<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
___________
For the Quarter Ended September 30, 1996 Commission File Number 1-14516
PRENTISS PROPERTIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 75-2661588
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3890 West Northwest Highway, Suite 400, Dallas, Texas 75220
(Address of Registrant's Principal Executive Office)
(214) 654-0886
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (i) 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 report), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes No X
----- -----
The registrant became subject to the filing requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934 on October 16, 1996.
The number of Common shares, $.01 par value, outstanding as of
November 27, 1996, was 20,279,897.
<PAGE>
PRENTISS PROPERTIES TRUST
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
PRENTISS PROPERTIES TRUST
Balance Sheet -- September 30, 1996 (unaudited) 3
Notes to Balance Sheet 4
Pro forma Combined Balance Sheet --
September 30, 1996 (unaudited) 6
Pro forma Combined Statements of Income for
the Nine Months Ended September 30, 1996 and 1995
(unaudited) 7
PREDECESSOR COMPANY
Combined Balance Sheets -- September 30,
1996 (unaudited) and December 31, 1995 8
Combined Statements of Income for the
Three and Nine Months Ended September 30, 1996
and 1995 (unaudited) 9
Combined Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995
(unaudited) 10
Notes to Combined Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Mortgages and Notes Payable 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
</TABLE>
2
<PAGE>
PRENTISS PROPERTIES TRUST
BALANCE SHEET
September 30, 1996
(dollars in thousands)
ASSETS
<TABLE>
<S> <C>
Cash............................................................. $ 1
----
$ 1
====
LIABILITIES AND SHAREHOLDERS' EQUITY
Commitments and contingencies (Note 2)
Common shares, $.01 par value, 100,000 shares authorized,
1,000 issued and outstanding.................................... $ --
Additional paid-in capital....................................... 1
----
$ 1
====
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO BALANCE SHEET
(dollars in thousands, except per share data)
1. ORGANIZATION:
Prentiss Properties Trust (the "Company"), was organized under the laws of
the state of Maryland on July 12, 1996 with $1 capitalization. The Company
intends to qualify as a real estate investment trust ("REIT") under the Internal
Revenue Code commencing with its taxable year ended December 31, 1996. The
Company acquired a sole general partnership interest in Prentiss Properties
Acquisition Partners, L.P. (the "Operating Partnership") through the Company's
wholly-owned subsidiary Prentiss Properties I, Inc., a Delaware corporation, and
will own an approximate 86.2% limited partnership interest in the Operating
Partnership directly.
The Company has been formed to succeed to substantially all of the
interests of Prentiss Properties Limited, Inc. ("PPL") and its affiliates in (i)
a portfolio of office and industrial properties and (ii) the national
acquisition, property management, leasing, development and construction
businesses of PPL and its affiliates (the "Prentiss Group"). The acquisition,
property management, leasing, development and construction businesses will be
carried out by the Operating Partnership and the Company's majority-owned
affiliates, (the "Manager").
2. FORMATION TRANSACTIONS:
The Offering
As of October 22, 1996, the Company completed an initial public offering of
16,000,000 common shares and an additional 2,400,000 common shares were issued
by the Company on November 1, 1996 upon exercise of the underwriter's over-
allotment option at a price per share of $20.00 (the "Offering"). The Company
used $88,804 (inclusive of estimated transfer costs) of the net proceeds of the
Offering to purchase certain limited partners' interests in the Operating
Partnership and contributed the remaining net proceeds of the Offering to the
Operating Partnership in exchange for 20,288,200 partnership units ("Units"),
representing an approximate 86.2% interest, in the Operating Partnership.
The Prentiss Group members who, prior to the Offering, collectively served
as the general partner of the Operating Partnership contributed to the Operating
Partnership all of its interests in the Properties (as defined below) and
certain management contracts of PPL (the "Contracts") in exchange for 3,259,763
Units.
The interests of the limited partners of the Operating Partnership were
acquired by the Company with common shares and cash. The limited partners
received $88,804 (inclusive of estimated transfer costs) in cash and 1,888,200
common shares for a total consideration of approximately $126,600 for their
interests.
