<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, 1997 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 X No
----- -----
The number of Common Shares, $.01 par value, outstanding as of October 31,
1997, was 26,289,483.
1
<PAGE>
PRENTISS PROPERTIES TRUST
INDEX
-----
PART I: FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
Consolidated Balance Sheets of Prentiss
Properties Trust at September 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Income of Prentiss
Properties Trust for the three and nine month
periods ended September 30, 1997(unaudited) and
Combined Statements of Income of the Predecessor
Company for the three and nine month periods ended
September 30, 1996 (unaudited) 4
Consolidated Statement of Cash Flows of Prentiss
Properties Trust for the nine month period ended
September 30, 1997 (unaudited) and Combined
Statement of Cash Flows of the Predecessor Company
for the nine month period ended September 30, 1996
(unaudited) 5
Notes to Consolidated and Combined Financial
Statements 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Mortgages and Notes Payable 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
2
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------------- --------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Real estate..................................................... $918,545 $501,035
Less: accumulated depreciation................................ (30,490) (18,507)
-------- --------
888,055 482,528
Deferred charges and other assets, net.......................... 19,457 11,747
Mortgage note receivable........................................ 36,378 -
Receivables, net................................................ 9,234 5,356
Cash and cash equivalents....................................... 3,614 7,226
Escrowed cash and deposits on real estate....................... 5,972 867
Other receivables (affiliates).................................. - 1,346
Investments in joint venture and unconsolidated subsidiaries.... 22,559 21,956
-------- --------
Total assets................................................... $985,269 $531,026
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debt on real estate............................................ $432,641 $128,800
Accounts payable and other liabilities......................... 24,016 15,868
Distributions payable.......................................... 11,834 7,309
Other payables (affiliates).................................... 4,755 -
-------- --------
Total liabilities............................................ 473,246 151,977
-------- --------
Minority interest in Operating Partnership...................... 56,921 52,857
-------- --------
Minority interest in partnerships............................... 1,034 971
-------- --------
Commitments and contingencies
Shareholders' equity:
Common shares $.01 par value, 100,000,000 shares
authorized, 26,289,053 and 20,279,897 shares issued
and outstanding at September 30, 1997 and
December 31, 1996, respectively............................... 263 203
Additional paid-in capital..................................... 457,892 326,309
Distributions in excess of accumulated earnings................ (4,087) (1,291)
-------- --------
Total shareholders' equity................................. 454,068 325,221
-------- --------
Total liabilities and shareholders' equity................. $985,269 $531,026
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PRENTISS PROPERTIES TRUST
AND PREDECESSOR COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
THE PREDECESSOR THE PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------------------- ------------------- ------------------- ------------------
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income................................ $33,998 $ 8,701 $85,092 $25,041
Mortgage interest............................ 640 - 640 -
Management fees.............................. 218 2,525 690 7,529
Development, leasing, sale and other fees.... 724 3,255 1,591 8,608
------- ------- ------- -------
Total revenues.............................. 35,580 14,481 88,013 41,178
------- ------- ------- -------
Expenses:
Property operating and maintenance............ 7,962 2,106 19,972 6,978
Real estate taxes............................. 3,683 1,188 9,386 2,897
General and administrative.................... 1,038 1,689 2,338 4,646
Personnel costs, net.......................... 1,073 4,247 2,437 11,170
Interest expense.............................. 5,893 1,657 12,926 4,205
Amortization of deferred financing costs...... 222 525 589 1,283
Depreciation and amortization................. 5,783 1,864 14,669 5,437
------- ------- ------- -------
Total expenses.............................. 25,654 13,276 62,317 36,616
------- ------- ------- -------
Equity in income (loss) of joint venture and
unconsolidated subsidiaries................... 1,488 (1) 4,270 18
------- ------- ------- -------
Income before gain on sale, minority interest,
and extraordinary item........................ 11,414 1,204 29,966 4,580
Gain on sale................................... - 378 243 378
Minority interest.............................. (1,298) - (3,753) -
------- ------- ------- -------
Income before extraordinary item............... 10,116 1,582 26,456 4,958
Extraordinary item - (loss) on early
extinguishment of debt........................ - - (111) -
------- ------- ------- -------
Net income..................................... $10,116 $ 1,582 $26,345 $ 4,958
======= ======= ======= =======
Net income per common share before
extraordinary item............................ $ 0.38 $ 1.10
Extraordinary item............................. - -
------- -------
Net income per common share.................... $ 0.38 $ 1.10
------- -------
Weighted average number of common shares
outstanding................................... 26,698 24,002
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PRENTISS PROPERTIES TRUST
AND PREDECESSOR COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR COMPANY
------------------ -------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 26,345 $ 4,958
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interest.................................................. 3,753 -
Extraordinary item................................................. 111 -
Gain on sale....................................................... (243) (378)
Depreciation and amortization...................................... 14,669 5,437
Amortization of deferred financing costs........................... 589 1,283
Equity in income of joint venture and unconsolidated subsidiaries.. (4,270) (18)
Non-cash compensation.............................................. 38 -
Changes in assets and liabilities, net of non-cash effect of
acquisitions:
Provision for doubtful accounts.................................... 24 (120)
Receivables........................................................ (3,834) (213)
Deferred charges and other assets.................................. (3,219) (119)
Escrowed cash...................................................... (1,120) (716)
Accounts payable and other liabilities............................. 4,989 2,164
Amounts due to/from affiliates..................................... 6,101 6
--------- --------
Net cash provided by operating activities.............................. 43,933 12,284
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate................................................ (375,561) (28,677)
Investment in real estate.............................................. (34,741) (3,864)
Investment in mortgage note receivable................................. (36,378) -
Investment in unconsolidated subsidiary................................ (667) -
Proceeds from sale of real estate...................................... 3,030 559
Distributions received from joint venture and unconsolidated
subsidiaries.......................................................... 4,143 -
Increase in deposits on real estate.................................... (3,528) -
--------- --------
Net cash used in investing activities.................................. (443,702) (31,982)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common shares................................ 135,971 -
Partners' contributions................................................ - 3,314
Distributions paid to limited partners................................. (3,659) (5,875)
Distributions paid to common shareholders.............................. (24,897) -
Distributions paid to owners........................................... - -
Distributions paid for minority interest in consolidated subsidiaries.. (17) -
Proceeds from debt on real estate...................................... 574,671 29,000
Repayments of debt on real estate...................................... (285,912) (233)
Financing costs of debt on real estate................................. - (2,000)
Distribution of PPL income............................................. - (2,342)
--------- --------
Net cash provided by financing activities.............................. 396,157 21,864
--------- --------
Net (decrease) increase in cash and cash equivalents................... (3,612) 2,166
Cash and cash equivalents, beginning of period......................... 7,226 1,033
--------- --------
Cash and cash equivalents, end of period............................... $ 3,614 $ 3,199
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................................. $ 11,829 $ 4,207
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
1. FORMATION TRANSACTIONS
The Organization, IPO and Follow-on Offering
Prentiss Properties Trust was formed under the laws of the state of
Maryland on July 12, 1996, to be a self-administered and self-managed real
estate investment trust ("REIT"). Prentiss Properties Trust owns a limited
partnership interest and a sole general partnership interest in Prentiss
Properties Acquisition Partners, L.P. (the "Operating Partnership") through a
wholly-owned subsidiary, Prentiss Properties I, Inc., a Delaware corporation.
