.0%, partially offset by an overall 2.5%
increase in rental rates. As of March 31, 2003, HRP had leases executed and in
place for 89.6% of the portfolio's net rentable square feet. The change in the
other property income component includes an increase in tenant expense
recoveries, partially offset by a lease termination fee received in the 2002
period.

REVENUE FROM PARKING, CONSTRUCTION AND TENANT SERVICES for the first quarter of
2003 decreased $282,000, or 22.9%, primarily as a result of fewer construction
service projects completed in the 2003 period compared to the 2002 period. By
their nature, the demand for and size of construction service projects can vary
significantly from time to time.

PROPERTY OPERATING EXPENSES for the first quarter of 2003 increased $385,000, or
5.8%, compared to the same period in 2002. Utilities increased $206,000
primarily due to higher heating costs due to a colder winter in the 2003 period
compared to the 2002 period. Combined, all other operating costs increased
$179,000, or about 2.7% between the periods, and include general increases in
real estate taxes and property liability and damage insurance.

PARKING, CONSTRUCTION AND TENANT SERVICES EXPENSE for the first quarter of 2003
decreased $231,000, or 33.4%, primarily as a result of fewer construction
service projects completed in the 2003 period compared to the 2002 period. By
their nature, the demand for and size of construction service projects can vary
significantly from time to time.

INTEREST EXPENSE for the first quarter of 2003 increased $294,000, or 8.5%,
compared to the same period in 2002, primarily due to the capitalization of
$256,000 of interest for construction of the development project at Executive
Park in the 2002 period.

DEPRECIATION AND AMORTIZATION EXPENSE increased $6,000, or 0.2%, primarily due
to building depreciation for the development project building at Executive Park
(completed in April 2002), partially offset by overall lower lease commission
amortization.

GENERAL AND ADMINISTRATIVE EXPENSES for the first quarter of 2003 increased
$176,000, or 18.4%, compared to the same period in 2002, due to increases in
certain professional fees, director and officer liability insurance, and
overhead costs.

LITIGATION COSTS were $377,000 and $217,000 for the first quarter of 2003 and
2002, respectively, and are related to the lawsuits described in Note 6 to the
Consolidated Financial Statements.

INTEREST INCOME decreased by $23,000, or 17.3%, as a result of decreased
earnings on overnight cash investments due to significantly lower interest rates
available between the periods.

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 disposition.

As of March 31, 2003, HRP owned 14 real estate assets (the "Properties"),
located in six states containing 5,200,000 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, 2002. There have been no changes to critical
accounting policies identified and set forth in HRP's Form 10-K for the year
ended December 31, 2002.

CASH SOURCES, CASH USES AND COMMITMENTS -

HRP's cash position decreased $805,000 during the first three months of 2003 to
$31,558,000 as of March 31, 2003. The sources of cash during the period were
$3,934,000 of cash provided by operating activities and $48,000 from the
exercise and issuance of unit options. The uses of cash were $3,642,000 for
property and tenant improvements, $1,135,000 for scheduled mortgage principal
payments, and $10,000 for loan fees.

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, 2002 to provide $54,963,000 of minimum rental payments during 2003.
For the prior year of 2002, HRP had leases in place to provide $55,261,000 of
minimum rental payments (based on leases in place as of December 31, 2001),
however the actual rental payments recorded for 2002 were $61,481,000. Actual
rental payment results for 2002 were greater than the minimum rental payment
amount primarily due to our ability to attract and retain tenants. For the three
months ended March 31, 2003 and 2002, HRP's actual rental payments were
$15,190,000 and $15,287,000, 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 our
properties. HRP has estimated and budgeted tenant and capital improvements of
$15,631,000 and lease commissions of $2,851,000 for 2003. For the first three
months of 2003, HRP incurred $3,642,000 of tenant and capital improvements and
$490,000 of lease commissions of these estimates. Each quarter Realty reviews
HRP's capacity to make cash distributions. HRP has not made any cash
distributions since February, 1992.

PROPERTY DEVELOPMENT -

In February 2001, HRP began constructing a five-story office building containing
128,000 net rentable square feet on a site formerly occupied by an 18,000 square
foot building. The building and its parking garage, excluding tenant finish-out,
was completed in April 2002. HRP incurred and capitalized $15,370,000 of
construction and development costs, which included all of the costs for the
building and its parking garage (excluding the existing land costs). A
seven-year lease for the entire building, with an option for five additional
years, with the General Services Administration was executed in September 2002
and will commence upon the completion of tenant improvements, estimated to be
sometime in May 2003. The lease commissions incurred were $777,000, while the
tenant improvements are estimated to be $4,500,000. All development and leasing
costs have been or will be paid from cash funds on hand; however, it is
anticipated that loan financing of $16,000,000 will be obtained in either the
second or third quarter of 2003.