The Properties
Upon completion of the Offering and certain related transactions
(collectively, the "Formation Transactions"), the Company owns 87 properties, 28
office and 59 industrial (the "Properties") located in 10 major markets
throughout the U.S. and containing 8.9 million net rentable square feet.
The Line of Credit
Upon the closing of the Offering, the Operating Partnership closed a three-
year, $100,000 revolving credit facility (the "Line of Credit") with Bank One,
Texas, N.A. and NationsBank of Texas, N.A. The Operating Partnership may borrow
to finance the acquisition of additional properties and for other corporate
purposes, including to obtain additional working capital. Borrowings under the
Line of Credit will bear interest at 30-day,
4
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO BALANCE SHEET--(Continued)
(dollars in thousands, except per share data)
60-day or 90-day LIBOR (the "London Interbank Offered Rate") at the option of
the Company, plus 2.00% per annum and is secured by first mortgage liens on
certain of the Properties (and may be secured by other properties acquired by
the Company) and will be guaranteed by the Company.
The Company's accompanying balance sheet as of September 30, 1996, presents
the Company's financial position before the Offering and related transactions.
Included in this Form 10-Q is financial information for the Predecessor Company
which includes the accounts of the Operating Partnership, the operations of PPL,
a 50% equity investment in Austex Associates, L.P., the accounts of Fairview
Eleven Investors, L.P. from February 23, 1996 through September 30, 1996, the
accounts of O'Hare Tech Center Associates, L.P. II (Bachman Creek Plaza) from
August 20, 1996 through September 30, 1996 and a 15% equity investment in PL
Properties Associates, L.P. from September 5, 1995 through September 30, 1996.
The accounts are presented on a combined basis as the above properties were
under the control of common investors, common ownership, common management and
were subject to the formation of the Company.
The unaudited balance sheet has been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and should be
read in conjunction with the financial statements and notes thereto of the
Company, the Predecessor Company, the Prentiss Group Acquisition Properties, the
Other Acquisition Properties and the Bachman Creek and Park West E1 and E2
Properties included in the Company's prospectus dated October 17, 1996 (the
"Registration Statement"). The following note to the balance sheet highlights
significant changes to the notes included in the Registration Statement and
present interim disclosure required by the SEC. The accompanying balance sheet
reflects, in the opinion of management, all adjustments necessary for a fair
presentation of the interim balance sheet. All such adjustments are of a normal
and recurring nature.
3. Pro Forma Information:
The following unaudited pro forma balance sheet and statements of income of
the Company are presented as if the consummation of the Formation Transactions
and the application of the net proceeds of the Offering had occurred on
September 30, 1996 and January 1, 1995, respectively. Such pro forma and
estimated information is based in part upon the combined statements of income of
the Predecessor Company included elsewhere in this Form 10-Q. Such information
should be read in conjunction with the Financial Statements listed in the index
on page 2 of this Form 10-Q and in the Company's prospectus dated October 17,
1996. In management's opinion, all adjustments necessary to reflect the effects
of the Formation Transactions and the Offering have been made. The pro forma
information is not necessarily indicative of what the actual financial position
would have been at September 30, 1996, or what the actual results of operations
would have been for the nine months ended September 30, 1996 and September 30,
1995 had the Formation Transactions been consummated on September 30, 1996 or
January 1, 1995, respectively and carried forward through the interim period
presented, nor do they purport to present the future financial position or
results of operations of the Company.