Prentiss Properties Trust, as referred to herein, includes the Company, its
majority-owned Operating Partnership and subsidiaries (collectively, the
"Company").
The Company succeeded 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 are carried out by the
Operating Partnership and the Company's majority-owned affiliates, Prentiss
Properties Limited, Inc. and Prentiss Properties Limited II, Inc. (collectively,
the "Manager").
On October 22, 1996, the Company commenced operations after completing an
initial public offering (the "IPO") of 16,000,000 common shares of beneficial
interest, $0.01 par value per share ("Common Shares"). The Company issued an
additional 2,400,000 Common Shares on October 31, 1996, pursuant to the exercise
of the underwriters' over-allotment option. The combined 18,400,000 Common
Shares were issued at a price per share of $20.00. The Company used
approximately $87.4 million of the net proceeds and issued 1,879,897 Common
Shares of the Company for a total consideration of approximately $125.0 million
to purchase certain limited partners' interests in the Operating Partnership.
The Company contributed the remaining net proceeds of the IPO to the Operating
Partnership in exchange for additional limited partnership units in the
Operating Partnership ("Units"). Subsequent to these transactions, the Company
held an approximate 86.0% interest in the Operating Partnership.
The Prentiss Group members, who, prior to the IPO, collectively served as
the general partner of the Operating Partnership, contributed to the Operating
Partnership all of their interests in the Operating Partnership, the Initial
Properties (as defined below) that were not owned by the Operating Partnership,
and certain management contracts of PPL (the "Contracts") in exchange for
3,295,995 Units.
On April 30, 1997, the Company completed an offering (the "Follow-on
Offering") of 6,000,000 Common Shares of beneficial interest, $0.01 par value
per share. The Common Shares were issued at a price per share of $24.00. The
Company contributed the net proceeds of the Follow-on Offering to the Operating
Partnership in exchange for additional Units. Subsequent to this transaction
and at September 30, 1997, the Company held an approximate 88.9% interest in the
Operating Partnership.
The Properties
Upon completion of the IPO and certain related transactions (collectively,
the "Formation Transactions"), the Company owned 87 properties (the "Initial
Properties"), which consisted of 28 office (the "Initial Office Properties") and
59 industrial (the "Initial Industrial Properties") containing an aggregate of
8.9 million net rentable square feet. Between the closing of the IPO and
December 31, 1996 and between January 1, 1997 and September 30, 1997, the
Company acquired 8 and 42 additional properties, respectively (the "Acquired
Properties"). Of the 50 Acquired Properties, 13 were acquired during the three
months ended September 30, 1997. As of September 30, 1997, the Company owned
137 properties consisting of 62 office and 75 industrial properties
(collectively, the "Properties") containing 14.7 million net rentable square
feet and located in 16 major markets throughout the U.S.
The Acquired Properties consist of 34 Class "A" suburban office Properties
(the "Acquired Office Properties") totaling 3.8 million square feet and 16
suburban industrial Properties (the "Acquired Industrial Properties") totaling
2.1 million square feet. The Acquired Office Properties are located in the
markets of Chicago, Illinois; Dallas, Texas; Sacramento, California; suburban
Detroit, Michigan; Denver, Colorado; Atlanta, Georgia; Northern Virginia; Los
Angeles, California; Phoenix, Arizona; Oakland, California; metropolitan
Washington,D.C.;
6
<PAGE>
and suburban Baltimore, Maryland. The Acquired Industrial Properties are
located in the markets of Chicago, Illinois; Milwaukee, Wisconsin; Los Angeles,
California; suburban Baltimore, Maryland; and Dallas, Texas. The purchase price
of the Acquired Properties, excluding closing costs, totaled approximately
$520.1 million, which was funded with borrowings under the Line of Credit (as
defined below), proceeds from the Follow-on Offering and other indebtedness
incurred or assumed directly by the Company (see Note 5).
The Line of Credit
Upon the closing of the IPO, the Company closed a three-year, $100 million
revolving credit facility (the "Line of Credit") with Bank One, Texas, N.A. and
NationsBank of Texas, N.A. The Company may borrow to finance the acquisition of
additional properties and for other corporate purposes, including to obtain
additional working capital. Initially, borrowings under the Line of Credit bore
interest at 30-day, 60-day or 90-day LIBOR (the "London Interbank Offered Rate")
at the option of the Company, plus 200 basis points per annum and were
collateralized by first mortgage liens on certain of the Properties. On January
24, 1997, the Company increased the amount available under its Line of Credit
from $100 million to $150 million and reduced the interest rate on borrowings
under the Line of Credit from LIBOR plus 200 basis points to LIBOR plus 175
basis points. The Company has received a preliminary term sheet from its banks
proposing modifications to the Line of Credit which include increasing the
facility from $150 to $300 million, converting from a secured to an unsecured
facility, extending the term to three years from the closing of modification and
reducing the rate by approximately 37.5 basis points.
2. BASIS OF PRESENTATION
The consolidated financial statements of the Company include all the
accounts of the Company, its majority-owned Operating Partnership and
subsidiaries. The combined financial statements of the Predecessor Company
include (i) the results of operations from 47 Properties for the periods
presented, (ii) the results of operations of the 3141 Fairview Park Drive
Property for the portion of the periods after a Prentiss Group member acquired
the Property in February 1996, (iii) the results of operations of the Bachman
East Property for the portion of the periods after a Prentiss Group member
acquired the Property in August 1996, (iv) a 25% equity interest in the
Broadmoor Austin Properties, (v) a 15% equity interest in the Park West C2
Property for the portion of the periods in which the Prentiss Group owned a non-
controlling interest, and (vi) results of operations of the Prentiss Properties
Service Business conducted primarily by a member of the Prentiss Group in the
periods presented. All significant intercompany balances and transactions have
been eliminated.
The accompanying financial statements are unaudited; however, the financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information and the rules
and regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results for the three and nine months ended September 30, 1997
are not necessarily indicative of the results to be obtained for the full fiscal
year. These financial statements should be read in conjunction with the
December 31, 1996 audited financial statements and notes thereto of the Company,
included in its annual report on Form 10-K for the fiscal year ended December
31, 1996.
