<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 March 31, 2000 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 of Beneficial Interest, $0.01 par value,
outstanding as of May 10, 2000, was 36,095,480 and the number of outstanding
Participating Cumulative Redeemable Preferred Shares of Beneficial Interest,
Series A, was 3,773,585.
<PAGE>
PRENTISS PROPERIES TRUST
INDEX
-----
Part I: FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements
Consolidated Balance Sheets of Prentiss
Properties Trust (the "Company") at March
31, 2000 (unaudited) and December 31, 1999 4
Consolidated Statements of Income of the
Company for the three month periods
ended March 31, 2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows of the
Company for the three month periods ended March
31, 2000 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements 7-12
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 19-20
Part II: OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Mortgages and Notes Payable 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 23
2
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-Q and the documents incorporated by reference herein
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). When used
in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect,"
"intend," "predict," "project," and similar expressions, as they relate to the
Company's management, identify forward-looking statements. Such forward-looking
statements are based on the beliefs of the Company's management as well as
assumptions made by and information currently available to the Company. These
forward-looking statements are subject to certain risks, uncertainties and
assumptions, including, but not limited to, risks, uncertainties and assumptions
related to the following:
<TABLE>
<S> <C>
. the geographic concentration of our properties; . conflicts of interest;
. our real estate acquisition, redevelopment, . change in our investment, financing and borrowing
development and construction activities; policies without shareholder approval;
. operating performance of our properties; . our dependence on key personnel;
. our incurrence of debt; . our third-party property management, leasing,
development and construction business and related
services; and
. limited ability of shareholders to effect a change . effect of shares available for future sale on price
of control; of common shares.
. our failure to qualify as a REIT;
</TABLE>
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect our current views with respect to future events and are subject to these
and other risks, uncertainties and assumptions, relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. A detailed
discussion of risks is included, under the caption "Risk Factors," in the
Company's Form 10-K, filed on March 24, 2000.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate:
Land...................................................... $ 306,475 $ 298,555
Buildings and improvements................................ 1,519,996 1,481,831
Construction in progress.................................. 60,712 87,860
Land held for development................................. 26,379 30,236
---------- ----------
1,913,562 1,898,482
Less: accumulated depreciation............................ (101,637) (91,461)
---------- ----------
Total real estate assets.................................. 1,811,925 1,807,021
Deferred charges and other assets, net......................... 125,363 115,250
Receivables, net............................................... 30,496 28,277
Cash and cash equivalents...................................... 12,210 13,313
Escrowed cash.................................................. 4,548 6,481
Other receivables (affiliates)................................. 5,039 3,617
Investments in joint ventures and unconsolidated subsidiary.... 19,956 20,704
---------- ----------
Total assets.............................................. $2,009,537 $1,994,663
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt on real estate............................................ $ 954,052 $ 896,810
Accounts payable and other liabilities......................... 52,330 68,144
Distributions payable.......................................... 21,425 18,896
---------- ----------
Total liabilities......................................... 1,027,807 983,850
---------- ----------
Minority interest in operating partnership..................... 177,748 177,817
---------- ----------
Minority interest in real estate partnerships.................. 1,543 1,503
Commitments and contingencies ---------- ----------
Preferred shares $.01 par value, 20,000,000 shares
authorized, 3,773,585 shares issued and outstanding
at March 31, 2000 and December 31, 1999..................... 100,000 100,000
Common shares $.01 par value, 100,000,000 shares
authorized, 40,171,383 and 40,078,643 (includes --------------- ---------------
4,098,136 and 2,591,900 in treasury) shares issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively................................................ 402 401
Additional paid-in capital..................................... 791,506 789,554
Unearned compensation.......................................... (1,730)
Retained earnings.............................................. 4,743 5,329
Common shares in treasury, at cost, 4,098,136 and 2,591,900
shares at March 31, 2000 and December 31, 1999, respectively (92,482) (63,791)
--------------- ---------------
Total shareholders' equity................................ 802,439 831,493
---------- ----------
Total liabilities and shareholders' equity................ $2,009,537 $1,994,663
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
--------------------- --------------------
<S> <C> <C>
Revenues:
Rental income.................................................... $80,443 $70,960
Management and other fees, net................................... 670 432
------- -------
Total revenues.................................................. 81,113 71,392
------- -------
Expenses:
Property operating and maintenance............................... 17,846 16,080
Real estate taxes................................................ 9,933 8,586
General and administrative and personnel costs, net.............. 2,290 2,100
Interest expense................................................. 17,026 13,494
Amortization of deferred financing costs......................... 328 249
Depreciation and amortization.................................... 14,834 12,144
------- -------
Total expenses.................................................. 62,257 52,653
------- -------
Equity in income of joint ventures and unconsolidated subsidiary...