5
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA COMBINED BALANCE SHEET
September 30, 1996
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Park West
The E1 and E2
Prentiss Group and Other Prentiss
Predecessor Acquisition Acquisition The Other Properties Trust
Company Properties Properties Offering Adjustments Pro Forma
----------- -------------- ------------ -------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Real estate $182,135 $ 87,682 $ 81,139 $ - $ 26,448 $377,404
Less: accumulated depreciation (15,252) (15,252)
-------- -------- -------- -------- --------- --------
166,883 87,682 81,139 - 26,448 362,152
Deferred charges and other assets, net 9,379 - - - (1,320) 8,059
Receivables, net 3,088 - - - - 3,088
Escrowed funds 2,010 - - - - 2,010
Cash and cash equivalents 3,199 (86,632) (81,139) 339,140 (165,088) 9,480
Investment in limited partnership -
and joint venture 1,050 - - - 19,083 20,133
-------- -------- -------- -------- --------- --------
Total Assets $185,609 $ 1,050 $ - $339,140 $(120,877) $404,922
======== ======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt on real estate $ 75,209 $ - $ - $ $ (54,209) $ 21,000
Accounts payable and other liabilities 5,745 - - - - 5,745
Amounts due to affiliates 711 - - - - 711
-------- -------- -------- -------- --------- --------
Total Liabilities 81,665 - - - (54,209) 27,456
-------- -------- -------- -------- --------- --------
Minority interest - - - - 52,090 52,090
Shareholders' Equity: -
Common shares - - - 184 19 203
Additional paid-in capital - - - 338,956 37,745 376,701
Note receivable - - - - 34,750 34,750
Accumulated equity (deficit) of
continuing interests 103,944 1,050 - - (191,272) (86,278)
-------- -------- -------- -------- --------- --------
Total Shareholders' Equity 103,944 1,050 - 339,140 (118,758) 325,376
======== ======== ======== ======== ========= ========
Total Liabilities and Shareholders'
Equity $185,609 $ 1,050 $ - $339,140 $(120,877) $404,922
======== ======== ======== ======== ========= ========
</TABLE>
6
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA COMBINED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
-------- --------
<S> <C> <C>
Revenues:
Rental income $ 48,018 $ 46,827
Management fees 739 731
Development, leasing, sales and other fees 780 883
----------- -----------
Total revenues 49,537 48,441
----------- -----------
Expenses:
Property operating and maintenance 13,113 12,877
Real estate taxes 4,237 3,752
General office and administration 1,688 1,551
Personnel costs, net 1,329 1,337
Interest expense 1,224 1,224
Interest expense (non-cash) 215 216
Depreciation and amortization 9,737 9,599
----------- -----------
Total expenses 31,543 30,556
----------- -----------
Equity in joint venture and subsidiary 3,149 1,426
Income before minority interest 21,143 19,311
Minority interest (2,918) (2,665)
Net income applicable to common shareholders $ 18,225 $ 16,646
=========== ===========
Net income per common share $ .90 $ .82
=========== ===========
Weighted average number of common shares
outstanding 20,288,200 20,288,200
=========== ===========
</TABLE>
7
<PAGE>
PREDECESSOR COMPANY
COMBINED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate............................................. $182,135 $153,148
Less: accumulated depreciation..................... (15,252) (11,780)
-------- --------
166,883 141,368
Deferred charges and other assets, net.................. 9,379 7,135
Receivables, net........................................ 3,088 2,755
Escrowed funds.......................................... 2,010 1,294
Cash and cash equivalents............................... 3,199 1,033
Investments in limited partnership and joint venture.... 1,050 1,050
-------- --------
Total Assets........................................... $185,609 $154,635
======== ========
LIABILITIES AND EQUITY
Debt on real estate..................................... $ 75,209 $ 46,442
Accounts payable and other liabilities.................. 5,745 3,622
Amounts due to affiliates............................... 711 705
-------- --------
Total Liabilities...................................... 81,665 50,769
Commitments and contingencies........................... - -
Owners' equity.......................................... 103,944 103,866
-------- --------
Total Liabilities and Equity........................... $185,609 $154,635
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
PREDECESSOR COMPANY
COMBINED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental income.......................... $ 8,701 $ 7,479 $25,041 $22,006
Management fees........................ 2,525 2,598 7,529 7,126
Development, leasing, sales and
other fees............................ 3,255 1,716 8,608 7,094
------- ------- ------- -------
Total revenues..................... 14,481 11,793 41,178 36,226
------- ------- ------- -------
Expenses:
Property operating and maintenance 2,106 1,782 6,978 5,673
Real estate taxes...................... 1,188 771 2,897 2,318