Net income per Common Share has been computed by dividing net income
applicable to common shareholders by the weighted average number of Common
Shares outstanding. Weighted average Common Shares outstanding include the
immaterial dilutive effect of common share equivalents.
3. REAL ESTATE
During the nine months ended September 30, 1997, the Company acquired 42 of
the Acquired Properties including 29 office Properties containing 2.9 million
square feet and 13 industrial Properties containing 1.9 million square feet.
The 29 office Properties are inclusive of the acquisition of the mortgage note
collateralized by a single Class "A" office Property in Oakland, California.
(see Note 4). The acquisitions are as follows:
7
<PAGE>
. On January 14, 1997, the Company acquired a single Class "A" office Property
containing 58,621 square feet located in the Northern Virginia area. The
purchase price of the Property, excluding closing costs, totaled $6.1
million.
. On February 20, 1997, the Company acquired a single industrial Property
containing 360,000 square feet located in the Milwaukee, Wisconsin, area. The
purchase price of the Property, excluding closing costs, totaled $9.8
million.
. On March 18, 1997, the Company acquired a single industrial Property
containing 143,924 square feet located in the suburban Baltimore, Maryland,
area. The purchase price of the Property, excluding closing costs, totaled
$5.5 million.
. On March 19, 1997, the Company acquired two industrial Properties containing
237,344 square feet located in the Dallas, Texas, area. The purchase price of
the Properties, excluding closing costs, totaled $8.7 million.
. On March 25, 1997, the Company acquired two industrial Properties containing
228,382 square feet located in the Los Angeles, California, area. The
purchase price of the Properties, excluding closing costs, totaled $7.0
million.
. On April 2, 1997, the Company acquired six Class "A" office Properties
containing 566,092 square feet located in the Sacramento, California, area.
The purchase price of the Properties, excluding closing costs, totaled $74.2
million.
. On April 8, 1997, the Company acquired a single Class "A" office Property
containing 243,048 square feet located in the Atlanta, Georgia, area. The
purchase price of the Property, excluding closing costs, totaled $24.8
million, including $12.0 million of debt assumed in the purchase.
. On May 6, 1997, the Company acquired five Class "A" office Properties
containing 323,728 square feet located in the Chicago, Illinois, area. The
purchase price of the Properties, excluding closing costs, totaled $50.5
million.
. On May 29, 1997, the Company acquired six industrial Properties containing
468,750 square feet located in the Los Angeles, California, area. The
purchase price of the Properties, excluding closing costs, totaled $16.3
million.
. On June 4, 1997, the Company acquired two Class "A" office Properties
containing 244,816 square feet located in the suburban Detroit, Michigan,
area. The purchase price of the Properties, excluding closing costs, totaled
$21.8 million.
. On June 4, 1997, the Company acquired a single Class "A" office Property
containing 70,090 square feet in Dallas, Texas, adjacent to the Company's
corporate office. The purchase price of the Property, excluding closing
costs, totaled $5.5 million, including $3.1 million of debt assumed in the
purchase.
. On June 19, 1997, the Company acquired a single industrial Property
containing 455,858 square feet located in the Chicago, Illinois, area. The
purchase price of the Property, excluding closing costs, totaled $11.3
million.
. On July 31, 1997, the Company acquired two Class "A" office Properties
containing 100,500 square feet located in the Phoenix, Arizona area. The
purchase price of the Properties, excluding closing costs, totaled $9.9
million.
. On July 31, 1997, the Company acquired three Class "A" office Properties
containing 193,961 square feet located in Los Angeles, California. The
purchase price of the Properties, excluding closing costs, totaled $23.0
million.
8
<PAGE>
. On August 27, 1997, the Company acquired three Class "A" office Properties
containing 307,802 square feet located in the metropolitan Washington, D.C.
area. The purchase price of the Properties, excluding closing costs, totaled
$28.5 million.
. On September 9, 1997, the Company acquired two Class "A" office Properties
containing 286,325 square feet located in the metropolitan Washington, D.C.
area. The purchase price of the Properties, excluding closing costs, totaled
$40.8 million.
. On September 15, 1997, the company acquired two Class "A" office Properties
containing 203,405 square feet located in the suburban Baltimore, Maryland
area. The purchase price of the Properties, excluding closing costs, totaled
$22.6 million.
4. MORTGAGE NOTE RECEIVABLE
On July 29, 1997, the Company acquired, from an unaffiliated third-party, a
mortgage loan collateralized by a 271,055 square foot Class "A" office Property
in Oakland, California. The purchase price of the mortgage loan, excluding
closing costs, totaled approximately $37.5 million. The Company has negotiated a
deed in lieu of foreclosure transaction, at no consideration, which provides for
the conveyance of the Property from a partnership in which an affiliated party
is the general partner (Prentiss Properties WSC, Inc.) to the Company in an arms
length transaction on or around January 1, 1998.
5. DEBT ON REAL ESTATE
In February 1997, the Company closed a ten-year fixed rate mortgage loan
with an initial outstanding balance of $180.1 million (the "Mortgage Loan").
The Mortgage Loan is collateralized by liens on 53 Properties. The Mortgage
Loan was obtained from an affiliate of Lehman Brothers Inc. ("Lehman"). Under
the terms of the Mortgage Loan, the Company pays interest only at a rate of
approximately 7.58% until the Mortgage Loan's maturity in February 2007. A
portion of the proceeds of the Mortgage Loan were used to (i) repay
approximately $40.0 million of variable rate loans made by the Mortgage Loan
lender in connection with the IPO and (ii) repay approximately $72.8 million of
outstanding indebtedness under the Line of Credit at December 31, 1996, and the
additional $15.4 million, net borrowings, drawn under the Line of Credit during
the three months ended March 31, 1997. A portion of the remaining proceeds from
the Mortgage Loan was used to fund the acquisition of the Properties acquired
subsequent to the funding of the Mortgage Loan.
In April 1997, the Company reached an agreement with an affiliate of
Lehman, to provide a new acquisition loan (the "Acquisition Loan"), with an
aggregate principal balance of up to $120 million. On July 29, 1997, the
Company closed on the Acquisition Loan. The proceeds were used to fund the
purchase of the mortgage loan as described above and repay a portion of the
outstanding balance on the Line of Credit. As of September 30, 1997, the
Acquisition Loan was collateralized by 16 Properties and bore interest at a rate
of LIBOR plus 165 basis points and will mature in August 1998. On October 10,
1997, the interest rate on the Acquisition Loan was reduced to LIBOR plus 125
basis points. As of September 30, 1997, the Company had drawn the entire $120
million available under the Acquisition Loan. The Company anticipates
converting this loan to a seven-year facility and has executed a seven-year
interest rate swap locking in cost of funds of 6.25% (before the spread over
LIBOR) on $110 million.