949 1,142
------- -------
Income before gain on sales and minority interests................. 19,805 19,881
Gain on sales...................................................... 1,047 96
Minority interests................................................. (3,905) (2,720)
------- -------
Net income......................................................... $16,947 $17,257
Preferred dividends................................................ (1,660) (1,509)
------- -------
Net income applicable to common shareholders....................... $15,287 $15,748
======= =======
Net income per common share - basic................................ $0.42 $0.41
======= =======
Weighted average number of common shares outstanding -
basic............................................................ 36,067 38,101
======= =======
Net income per common share - diluted.............................. $0.42 $0.41
======= =======
Weighted average number of common shares and
common share equivalents outstanding - diluted................... 36,123 41,891
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------------- -----------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income.................................................... $ 16,947 $ 17,257
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interests Minority interests........................ 3,905 2,720
Gain on sales................................................ (1,047) (96)
Provision for doubtful accounts.............................. (256) 20
Depreciation and amortization................................ 14,834 12,144
Amortization of deferred financing costs..................... 328 249
Equity in income of joint ventures and unconsolidated
subsidiary................................................. (949) (1,142)
Non-cash compensation........................................ 182 25
Changes in assets and liabilities:
Deferred charges and other assets............................ (5,305) (1,108)
Receivables.................................................. (1,501) (114)
Escrowed cash................................................ 1,933 1,228
Other receivables (affiliates)............................... (1,422) (1,442)
Accounts payable and other liabilities....................... (15,814) (11,062)
-------- ---------
Net cash provided by operating activities....................... 11,835 18,679
-------- ---------
Cash Flows from Investing Activities:
Purchase and development of real estate......................... (46,995) (21,535)
Investment in real estate....................................... (9,731) (9,870)
Investment in joint ventures.................................... (11) (8,228)
Proceeds from sale of real estate............................... 32,962 3,207
Distributions received from joint ventures and unconsolidated
subsidiary..................................................... 1,182 1,356
-------- ---------
Net cash used in investing activities........................... (22,593) (35,070)
-------- ---------
Cash Flows from Financing Activities:
Net proceeds from sale of common shares......................... 536
Purchase of treasury shares..................................... (28,691) (26,257)
Distributions paid to limited partners.......................... (743) (692)
Distributions paid to common shareholders....................... (16,492) (15,573)
Distributions paid to preferred shareholders.................... (1,661) (1,509)
Proceeds from debt on real estate............................... 58,091 276,343
Repayments of debt on real estate............................... (849) (204,829)
-------- ---------
Net cash provided by financing activities....................... 9,655 28,019
-------- ---------
Net change in cash and cash equivalents......................... (1,103) 11,628
Cash and cash equivalents, beginning of period.................. 13,313 5,523
-------- ---------
Cash and cash equivalents, end of period........................ $ 12,210 $ 17,151
======== =========
Supplemental Cash Flow Information:
Cash paid for interest.......................................... $ 15,283 $ 14,406
======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. The Organization
Prentiss Properties Trust is a Maryland Real Estate Investment Trust
("REIT") that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States. The Company (as defined
below) is self-administered, in that it provides its own administrative
services, such as accounting, tax and legal, internally through its own
employees. The Company is self-managed, in that it internally provides all the
management and maintenance services that its properties require through its own
employees, such as property managers, leasing professionals and engineers. The
Company operates principally through Prentiss Properties Acquisition Partners,
L.P. and its subsidiaries (the "Operating Partnership") and Prentiss Properties
Limited, Inc. (the "Manager") (collectively referred to herein as the
"Company"). As of March 31, 2000, the Company owned interests in a diversified
portfolio of 200 primarily Class A office and industrial properties containing
approximately 20.0 million net rentable square feet (the "Properties"). The
Properties consist of 134 office buildings (the "Office Properties") containing
approximately 15.1 million net rentable square feet and 66 industrial buildings
(the "Industrial Properties") containing approximately 4.9 million net rentable
square feet. The Properties include 8 Properties containing 855,000 square feet
that are in various stages of development or have been recently developed by the
Company and are in various stages of lease-up (the "Development Properties").