General office and administration...... 1,689 1,396 4,646 4,905
Personnel costs, net................... 4,247 3,058 11,170 9,835
Interest expense....................... 1,657 945 4,205 2,839
Interest expense (non-cash)............ 525 26 1,283 76
Depreciation and amortization.......... 1,864 1,870 5,437 5,359
------- ------- ------- -------
Total expenses..................... 13,276 9,848 36,616 31,005
------- ------- ------- -------
Equity (loss) in joint venture......... (1) (7) 18 22
Income before gain on sale of property.. 1,204 1,938 4,580 5,243
Gain on sale of property................ 378 - 378 -
------- ------- ------- -------
Net income.............................. $ 1,582 $ 1,938 $ 4,958 $ 5,243
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
PREDECESSOR COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 4,958 $ 5,243
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of property...................... (378) -
Depreciation and amortization................. 5,437 5,359
Amortization of deferred financing
costs........................................ 1,283 76
Changes in assets and liabilities:
Receivables................................... (213) (265)
Provision for doubtful accounts............... (120) (166)
Organization costs and other assets........... (119) 80
Escrowed funds................................ (716) 107
Accounts payable and other
liabilities.................................. 2,123 (612)
Amounts due to affiliates..................... 6 (12)
Equity in joint venture....................... (18) (22)
Other......................................... 41 48
---------- ---------
Cash flows provided by operating
activities................................. 12,284 9,836
---------- ---------
Cash flows from investing activities:
Acquisition of Real estate...................... (28,677) -
Proceeds from sale of Real estate............... 559 -
Investment in Real estate....................... (3,864) (3,710)
Cash flows used in investing.................. ---------- ---------
activities................................... (31,982) (3,710)
---------- ---------
Cash flows from financing activities:
Partners' contributions......................... 3,314 -
Partners' distributions......................... (5,875) (11,300)
Funding of Debt on real estate.................. 29,000 -
Repayment of Debt on real estate................ (233) (215)
Financing costs of Debt on real estate.......... (2,000) (1,237)
Distributions of PPL income..................... (2,342)
---------- ---------
Cash flows provided by (used in)
financing activities......................... 21,864 (12,752)
---------- ---------
Net increase (decrease) in Cash and
cash equivalents................................. 2,166 (6,626)
Cash and cash equivalents, beginning of
periods.......................................... 1,033 9,133
---------- ---------
Cash and cash equivalents, end of
periods.......................................... $ 3,199 $ 2,507
---------- ---------
Supplemental cash flow information:
Cash paid for interest.......................... $ 4,207 $ 2,842
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. ORGANIZATION:
Prentiss Properties Trust (the "Company"), a newly-organized Maryland real
estate investment trust which intends to qualify as a real estate investment
trust ("REIT") under the Internal Revenue Code commencing with its taxable year
ended December 31, 1996 has been formed to succeed to substantially all of the
interests of Prentiss Properties Limited, Inc. ("PPL") and its affiliates in
(i) a portfolio of office and industrial properties and (ii) the national
acquisition, property management, leasing, development and construction
businesses of PPL and its affiliates.
Upon completion of the public offering described below, the Company
acquired a sole general partnership interest in Prentiss Properties Acquisition
Partners, L.P. (the "Operating Partnership") through the Company's wholly-owned
subsidiary Prentiss Properties I, Inc., a Delaware corporation, and will own an
approximate 86.2% limited partnership interest in the Operating Partnership
directly.
2. BASIS OF PRESENTATION:
The accompanying combined financial statements of the Predecessor Company
include the accounts of Prentiss Properties Acquisition Partners, L.P., the
operations of PPL, a 50% equity investment in Austex Associates, L.P.
("Austex"), the accounts of Fairview Eleven Investors, L.P. ("3141 Fairview Park
Drive") from February 23, 1996 through September 30, 1996, the accounts of
O'Hare Tech Center Associates, L.P. II (Bachman Creek Plaza) from August 20,
1996 through September 30, 1996 and a 15% equity investment in PL Properties
Associates, L.P. ("Park West C2") from September 5, 1995 through September 30,
1996. The accounts are presented on a combined basis as the above properties
were under the control of common investors (the "Prentiss Group"), common
ownership interest, common management, and were subject to the formation of the
Company.