In connection with the acquisition of Properties, during the nine months
ended September 30, 1997, the Company assumed debt totaling $15.1 million and at
September 30, 1997, the Company had $88.3 million outstanding under the Line of
Credit which represents a net increase of $15.5 million since December 31, 1996.
6. DISTRIBUTION
On September 16, 1997, the Company declared a cash distribution for the
third quarter of 1997 in the amount of $.40 per share, payable on October 17,
1997 to shareholders of record on September 30, 1997. In addition, it was
determined that a distribution of $.40 per Unit would be made to the partners of
the Operating Partnership, payable on October 17, 1997. The distributions were
paid on October 17, 1997, totaling approximately $11.8 million.
9
<PAGE>
7. INVESTMENT IN JOINT VENTURE AND UNCONSOLIDATED SUBSIDIARIES
Included in investments in joint venture and unconsolidated subsidiaries
are the Company's investment in the Broadmoor Austin Associates Joint Venture
("Broadmoor Austin"), the Company's investment in the Manager and the Company's
investment in a partnership owning a parcel of land in northwest Dallas. The
Company accounts for its 49.9% investment in Broadmoor Austin, its 95%
investment in the Manager and its 51% interest in the land parcel using the
equity method of accounting, and thus reports its share of income and losses
based on its ownership interest in the respective entities. At September 30,
1997, the carrying value of the Company's interest in Broadmoor Austin, the
Manager and the land parcel totaled $15.3 million, $6.6 million and $0.7
million, respectively. The partnership owning the parcel of land in northwest
Dallas had no other assets at September 30, 1997, and no operations for the
period then ended. The difference between the carrying value of the Company's
interest in Broadmoor Austin and the book value of the underlying equity is
being amortized over 40 years.
The following is summarized financial information for 100% of Broadmoor
Austin at September 30, 1997 and December 31, 1996 and for the nine month
periods ended September 30, 1997 and September 30, 1996:
<TABLE>
<CAPTION>
BALANCE SHEET: SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate and deferred charges, net................ $112,607 $115,856
Total assets......................................... $127,098 $129,513
Mortgage note payable................................ $140,000 $140,000
Venturers' deficit................................... $(17,072) $(14,097)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
INCOME STATEMENT: SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C>
Rental income........................................ $14,601 $14,875
Interest expense..................................... $10,209 $10,219
Depreciation and amortization........................ $ 3,210 $ 3,249
Net income........................................... $ 695 $ 752
</TABLE>
The following is summarized financial information for 100% of the Manager at
September 30, 1997 and for the nine months then ended:
<TABLE>
<CAPTION>
BALANCE SHEET: SEPTEMBER 30, 1997
------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Total assets......................................... $12,934
Total liabilities.................................... $ 6,086
Owners' equity....................................... $ 6,848
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
INCOME STATEMENT: SEPTEMBER 30, 1997
---------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Fee income........................................... $19,400
Personnel costs, net................................. $10,405
General office and administrative.................... $ 4,212
Net income........................................... $ 3,979
</TABLE>
10
<PAGE>
8. SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
During the three months ended September 30, 1997, the Company declared cash
distributions totaling $11.8 million. The distributions were paid October 17,
1997.
In addition, during the nine months ended September 30, 1997, the Company
assumed $15.1 million of mortgage debt and $1.5 million of net liabilities in
connection with the acquisition of Properties during the period.
During the nine months ended September 30, 1997, $4.4 million of the net
proceeds of the Company's Follow-on Offering was allocated to minority interest.
The remainder of the net proceeds increased Common Shares and additional paid-in
capital.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS"), No. 128, "Earnings per
Share" ("EPS") and FAS No. 129, "Disclosure of Information about Capital
Structure."
FAS No. 128 establishes standards for computing and presenting EPS by
eliminating the current presentation of primary EPS and requiring a dual
presentation of basic and diluted EPS on the face of the income statement. FAS
No. 128 also requires a reconciliation of the numerator and denominator used in
computing basic and diluted EPS. FAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Although early application of FAS No. 128 is not permitted, it does
require restatement of all prior-period EPS data presented. The Company
believes that upon implementation, FAS No. 128 will not have a material impact
on the financial statements of the Company.
FAS No. 129 establishes standards for disclosure of information about an
entity's capital structure such as information about securities, liquidation
preference of preferred stock and redeemable stock. FAS No. 129 is effective
for financial statements issued for periods ending after December 15, 1997. The
Company believes that upon implementation, FAS No. 129 will not have a material
impact on the financial statements of the Company.
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income"
and FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
FAS No. 130 establishes standards for reporting comprehensive income by
showing changes in the amounts of those items that affect comprehensive income
on the face of the financial statements. FAS No. 130 does not require a
specific format for the financial statement in which comprehensive income is
reported, but does require that an amount representing total comprehensive
income be reported in that statement. FAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of earlier
financial statements for comparative purposes. The Company believes that upon
implementation, FAS No. 130 will not have a material impact on the financial
statements of the Company.
FAS No. 131 requires disclosure of segment data in an entity's annual
financial statements and selected segment information in their quarterly report
to shareholders. FAS No. 131 also requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. FAS No. 131
supersedes FASB Statement 14, "Financial Reporting for Segments of a Business
Enterprise," and is effective for fiscal years beginning after December 15,
1997. The Company believes that upon implementation, FAS No. 131 will not have
a material impact on the financial statements of the Company.
10. PRO FORMA FINANCIAL INFORMATION
Due to the 42 Properties acquired between January 1, 1997 and September 30,
1997, the historical results of operations for the same period may not be
indicative of future results of operations. The following Pro Forma Condensed
Statements of Income for the nine months ended September 30, 1997 and 1996 are
presented as if the IPO and related Formation Transactions, the Follow-on
Offering and property acquisitions occurred on January 1, 1996.
11
<PAGE>
The pro forma information is based upon historical information and does not
purport to present what actual results would have been had such transactions, in
fact, occurred January 1, 1996, or to project results for any future period.
PRO FORMA CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------ -------------------------
(in thousands, except for per share data)
<S> <C> <C>
Total revenues....................................... $132,145 $127,310
Property operating and maintenance................... 31,329 31,320
Real estate taxes.................................... 13,911 13,036
General and administrative........................... 2,382 1,732
Personnel costs, net................................. 2,617 1,509
Interest expense..................................... 33,761 33,761
Amortization of deferred financing costs............. 848 848
Depreciation and amortization........................ 21,511 21,511
Equity in joint venture and unconsolidated
subsidiaries........................................ 4,514 3,393
-------- --------
Income before gain on sale, minority interest and
extraordinary item.................................. 30,300 26,986
Gain on sale......................................... 243 --
Minority interest.................................... (3,955) (3,503)
-------- --------
Income before gain on sale and extraordinary item.... 26,588 23,483
Extraordinary item................................... (111) --
-------- --------
Net income........................................... $ 26,477 $ 23,483
======== ========
Net income per common share before extraordinary item
$ 1.01 $ 0.89
Extraordinary item................................... -- --
-------- --------
Net income per common share.......................... $ 1.01 $ 0.89
======== ========
</TABLE>
11. SUBSEQUENT EVENTS
The Company has agreements to acquire five additional office properties and
six additional industrial properties (the "Contracted Properties") in the near
future for an aggregate purchase price of approximately $77.1 million, excluding
closing costs. The agreements relating to the Contracted Properties are subject
to customary closing conditions; therefore, there can be no assurances that the
Company will acquire all of the Contracted Properties.