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. In
October 2001, HRP received the $3,417,423 judgment together with $2,987,576 of
interest, subject to an arrangement that it be returned in full or part if the
judgment is modified or reversed on appeal. Oral arguments were heard on
February 12, 2002, and a rehearing en banc was held on March 26, 2002. On August
29, 2002, the Supreme Court affirmed the judgment of the trial court that the
remaining defendants other than HRP are jointly and severally liable to HRP. The
Supreme Court reversed the trial court's determination of damages, and remanded
the case to the trial court to fashion appropriate relief. A further hearing on
the remand is scheduled to take place in May 2003, with a decision by the Court
of Chancery to follow. (For more information about this litigation, see Note 6
to the Consolidated Financial Statements.) Since the appellate court reversed
the judgment, any subsequent ruling by the trial court on remand may be more or
less favorable to HRP. As a result of the uncertainty of the litigation's
outcome, HRP recorded the judgment and interest as "Deferred Litigation
Proceeds" on its balance sheet.

On April 23, 2003, an action was filed against the General Partner, its
directors and HRP as nominal defendant by High River Limited Partnership, which
is wholly owned by Carl C. Icahn, in the Court of Chancery of the State of
Delaware, styled High River Limited Partnership v. Hallwood Realty, LLC, et al.
(C.A. No. 20276). The action challenges the unit purchase rights agreement dated
November 30, 1990, between HRP and Equiserve Trust Company, N.A., as rights
agent, as amended (the "Rights Plan"). High River claims in the suit that
defendants have wrongfully utilized the Rights Plan to prevent High River and
other third parties from purchasing 15 percent or more of the units of the
Partnership, while at the same time exempting the General Partner and its
affiliates and subsidiaries from the provisions of the Rights Plan. High River
asserts that if defendants make additional purchases of units, they could render
removal of the General Partner pursuant to the two-thirds removal provision of
the partnership agreement impossible, thereby impeding or preventing the High
River tender offer. The complaint seeks as relief an order preventing defendants
from treating the General Partner as exempt from or otherwise not subject to the
definition of Acquiring Person under the Rights Agreement, or, alternatively,
preventing defendants from treating High River as an Acquiring Person under the
Rights Agreement or applying the Rights Agreement to the High River tender
offer.

On April 28, 2003, a putative class action lawsuit was filed against the General
Partner, its directors and HRP as nominal defendant by three purported
unitholders of HRP in the Court of Chancery of the State of Delaware, styled
I.G. Holdings, Inc., et al. v. Hallwood Realty LLC, et al. (C.A. No. 20283). The
action asserts that in allegedly refusing to consider the High River tender
offer, the defendants are not acting in good faith and are deriving an improper
personal benefit in impeding a potential removal of the General Partner or a
sale of control of HRP, in breach of their fiduciary duties under the
partnership agreement. The complaint seeks as relief an order requiring the
General Partner to consider the High River tender offer, an order preventing the
General Partner or its affiliates from acquiring units or otherwise improperly
entrenching the General Partner or impeding a transaction that would maximize
value for the public unitholders, an order directing the defendants to use the
Rights Plan fairly, and damages.

MORTGAGE LOANS -

Substantially all of the buildings in HRP's real estate properties were
encumbered and pledged as collateral by non-recourse mortgage loans aggregating
$196,417,000 as of March 31, 2003. These mortgage loans have interest rates
varying from 2.64% to 8.70% (with an effective average interest rate of 7.51%)
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
$2,863,000 of principal payments during the remainder of 2003.

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.

PAGE 14

HALLWOOD REALTY PARTNERS, L.P.

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

TRANSACTIONS WITH RELATED PARTIES -

For information about transactions with related parties, see Note 4 to the
Consolidated Financial Statements.

INFLATION -

Inflation did not have a significant impact on HRP during 2002 or for the three
months ended March 31, 2003. Additionally, inflation is not anticipated to have
a material impact on HRP for the rest of 2003.

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, 2002.