3. THE OFFERING:
As of October 22, 1996, the Company completed an initial public offering of
16,000,000 common shares and an additional 2,400,000 common shares were issued
by the Company on November 1, 1996 upon exercise of the underwriter's over-
allotment option at a price per share of $20.00 (the "Offering"). The Company
used $88,804 (inclusive of estimated transfer costs) of the net proceeds of the
Offering to purchase certain limited partners' interests in the Operating
Partnership and contributed the remaining net proceeds of the Offering to the
Operating Partnership in exchange for 20,288,200 partnership units ("Units"),
representing an approximate 86.2% interest, in the Operating Partnership.
4. INTERIM FINANCIAL INFORMATION:
The unaudited interim financial statements as of September 30, 1996 and for
the three and nine months ended September 30, 1996 and 1995 have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). The notes to the interim financial statements included herein are
intended to highlight significant changes to the notes to the December 31, 1995
financial statements and present interim disclosures required by the SEC. Such
information should be read in conjunction with the Financial Statements listed
in the Index on page 2 of this Form 10-Q and in the Company's prospectus dated
October 17, 1996. The accompanying interim financial statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation of the
interim financial statements. All such adjustments are of a normal and
recurring nature.
5. SUBSEQUENT EVENT:
On November 25, 1996, the Company completed an acquisition of three
industrial buildings in suburban Chicago, Illinois. These industrial buildings,
totaling 226,076 square feet, were purchased for approximately $8.8 million.
11
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains historical information and forward-
looking statements. Statements looking forward in time are included in this
Form 10-Q pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. They involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
be materially different from any future performance suggested herein. In the
context of forward-looking information provided in this Form 10-Q and in other
reports, please refer to the discussion of risk factors detailed in, as well as
the other information contained in, the Company's filing with the Securities and
Exchange Commission during the past 12 months.
OVERVIEW
Prentiss Properties Trust (the "Company") has been formed to succeed to
substantially all of the interests of Prentiss Properties Limited, Inc. ("PPL")
and its affiliates in (i) a portfolio of office and industrial properties and
(ii) the national acquisition, property management, leasing, development and
construction businesses of PPL and its affiliates (the "Prentiss Group"). The
acquisition, property management, leasing, development and construction
businesses will be carried out by Prentiss Properties Acquisition Partners, L.P.
(the "Operating Partnership") and the Company's majority-owned affiliates, (the
"Manager").
Upon consummation of the Offering and related transactions, the Company
owns an approximate 86.2% interest in a diversified portfolio of 87 office and
industrial properties (the "Properties") with approximately 8.9 million net
rentable square feet through its interest in the Operating Partnership.
The accompanying discussion and analysis of financial condition and results
of operations is based on the combined historical financial statements of the
Predecessor Company that are included elsewhere in this Form 10-Q. The
Predecessor Company financial statements include the accounts of the Operating
Partnership, the operations of PPL, a 50% equity investment in Austex
Associates, L.P., the accounts of Fairview Eleven Investors, L.P. from February
23, 1996 through September 30, 1996, the accounts of O'Hare Tech Center
Associates, L.P. II (Bachman Creek Plaza) from August 20, 1996 through September
30, 1996 and a 15% equity investment in PL Properties Associates, L.P. from
September 5, 1995 through September 30, 1996. The accounts are presented on a
combined basis as the above properties were acquired by the Company from the
Prentiss Group and affiliates.
RESULTS OF OPERATIONS
Comparison of the Pro Forma Nine Months Ended September 30, 1996 to the Nine
- ----------------------------------------------------------------------------
Months Ended September 30, 1995
- -------------------------------
For the nine months ended September 30, 1996, the Company estimates
revenues of approximately $49,537,000, representing an increase of $1,096,000,
or 2.3% from the $48,441,000 from the same period in 1995. The increase in
total revenues is primarily attributable to an increase in rental income of
$1,191,000, net of a decrease in management and other fee income totaling
$95,000. Total expenses for the period of $31,543,000, reflect an increase of
$987,000 or 3.2% from 1995. The increase in total expenses results from an
increase of $236,000 in property operating and maintenance, $485,000 in real
estate taxes, $138,000 in depreciation and amortization and $128,000 in general
and administrative and other expenses. The increase of $236,000 or 1.8% in
property operating and maintenance expense results primarily from the
recognition of bad debt expense related to the March 1996 bankruptcy of a tenant
in one of the Milwaukee, Wisconsin industrial properties. The real estate tax
expense increase of $485,000 or 12.9% results from the receipt of higher
property tax appraisals in 1996, the majority of which are being contested by
the Company.