On October 22, 1997, the Company acquired 15 Class "A" office Properties
containing 904,000 square feet located in the suburban Philadelphia,
Pennsylvania area (the "Terramics Properties"), as well as the rights to acquire
land capable of supporting 1.1 million net rentable square feet of development.
The purchase price of the Terramics Properties (including estimated closing
costs) totaled approximately $134 million, including $14 million of debt
assumed, approximately $106 million in cash, and the issuance of Operating
Partnership units valued at $14 million.
On October 6, 1997, the Company closed a bank bridge loan in the amount of
$133.0 million. The bank bridge was used primarily for closing the Terramics
Properties. The bank bridge is unsecured and has a floating rate of LIBOR plus
175 basis points. The Company anticipates that the bank bridge loan will be
partially repaid by a $60 million, six-year loan at 6.80% with a life insurance
company. The proposed loan will be collateralized by a portion of the Terramics
Properties.
On October 16, 1997, the Company filed a Form S-3 Registration Statement
("Shelf Registration") with respect to $550 million of Common and Preferred
Shares in the aggregate. The Shelf Registration was filed on the first day in
which the company was eligible for such filing and was declared effective on
October 24, 1997.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q may include forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements are identified by phrases such as the
Company "expects" or "anticipates" and words of similar effect. The Company's
actual results may differ materially from those projected. Factors that could
cause such a difference include: the Company's inability or failure to acquire
properties under contract or additional properties; difficulties in integrating
and operating acquired properties; bankruptcy or default of major tenants
resulting in a failure or delay in payment of rent; and general risks associated
with investments in real estate, including the effect of changes in economic,
competitive and other market conditions in the markets where the Company's
properties are concentrated, non-renewal of expiring leases or inability to re-
let vacated space at adequate rates, the inability of properties to generate
adequate cash flow to fund debt service and operating expenses, financing and
refinancing risks related to the Company's floating rate debt and new debt
necessary to support growth. For additional information, please refer to the
detailed discussion of risks included in the Company's Registration Statement on
Form S-3 (file no. 333-38079) dated October 16, 1997, under the caption "Risk
Factors."
OVERVIEW
Prentiss Properties Trust, together with its subsidiaries, (collectively
the "Company"), succeeded 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 are carried out by Prentiss
Properties Acquisition Partners, L.P. (the "Operating Partnership") and the
Company's majority-owned affiliates, Prentiss Properties Limited, Inc. and
Prentiss Properties Limited II, Inc. (collectively, the "Manager").
On October 22, 1996, the Company commenced operations after completing an
initial public offering (the "IPO") of 16,000,000 common shares of beneficial
interest, $0.01 par value per share ("Common Shares"). The Company issued an
additional 2,400,000 Common Shares on October 31, 1996, pursuant to the exercise
of the underwriters' over-allotment option. The combined 18,400,000 Common
Shares were issued at a price per share of $20.00. The Company used
approximately $87.4 million of the net proceeds of the IPO and issued 1,879,897
Common Shares of the Company for a total consideration of approximately $125.0
million to purchase certain limited partners' interests in the Operating
Partnership. The Company contributed the remaining net proceeds of the IPO to
the Operating Partnership in exchange for additional limited partnership units
in the Operating Partnership ("Units"). Subsequent to these transactions, the
Company held an approximate 86.0% interest in the Operating Partnership.
The Prentiss Group members, who, prior to the IPO, collectively served as
the general partner of the Operating Partnership, contributed to the Operating
Partnership all of their interests in the (i) Operating Partnership, (ii) the
initial properties that were not owned by the Operating Partnership, and (iii)
certain management contracts of PPL (the "Contracts") in exchange for 3,295,995
Units.
On April 30, 1997, the Company completed an offering (the "Follow-on
Offering") of 6,000,000 Common Shares of beneficial interest, $0.01 par value
per share. The Common Shares were issued at a price per share of $24.00. The
Company contributed the net proceeds of the Follow-on Offering to the Operating
Partnership. Subsequent to this transaction and at September 30, 1997, the
Company held an approximate 88.9% interest in the Operating Partnership.
RESULTS OF OPERATIONS
As of September 30, 1997, the Company owned 137 properties, 62 office and
75 industrial (the "Properties") containing 14.7 million square feet and located
in 16 major markets throughout the U.S. The Predecessor Company includes: (i)
the results of operations from 47 Properties for the periods presented, (ii) the
results of operations of the 3141 Fairview Park Drive Property for the portion
of the periods after a Prentiss Group member acquired the Property in February
1996, (iii) the results of operations of the Bachman East Property for the
portion of the periods after a Prentiss Group member acquired the Property in
August 1996, (iv) a 25% equity interest in the Broadmoor Austin Properties, (v)
a 15% equity interest in the Park West C2 Property for the portion of the
periods in which the Prentiss Group owned a non-controlling interest, and (vi)
results of operations of the
13
<PAGE>
Prentiss Properties Service Business conducted primarily by a member of the
Prentiss Group in the periods presented.
The results of operations for the periods ended September 30, 1997 and
1996, include the operations of the Company and Predecessor Company,
respectively. Consequently, the comparisons of the periods provide only limited
information regarding the operations of the Company as currently constituted.
Comparison of Three Months Ended September 30, 1997 to the Three Months Ended
- -----------------------------------------------------------------------------
September 30, 1996
- ------------------
Rental income increased by $25.3 million, or 290.7%, to $34.0 million from
$8.7 million primarily as a result of the Properties acquired concurrent with
and subsequent to the Company's IPO. As described above, the Predecessor Company
only includes results of operations of the 47 Properties and the 3141 Fairview
Park Property for the complete three month period. The rental income for the
combined 48 Properties increased by $.5 million, or 6.2%, from the three month
period ended September 30, 1996, to the three month period ended September 30,
1997. The increase of $.5 million is primarily attributable to net increases in
rental income, including, i) $149,000 at the Kansas City Industrial Properties,
(ii) $323,000 at the Walnut Glen Property, and (iii) $78,000 at the 8521
Leesburg Pike Property. The increase of $149,000 at the Kansas City Industrial
Properties results primarily from the leasing of 200,000 square feet, or 100%,
of one of the Properties in February 1997. The space, which was vacated in
February 1996, was leased at a net rate of $2.10 per square foot versus an
expiring rate of $1.80. The increase of $323,000 at the Walnut Glen Property is
attributable to a net increase in occupancy of approximately 57,000 square feet.