PAGE 15

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 March 31, 2003 and December 31, 2002, the unamortized balance, included on
the balance sheet as "Accumulated other comprehensive income", was $856,000 and
$926,000, 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 2.64% and 2.68% as of March 31, 2003 and December 31,
2002, 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 March 31, 2003 and December 31, 2002, the
estimated fair value of the interest rate cap was $110,000 and $55,000,
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 $250,000 on an annual basis.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. It is the conclusion
of the registrant's principal executive officer and principal financial
officer that the registrant's disclosure controls (as defined in
Exchange Act rules 13a-14 and 15d-14), based on their evaluation of
these controls and procedures as of a date within 90 days of the filing
of this quarterly report, are effective.

(b) Changes in internal controls. There were no significant changes in the
registrant's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.

PAGE 16

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, 2002 and Note 6 of this Form 10-Q.

2 Changes in Securities and Use of Proceeds

On March 28, 2003, HRP and EquiServe Trust Company, N.A. amended the
Unit Purchase Agreement (the "Rights Agreement"), which describes the
terms and conditions of the limited partner unit purchase rights (the
"Rights") that were distributed in 1990. The Rights currently trade
automatically with HRP's units representing limited partner interests,
are not evidenced by separate certificates and are not exercisable
until the occurrence of events specified in the Rights Agreement. The
Rights Agreement was amended to extend the expiration date of the
Rights Agreement to March 31, 2008, to reflect the automatic adjustment
that occurred to the initial exercise price from $50 to $250 as a
result of the 1-for-5 reverse unit split effected by HRP in 1995 and
otherwise to update the Rights Agreement.

In connection with the announcement of an intent to conduct a tender
offer discussed in Item 5 of this 10-Q, on April 29, 2003, the board of
directors of the General Partner deferred the Distribution Date of the
Rights as defined in the Rights Agreement until the close of business
on the tenth day after the date of the filing of a tender offer
statement on Schedule TO with the Securities and Exchange Commission.
Such a filing was made on May 1, 2003, and the board of directors of
the General Partner subsequently deferred the Distribution Date until a
later date the General Partner may determine. The action of the General
Partner does not foreclose its ability to, or indicate any intention
not to, determine another Distribution Date, in its sole discretion,
and does not alter or affect the provisions of the Rights Agreement
with respect to any Distribution Date that may occur upon an Unit
Acquisition Date (as defined in the Rights Agreement) or the provisions
of the Rights Agreement with respect to any tender or exchange offer
other than the tender offer announced on May 1, 2003.

3 Defaults upon Senior Securities None.

4 Submission of Matters to a Vote of Security Holders None.

5 Other Information

On May 1, 2003, High River Limited Partnership, an affiliate of Carl C.
Icahn, announced its unsolicited tender offer for any and all of the
outstanding limited partnership units of HRP. On May 7, 2003, HRP
announced that the management, board of directors and professional
advisors of the General Partner are evaluating the offer and that HRP
will advise its unitholders no later than May 15, 2003 about its
recommendation with respect to the tender offer.

6 Exhibits and Reports on Form 8-K

(a) Exhibits

99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

HRP filed a report on Form 8-K, dated March 28, 2003, to
report that HRP had entered into Amendment No. 2 to the Unit
Purchase Rights Agreement, dated as of November 30, 1990. HRP
filed a report on Form 8-K, dated April 29, 2003, to report a
ten day deferral of the distribution date under its Unit
Purchase Rights Agreement. HRP filed a report on Form 8-K,
dated May 5, 2003, to report the deferral, until a later date
that the General Partner may determine, of the distribution
date under its Unit Purchase Rights Agreement. HRP filed a
report on Form 8-K, dated May 7, 2003, to report that it had
mailed a letter to its unitholders informing them that HRP
received an announcement of an unsolicited offer from High
River Limited Partnership.

PAGE 17

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: May 13, 2003 By: /s/ JEFFREY D. GENT
------------ -------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and Accounting
Officer)

PAGE 18

HALLWOOD REALTY PARTNERS, L.P.

CERTIFICATION FOR QUARTERLY REPORTS ON FORM 10-Q

I, Anthony J. Gumbiner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hallwood Realty
Partners, L.P.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: May 13, 2003 /s/ Anthony J. Gumbiner
------------ ---------------------------
Anthony J. Gumbiner
Chief Executive Officer

PAGE 19

HALLWOOD REALTY PARTNERS, L.P.

CERTIFICATION FOR QUARTERLY REPORTS ON FORM 10-Q

I, Jeffrey D. Gent, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hallwood Realty
Partners, L.P.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: May 13, 2003 /s/ Jeffrey D. Gent
------------ ---------------------------
Jeffrey D. Gent
Vice President - Finance
(Principal Financial and
Accounting Officer)

PAGE 20

INDEX TO EXHIBITS