Funds from Operations
- ---------------------
The Company generally considers Funds From Operations to be an appropriate
measure of liquidity of an equity REIT because industry analysts have accepted
it as a performance measure of equity REITs. "Funds From Operations" as defined
by the National Association of Real Estate Investment Trusts ("NAREIT") means
net income (computed in accordance with GAAP) excluding gains (or losses) from
debt restructuring and sale of property, plus depreciation and amortization on
real estate assets, and after adjustments for unconsolidated partnerships and
joint ventures. The Company's Funds From Operations are not comparable to Funds
From
12
<PAGE>
Operations reported by other REITs that do not define that term using the
current NAREIT definition. Funds From Operations does not represent cash
generated from operating activities in accordance with GAAP and should not be
considered as an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity or ability to make
distributions. The following is a reconciliation of Pro forma net income to
Funds From Operations for the nine months ended September 30, 1996 and September
30, 1995:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1996 1995
---------- ----------
(unaudited)
(dollars in thousands)
<S> <C> <C>
Pro forma net income.................... $18,225 $16,646
Add:
Real estate depreciation and
amortization......................... 9,737 9,599
Real estate depreciation and
amortization of unconsolidated
joint ventures....................... 1,626 1,626
Minority interest..................... 2,918 2,665
Less:
Gain on sale of property.............. - -
-------- --------
Funds From Operations................... $32,506 $30,536
-------- --------
Funds From Operations (Company's 86.2%
Share)................................. $28,020 $26,322
======== ========
</TABLE>
Comparison of Three Months Ended September 30, 1996 to the Three Months Ended
- -----------------------------------------------------------------------------
September 30, 1995
- ------------------
Total Revenues increased by $2,688,000 or 22.8%, to $14,481,000 in the
three months ended September 30, 1996 from $11,793,000 for the same period of
1995 due to increase in rental revenues and fee and other income. Rental
revenues increased by $1,222,000 or 16.3%, to $8,701,000 from $7,479,000
primarily as a result of the addition of the 3141 Fairview Park Drive property
in February 1996 and the Bachman Creek Plaza property in August 1996 which
increased rental revenues by $1,056,000 and $148,000 respectively. Fee and
other income increased $1,466,000, or 34.0%, from $4,314,000 to $5,780,000
primarily due to an increase in development fees, leasing and tenant service
fees, sales fees and other fees and income of $437,000, $873,000, $214,000, and
$15,000 respectively, offset by a decrease in management fees of $73,000.
Total expenses increased $3,428,000, or 34.8%, to $13,276,000 in the three
months ended September 30, 1996 from $9,848,000 in the same period of 1995.
Operating expenses increased by $2,217,000, or 25.0%, to $11,094,000 from
$8,877,000. The Manager had an increase in operating expenses of $1,347,000.
The increase in the Manager is primarily attributable to an increase in
development and leasing related expenses. The properties had an increase in
operating expenses of $870,000. Increases in operating expenses of $351,000 and
$75,000 are attributable to the addition of the 3141 Fairview Park Drive
property in February 1996 and the Bachman Creek Plaza property in August 1996.
The remaining increase in property operating expenses of $444,000 was comprised
of increases in property operating and maintenance expenses of $1,000, real
estate taxes of $329,000, and an increase in general office and administration
expenses of $135,000, offset by a reduction in depreciation of $21,000. In
addition to the increase in operating expenses, interest expense increased
$1,211,000, or 124.7%, resulting primarily from the interest expense and
interest expense (non-cash) of $717,000 and $500,000, respectively, incurred in
connection with the addition of the 3141 Fairview Park Drive property in
February 1996, offset by a slight decrease of $6,000 related to other
properties.
Net income for the three months ended September 30, 1996 decreased by
$356,000, or 18.4%, to $1,582,000 from $1,938,000 for the same period of 1995.