The increase of $78,000 at the 8521 Leesburg Pike Property is due to a net
increase in occupancy of approximately 12,000 square feet. The 89 Properties
acquired concurrent with or subsequent to the IPO (including the Bachman East
Property acquired by the Predecessor Company in August 1996) account for a $24.8
million increase in rental income.
Property operating and maintenance expenses increased by $5.9 million, or
278.1%, primarily as a result of the Properties acquired concurrent with or
subsequent to the Company's IPO. The property operating and maintenance
expenses for the 48 Predecessor Company Properties increased by approximately
$200,000, or 9.5%, from the three month period ended September 30, 1996 to the
three month period ended September 30, 1997. The 89 Properties acquired
concurrent with and subsequent to the IPO account for a $5.7 million increase in
property operating and maintenance expense.
Real estate taxes increased by $2.5 million, or 210%, primarily as a result
of the Properties acquired concurrent with and subsequent to the Company's IPO.
The real estate tax expense for the 48 Predecessor Company Properties decreased
by approximately $200,000, or 17.0%, from the three month period ended September
30, 1996 to the three month period ended September 30, 1997. The decrease in
real estate taxes for the 48 Predecessor Company Properties results primarily
from a decrease of real estate tax expenses on the Cumberland Office Park
Properties of approximately $215,000, offset by individually insignificant
increases of $15,000. The decrease of real estate tax expense on the Cumberland
Office Park Properties is attributed to a refund from the taxing authority for
previously paid, but contested, taxes. The 89 Properties acquired concurrent
with and subsequent to the IPO account for a $2.7 million increase in real
estate tax expense.
Interest expense increased by $4.2 million, or 255.6%, primarily as a
result of the increase in debt on real estate from $75.2 million at September
30, 1996 to $432.6 million at September 30, 1997. The increase in debt is
attributable to borrowings incurred and assumed in connection with the 89
Properties acquired concurrent with and subsequent to the IPO.
The decrease in management fees and development, leasing, sale and other
fees as well as general and administrative expenses and personnel costs for the
three month period ended September 30, 1997, from the three month period ended
September 30, 1996, is primarily attributable to the Company's use of the equity
method of accounting for the majority of the Company's third-party management
service business, and thus, the inclusion of the third-party management service
operations in the equity in income of joint venture and unconsolidated
subsidiaries line item for the three months ended September 30, 1997. The
Predecessor Company's third-party management services are combined into the
operations of the Predecessor Company and therefore included on a gross basis in
the line items (i) management fees, (ii) development, leasing, sale and other
fees, (iii) general and administrative, and (iv) personnel costs.
14
<PAGE>
Comparison of Nine Months Ended September 30, 1997 to the Nine Months Ended
- ---------------------------------------------------------------------------
September 30, 1996
- ------------------
Rental income increased by $60.1 million, or 239.8%, to $85.1 million from
$25.0 million primarily as a result of the Properties acquired concurrent with
and subsequent to the Company's IPO. As described above, the Predecessor
Company includes results of operations of 47 Properties for the complete nine
month period and the results of operations of the 3141 Fairview Park Property
for the portion of the period subsequent to its acquisition in February 1996.
The rental income for the 47 Properties increased by $1.7 million, or 7.6%, from
the nine month period ended September 30, 1996, to the nine month period ended
September 30, 1997. The increase of $1.7 million is primarily attributable to
incremental increases in rental income, including (i) $329,000 at the Kansas
City Industrial Properties, (ii) $713,000 at the Walnut Glen Property, (iii)
$166,000 at the 8521 Leesburg Pike Property, (iv) $184,000 at the Milwaukee
Industrial Properties, (v) $92,000 at the Nicholson III Properties, and (vi)
various other individually insignificant increases totaling $232,000. The
increase of $329,000 at the Kansas City Industrial Properties resulted primarily
from the leasing of 200,000 square feet, or 100%, of one of the Properties in
February 1997. The space was vacated in February 1996 and subsequently renewed
at a net rate of $2.10 per square foot versus the expiring rate of $1.80 per
square foot. The incremental increase of $713,000 at the Walnut Glen Property
is attributable to a net increase in occupancy of 57,000 square feet. The
increase of $166,000 at the 8521 Leesburg Pike Property is due to a net increase
in occupancy of approximately 12,000 square feet. The $184,000 increase at the
Milwaukee Industrial Properties resulted primarily from the collection of past
due rents totaling $511,000, offset by a reduction in rental income resulting
from spaces vacated in March and November of 1996. The incremental increase of
$92,000 at the Nicholson III Properties is primarily due to a net increase in
occupancy of 33,000 square feet. The 89 Properties acquired concurrent with or
subsequent to the IPO account for a $58.4 million increase in rental income.
Property operating and maintenance expenses increased by $13.0 million, or
186.2%, primarily as a result of the Properties acquired concurrent with or
subsequent to the Company's IPO. The property operating and maintenance
expenses for the 47 Predecessor Company Properties increased by approximately
$177,000, or 2.9%, from the nine month period ended September 30, 1996, to the
nine month period ended September 30, 1997. Property operating and maintenance
expenses at the 3141 Fairview Park Property increased by $124,000, from $847,000
to $971,000, from the nine month period ended September 30, 1996 to the nine
month period ended September 30, 1997. The increase results from the operations
of the Property being reported for the full nine month period in the current
year versus the shorter reporting period in the prior year as the Property was
acquired in February 1996. The 89 Properties acquired concurrent with and
subsequent to the IPO account for a $12.7 million increase in property operating
and maintenance expense.
Real estate taxes increased by $6.5 million, or 224.0%, primarily as a
result of the Properties acquired concurrent with and subsequent to the
Company's IPO. The real estate tax expense for the 47 Predecessor Company
Properties decreased by approximately $128,000, or 4.7%, from the nine month
period ended September 30, 1996, to the nine month period ended September 30,
1997. The decrease in real estate taxes results from a decrease in real estate
tax expenses of approximately $325,000 on the Cumberland Office Park Properties,
offset by an increase of $152,000 on the Walnut Glen Property and other
individually insignificant increases of $45,000. The decrease of real estate
tax expense on the Cumberland Office Park Properties is attributable to a refund
from the taxing authority for previously paid, but contested, taxes. The 3141
Fairview Park Property accounted for an increase in real estate taxes of $66,000
from the nine months ended September 30, 1996 to the nine months ended September
30, 1997. The increase results from the operations of the Property being
reported for the full nine month period in the current year versus the shorter
reporting period in the prior year as the Property was acquired in February
1996. The 89 Properties acquired concurrent with and subsequent to the IPO
account for a $6.6 million increase in real estate tax expense.