The net decrease in net income resulted from an increase of $2,688,000 in total
revenues, $378,000 gain recognized on the sale of property and, a $6,000
increase in income from equity investments, offset by an increase in total
expenses of $3,428,000. Interest expense incurred
13
<PAGE>
in connection with the addition of the 3141 Fairview Park Drive property in
February 1996 of $1,217,000 ($500,000 of which represents amortization of
financing costs) represents 35.5% of the total increase in expenses.
Comparison of Nine Months Ended September 30, 1996 to the Nine Months Ended
- ---------------------------------------------------------------------------
September 30, 1995
- ------------------
Total Revenues increased by $4,952,000 or 13.7%, to $41,178,000 in the
first nine months of 1996 from $36,226,000 in the first nine months of 1995 due
to increase in rental revenues and fee and other income. Rental revenues
increased by $3,035,000 or 13.8%, to $25,041,000 from $22,006,000 primarily as a
result of the addition of the 3141 Fairview Park Drive property in February 1996
and the Bachman Creek Plaza property in August 1996, which increased rental
revenues by $2,325,000 and $148,000 respectively. Of the remaining $562,000
increase in rental revenues, $412,000 represents an increase in rental rates,
offset by a slight decrease in average occupancy during the period, and $150,000
represents revenues collected in connection with certain lease terminations.
Fee and other income increased $1,917,000, or 13.5%, from $14,220,000 to
$16,137,000 primarily due to an increase in development fees, leasing and tenant
service fees, sales fees, management fees, and other income of $653,000,
$761,000, $494,000, $403,000, and $156,000 respectively, offset by a decrease in
recoveries of $550,000.
Total expenses increased $5,611,000, or 18.1%, to $36,616,000 in the first
nine months of 1996 from $31,005,000 in the same period of 1995. Operating
expenses increased by $3,038,000, or 10.8%, to $31,128,000 from $28,090,000. The
Manager had an increase in operating expenses of $946,000. The increase in the
Manager is primarily attributable to an increase in development and leasing
related expenses. The properties had an increase in operating expenses of
$2,092,000. Increases in operating expenses of $915,000 and $75,000 are
attributable to the addition of the 3141 Fairview Park Drive property in
February 1996 and the Bachman Creek Plaza property in August 1996. The remaining
increase in property operating expenses of $1,102,000 was comprised of increases
in property operating and maintenance expenses of $513,000, real estate taxes of
$396,000, an increase in general office and administration expenses of $130,000,
and an increase in depreciation of $63,000. In addition to the increase in
operating expenses, interest expense increased $2,573,000, or 88.3%, resulting
primarily from the interest expense and interest expense (non-cash) of
$1,384,000 and $1,208,000, respectively, incurred in connection with the
addition of the 3141 Fairview Park Drive property in February 1996, offset by a
slight decrease of $19,000 related to other properties.
Net income for the nine months ended September 30, 1996 decreased by
$285,000, or 5.4%, to $4,958,000 from $5,243,000 for the same period of 1995.
The net decrease in net income resulted from an increase of $4,952,000 in total
revenues, $378,000 gain recognized on the sale of property and, a $4,000
decrease in income from equity investments, offset by an increase in total
expenses of $5,611,000. Interest expense incurred in connection with the
addition of the 3141 Fairview Park Drive property in February 1996 of $2,592,000
($1,208,000 of which represents amortization of financing costs) represents
46.2% of the increase in total expenses.
Liquidity and Capital Resources
- -------------------------------
The Company expects to make distributions to its shareholders primarily
based on its distributions from the Operating Partnership. The Operating
Partnership's income will be derived primarily from lease revenues from the
Properties and, to a limited extent, from fees generated by its office and
industrial real estate management, leasing development and construction business
and from the Manager. The Manager's sole source of income will be fees
generated by its office and industrial real estate management, leasing,
development and construction business.
The Company expects to meet its long-term liquidity requirements for the
funding of activities such as development, property acquisitions, scheduled debt
maturities, major renovations, expansions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness and the
issuance of additional equity securities from the Company and the Operating
Partnership. The Company also intends to use proceeds from the Line of Credit
(as described below) to fund property acquisitions, development, redevelopment,
expansions and capital improvements on an interim basis.