Interest expense increased by $8.7 million, or 207.4%, primarily as a
result of the increase in debt on real estate from $75.2 million at September
30, 1996 to $432.6 million at September 30, 1997. The increase in debt is
attributable to borrowings incurred and assumed in connection with the 89 real
estate Properties acquired concurrent with and subsequent to the IPO.
The decrease in management fees and development, leasing, sale and other
fees as well as general and administrative expenses and personnel costs for the
nine month period ended September 30, 1997 from the nine month period ended
September 30, 1996 is primarily attributable to the Company's use of the equity
method of
15
<PAGE>
accounting for the majority of the Company's third-party management service
business, and thus, the inclusion of the third-party management service
operations in the equity in income of joint venture and unconsolidated
subsidiaries line item for the nine months ended September 30, 1997. The
Predecessor Company's third-party management services are combined into the
operations of the Predecessor Company and therefore included on a gross basis in
the line items (i) management fees, (ii) development, leasing, sale and other
fees, (iii) general and administrative, and (iv) personnel costs.
Funds from Operations
- ---------------------
The Company generally considers Funds from Operations, in conjunction with
cash flows, to be an appropriate measure of liquidity of an equity REIT. "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 may not be comparable to Funds from 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 net income to Funds from Operations for the three and nine
month periods ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
THE PREDECESSOR THE PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------------------ ------------------- ------------------- -------------------
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------- ------------------- -------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income $10,116 $1,582 $26,345 $ 4,958
Add:
Real estate depreciation and amortization...... 5,783 1,864 14,669 5,437
Real estate depreciation and amortization of
unconsolidated joint ventures............... 532 271 1,605 804
Minority interest in Operating Partnership..... 1,269 - 3,673 -
Extraordinary item............................. - - 111 -
Less: Gain on sale of property................ - (378) (243) (378)
------- ------ ------- -------
Funds from Operations 17,700 3,339 46,160 10,821
------- ------ ------- -------
Funds from Operations (Company's Share) $15,728 $2,866 $40,587 $ 9,290
======= ====== ======= =======
</TABLE>
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents were $3.6 million and $3.2 million at September
30, 1997 and September 30, 1996, respectively. Net cash provided by operating
activities was $43.9 million for the nine months ended September 30, 1997,
compared to the $12.3 million for the nine months ended September 30, 1996. The
increase is due primarily to the operating results of the 50 Properties acquired
subsequent to the IPO.
Net cash used in investing activities increased from $32.0 million for the
nine months ended September 30, 1996 to $443.7 million for the nine months ended
September 30, 1997. This increase is due primarily to the 42 real estate
Properties acquired during the nine months ended September 30, 1997.
Net cash provided by financing activities increased from $21.9 million for
the nine months ended September 30, 1996 to $396.2 million for the nine months
ended September 30, 1997. This increase is primarily attributable to the net
increase in debt on real estate of the Company during the nine months ended
September 30, 1997 exceeding the increase by the Predecessor Company during the
nine months ended September 30, 1996 and cash proceeds from the Company's
Follow-on Offering, partially offset by an increase in distributions paid during
the nine months ended September 30, 1997 from the distributions paid during the
nine months ended September 30, 1996.
Upon the closing of the IPO, the Company closed a three-year, $100 million
revolving credit facility (the "Line of Credit") with Bank One, Texas, N.A. and
NationsBank of Texas, N.A. The Company may borrow to
16
<PAGE>
finance the acquisition of additional properties and for other corporate
purposes, including to obtain additional working capital. Initially, borrowings
under the Line of Credit bore interest at 30-day, 60-day or 90-day LIBOR (the
"London Interbank Offered Rate") at the option of the Company, plus 200 basis
points per annum and is collateralized by first mortgage liens on certain of the
Properties. On January 24, 1997, the Company increased the amount available
under its Line of Credit from $100 million to $150 million and reduced the
interest rate on borrowings under the Line of Credit from LIBOR plus 200 basis
points to LIBOR plus 175 basis points.
In February 1997, the Company closed a ten-year fixed rate mortgage loan
with an initial outstanding balance of $180.1 million (the "Mortgage Loan").
The Mortgage Loan is collateralized by liens on 53 Properties. The Mortgage
Loan was obtained from an affiliate of Lehman Brothers Inc. ("Lehman"). Under
the terms of the Mortgage Loan, the Company pays interest only at a rate of
approximately 7.58% until the Mortgage Loan's maturity in February 2007. A
portion of the proceeds from the Mortgage Loan was used to fund the acquisition
of the Properties acquired subsequent to the funding of the Mortgage Loan.
On July 29, 1997, the Company closed a new acquisition loan (the
"Acquisition Loan") with an affiliate of Lehman Brothers Inc. The Proceeds from
the Acquisition Loan were used to fund the purchase of the mortgage loan as
described above and repay a portion of the outstanding balance on the Line of
Credit. The Acquisition Loan was collateralized by 16 Properties and bore
interest at a rate of LIBOR plus 165 basis points and will mature in August
1998. On October 10, 1997, the interest rate on the Acquisition Loan was
reduced to LIBOR plus 125 basis points. As of September 30, 1997, the Company
had drawn the entire $120 million available under the Acquisition Loan. The
Company anticipates converting this loan to a seven-year facility and has
executed a seven-year interest rate swap locking in cost of funds of 6.25%
(before the spread over LIBOR) on $110 million.
The following table sets forth the Company's mortgage debt as of September 30,
1997:
MORTGAGE DEBT
<TABLE>
<CAPTION>
ANNUAL
PRINCIPAL INTEREST INTEREST
PROPERTY(IES) AMOUNT RATE AMORTIZATION MATURITY PAYMENT
------------- --------------- ---------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
Mortgage Loan...................................... $180,100,000(1) 7.58% None February 27, 2007 $13,651,580
Acquisition Loan................................... 120,000,000(2) 7.31%(3) None August 1, 1998 8,772,000
PacificCare Building (FHP)......................... 6,000,000 7.30% None November 1, 2000 438,000
Walnut Glen........................................ 10,000,000 7.50% None January 31, 2001 750,000
Crescent Centre.................................... 12,000,000 7.95% None March 1, 2004 954,000
Bachman Creek-West................................. 3,069,602 8.63% 25 yr November 30, 2002 264,907
Broadmoor Austin(4)................................ 69,860,000 9.75% None April 1, 2001 6,811,350
Federal Express.................................... 13,171,450 7.51% (5) None June 30, 1998 989,176(6)
Line of Credit..................................... 88,300,000 7.41% (7) None October 14, 1999 6,543,030
----------- ------ -----------
Total/Weighted Average............................. $502,501,052 7.80% $39,174,043
=========== ====== ===========
</TABLE>
(1) The Mortgage Loan is collateralized by the following 53 Properties: Park
West E1, Park West E2, One Northwestern Plaza, 3141 Fairview Park Drive,
O'Hare Plaza II, 1717 Deerfield, 2411 Dulles Corner Road, 4401 Fair Lakes
Court, Kansas City Industrial Properties (seven Properties), certain of the
Los Angeles Industrial Properties (18 Properties), certain of the Milwaukee
Industrial Properties (17 Properties), and the certain of the Chicago
Industrial Properties (3 Properties).
(2) The Acquisition Loan is collateralized by the following 16 Properties:
Natomas Corporate Center (six Properties), The Academy (three Properties),
Seven Mile Crossing (two Properties), and Corporetum Office Campus (five
Properties).
(3) Represents a variable rate equal to LIBOR + 1.65%; on October 27, 1997
LIBOR was equal to 5.66%. The rate was changed to LIBOR + 1.25% on October
10, 1997.
(4) The Company, through the Operating Partnership, owns 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 collateralized by the Properties.
(5) Represents a variable rate equal to LIBOR + 1.85%; on October 27, 1997
LIBOR was equal to 5.66%.
(6) Interest payments related to this construction loan are not included in
interest expense, as these costs are capitalized to the project.
(7) Represents a variable rate equal to LIBOR + 1.75%; on October 27, 1997
LIBOR was equal to 5.66%.
The Company's policy is to limit combined indebtedness plus its pro rata
share of joint venture debt so that at the time such debt is incurred, it does
not exceed 50% of the Company's total market capitalization (the "Debt
Limitation"). As of September 30, 1997, the Company had outstanding total
indebtedness, including its pro rata share of joint venture debt of
approximately $502.5 million, or approximately 37.04% of total market
capitalization based on a Common Share price of $28.875 per share. As of
September 30, 1997, the Company had the approximate capacity to borrow up to an
additional $351.7 million under the Debt Limitation. The amount of
17
<PAGE>
indebtedness that the Company may incur, and the policies with respect thereto,
are not limited by the Company's Declaration of Trust and Bylaws, and are solely
within the discretion of the Company's Board of Trustees.
The Company's Properties require periodic investments of capital for
tenant-related capital expenditures and for general capital improvements. For
the three and nine months ended September 30, 1997, the Company's recurring non-
incremental revenue-generating capital expenditures totaled $1.9 million and
$4.6 million, respectively. The Company's recurring non-incremental revenue-
generating capital expenditures exclude approximately $496,000 and $1,239,000,
related to the Walnut Glen Property for the three and nine month periods,
respectively, which were reserved for during the formation of the Company.
The Company has considered its short-term liquidity needs and the adequacy
of adjusted estimated cash flows and other expected liquidity sources to meet
these needs. The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements and the minimum
distribution required to maintain the Company's REIT qualification under the
Code. The Company anticipates that these needs will be fully funded from the
Company's cash flows provided by operating activities and, when necessary to
fund shortfalls resulting from the timing of collections of accounts receivable
in the ordinary course of business, from the Line of Credit, leasing development
and construction business and from the Manager. The Manager's sole sources of
income are fees generated by its office and industrial real estate management,
leasing, development and construction business.
The Company has agreements to acquire five office properties and six
industrial properties (the "Contracted Properties") in the near future. The
agreements relating to the Contracted Properties are subject to customary
closing conditions; therefore, there can be no assurances that the Company will
acquire all of the Contracted Properties. In addition to the Contracted
Properties, on October 22, 1997, the Company acquired 15 Class "A" office
properties (the "Terramics Properties") containing 904,000 square feet located
in the suburban Philadelphia, Pennsylvania area and the rights to acquire
parcels of land that can support up to 1.1 million net rentable square feet of
development. Subsequent to the closing of the Terramics Properties and upon the
completion of the acquisition of the Contracted Properties, the Company expects
to have approximately $697.1 million of mortgage indebtedness outstanding,
including its pro rata share of joint venture debt.
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. The Company also
intends to use proceeds from the Line of Credit to fund property acquisitions,
development, redevelopment, expansions and capital improvements on an interim
basis.
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 property.
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 month to 15 years, further reducing the impact on the
Company of the adverse effects of inflation.
Recently Issued Accounting Standards
- ------------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS"), No. 128, "Earnings per
Share" ("EPS") and FAS No. 129, "Disclosure of Information about Capital
Structure."
18
<PAGE>
FAS No. 128 establishes standards for computing and presenting EPS by
eliminating the current presentation of primary EPS and requiring a dual
presentation of basic and diluted EPS on the face of the income statement. FAS
No. 128 also requires a reconciliation of the numerator and denominator used in
computing basic and diluted EPS. FAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Although early application of FAS No. 128 is not permitted, it does
require restatement of all prior-period EPS data presented. The Company
believes that upon implementation, FAS No. 128 will not have a material impact
on the financial statements of the Company.
FAS No. 129 establishes standards for disclosure of information about an
entity's capital structure such as information about securities, liquidation
preference of preferred stock and redeemable stock. FAS No. 129 is effective
for financial statements issued for periods ending after December 15, 1997. The
Company believes that upon implementation, FAS No. 129 will not have a material
impact on the financial statements of the Company.
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income"
and FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
FAS No. 130 establishes standards for reporting comprehensive income by
showing changes in the amounts of those items that affect comprehensive income
on the face of the financial statements. FAS No. 130 does not require a
specific format for the financial statement in which comprehensive income is
reported, but does require that an amount representing total comprehensive
income be reported in that statement. FAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of earlier
financial statements for comparative purposes. The Company believes that upon
implementation, FAS No. 130 will not have a material impact on the financial
statements of the Company.
FAS No. 131 requires disclosure of segment data in an entity's annual
financial statements and selected segment information in their quarterly report
to shareholders. FAS No. 131 also requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. FAS No. 131
supersedes FASB Statement 14, "Financial Reporting for Segments of a Business
Enterprise," and is effective for fiscal years beginning after December 15,
1997. The Company believes that upon implementation, FAS No. 131 will not have
a material impact on the financial statements of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
<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
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
20
<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: October 31, 1997 By: /s/ Thomas P. Simon
--------------------------------
Thomas P. Simon (Vice President)
21
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,614
<SECURITIES> 0
<RECEIVABLES> 9,709
<ALLOWANCES> 475
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 918,545
<DEPRECIATION> 30,490
<TOTAL-ASSETS> 985,269
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 263
<OTHER-SE> 453,805
<TOTAL-LIABILITY-AND-EQUITY> 985,269
<SALES> 0
<TOTAL-REVENUES> 88,013
<CGS> 0
<TOTAL-COSTS> 62,317
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,515
<INCOME-PRETAX> 26,456
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 111
<CHANGES> 0
<NET-INCOME> 26,345
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
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