The Company intends to maintain a debt policy (the "Debt Limitation")
limiting the Company's total combined indebtedness plus its pro rata share of
indebtedness of unconsolidated investments ("Joint Venture Debt") to 50% of the
Company's total equity market capitalization plus its combined indebtedness and
pro rata
14
<PAGE>
share of Joint Venture Debt ("Total Market Capitalization"). However, the
Company's organizational documents do not limit the amount of indebtedness that
the Company may incur.
Upon the completion of the Offering and exercise of the underwriter's over-
allotment option, the Company has total outstanding indebtedness including the
Company's pro rata share of Joint Venture Debt of approximately $90.9 million or
16.2% of Total Market Capitalization (the "Mortgage Debt"). Approximately $11.0
million of the Mortgage Debt consists of a mortgage loan that the Company
obtained from an affiliate of Lehman Brothers Inc. in connection with the
Formation Transactions. The remainder of the Mortgage Debt consists of prior
indebtedness of the Predecessor Company that is secured by certain of the
Properties and was not fully repaid with the net proceeds of the Offering. The
following table sets forth certain information regarding the Mortgage Debt
outstanding immediately following the Offering:
REMAINING MORTGAGE DEBT
<TABLE>
<CAPTION>
PRINCIPAL INTEREST ANNUAL
PROPERTY(IES) AMOUNT RATE AMORTIZATION MATURITY PAYMENT
- ---------------------------------------- --------- -------- ------------ -------- -------
<S> <C> <C> <C> <C> <C>
All Industrial properties in Kansas
City, MO and Milwaukee, WI............. $11,000,000 LIBOR+1.65%(1) None November 1, 1999 $ 772,750
Walnut Glen............................. 10,000,000 7.500% None January 31, 2001 750,000
Broadmoor Austin........................ 69,860,000(2) 9.750% None April 1, 2001 6,811,350
----------- ---------- ----------
Total............................. $90,860,000 $8,334,100
</TABLE>
(1) 30 day LIBOR of 5.375% as of November 20, 1996, was used for calculation of
the annual payment in the table above.
(2) The Company, through the Operating Partnership, will own a 49.9% general
partnership interest in the entity that owns the Broadmoor Austin
properties, which interest is accounted for under the equity method of
accounting. The amount shown reflects the Company's proportionate share of
the mortgage indebtedness secured by the property.
Upon the closing of the Offering, the Operating Partnership closed a three-
year, $100,000 revolving credit facility (the "Line of Credit") with Bank One,
Texas, N.A. and NationsBank of Texas, N.A. The Operating Partnership may borrow
to finance the acquisition of additional properties and for other corporate
purposes, including to obtain additional working capital. Borrowings under the
Line of Credit will bear interest at 30-day, 60-day or 90-day LIBOR (the "London
Interbank Offered Rate") at the option of the Company, plus 2.00% per annum and
is secured by first mortgage liens on certain of the Properties and may be
secured by other properties acquired by the Company and will be guaranteed by
the Company.
Inflation
- ---------
Most of the leases on the Properties require tenants to pay increases in
operating expenses, including common area charges and real estate taxes, thereby
reducing the impact on the Company of the adverse effects of inflation. Leases
also vary in term from one to 15 years, further reducing the impact on the
Company of the adverse effects of inflation.
15
<PAGE>
PART II: OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON MORTGAGES AND NOTES PAYABLE
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
16
<PAGE>
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.
PRENTISS PROPERTIES TRUST
Date: November 27, 1996
By:
----------------------------------
Thomas P. Simon (Vice President)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS, OF THE PREDECESSOR COMPANY, AS OF SEPTEMBER 30, 1996 (UNAUDITED) AND
DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,199
<SECURITIES> 0
<RECEIVABLES> 3,088
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 182,135
<DEPRECIATION> 15,252
<TOTAL-ASSETS> 185,609
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 103,944
<TOTAL-LIABILITY-AND-EQUITY> 185,609
<SALES> 0
<TOTAL-REVENUES> 41,178
<CGS> 0
<TOTAL-COSTS> 36,616
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,488
<INCOME-PRETAX> 4,958
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,958
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