As of March 31, 2000, the Office Properties and Industrial Properties, exclusive
of the Development Properties, were approximately 95% leased to approximately
1200 tenants and approximately 96% leased to approximately 150 tenants,
respectively. In addition to managing the Properties that the Company owns, the
Company manages approximately 25.8 million net rentable square feet in office,
industrial and other properties that are owned by third parties.
Real Estate Transactions
During the three months ended March 31, 2000, the Company: (i) took
ownership of and concurrently sold an office building totaling 225,000 square
feet in the Chicago area, which resulted in a gain on sale of approximately
$1.05 million; (ii) acquired a 5.7 acre parcel of land which is currently under
development in the Austin area (iii) sold a 1.8 acre parcel of land for $3.8
million that was acquired in connection with the site acquisition for the Del
Mar Gateway Development Property; and (iv) transitioned three Properties,
totaling 350,000 square feet, from development into operations and as a result
moved the real estate from construction in progress into the respective land and
building and improvement line items on the consolidated balance sheet.
2. Basis of Presentation
The accompanying financial statements are unaudited; however, the
financial statements of the Company have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and the rules and regulations of the Securities and Exchange
Commission ("SEC"). Accordingly, they do not include all of the disclosures
required by GAAP 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 months ended March 31,
2000 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, 1999 audited financial statements and notes thereto of the Company,
included in its annual report on Form 10-K.
3. Debt on Real Estate
At March 31, 2000, the Company had debt on real estate of $954.1 million,
excluding the Company's proportionate share of debt of its equity investments.
See Note (5) - Investment in Joint Ventures and Unconsolidated Subsidiary for
further information on the Company's equity investments.
7
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company's mortgage debt transactions for the three months ended March
31, 2000 are summarized in the table below:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Debt on real estate at December 31, 1999......................... $896,810
Activity for the three months ending March 31, 2000:
Net borrowings under the line of credit......................... 54,978
Construction loan draws......................................... 3,072
Net payments on mortgage loans.................................. (808)
--------
Debt on real estate at March 31, 2000............................ $954,052
========
</TABLE>
On March 22, 2000, the Company closed a 3-year $26.2 million construction
loan. The borrowings under the loan bear interest at LIBOR plus 175 basis
points per annum and are collateralized by the Del Mar Gateway Development
Property. At March 31, 2000, outstanding borrowings under the loan totaled $3.1
million.
During the period, the Company had net borrowings under its $300.0 million
line of credit of $55.0 million resulting in an outstanding balance of $184.0
million at March 31, 2000. The Company's line of credit bears interest at LIBOR
plus 137.5 basis points and matures January 2, 2001.
The Company's debt balance at March 31, 2000, excluding its proportionate
share of debt on its equity investments, was $954.1 million. Of this amount,
$575.9 million was fixed rate, non-recourse, long-term mortgages. The remaining
$378.2 million was floating rate debt, of which, $160.0 million was hedged
pursuant to four separate interest rate swap agreements which effectively fixed
the interest rates on $110.0 million until September 2004 and $50.0 million
until June 2003. Future scheduled principal repayments of debt on real estate
are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
2000..................................................... $ 7,678
2001..................................................... 203,866
2002..................................................... 106,352
2003..................................................... 68,699
2004..................................................... 111,060
Thereafter............................................... 456,397
--------
$954,052
========
</TABLE>
4. Distribution
On March 15, 2000, the Company declared a cash distribution for the first
quarter of 2000 in the amount of $.44 per share, payable on April 14, 2000 to
common shareholders of record on March 31, 2000. Additionally, it was
determined that a distribution of $.44 per unit would be made to the partners of
the Operating Partnership, and the holders of the Company's Series A Convertible
Preferred Shares (the "Series A Convertible Preferred Shares"). The total
distributions were paid on April 14, 2000, totaling approximately $18.3 million.
In addition, a quarterly distribution totaling $3.2 million in the aggregate was
declared on March 15, 2000 for the holders of the Series B Perpetual Preferred
Units (the "Series B Perpetual Preferred Units") and the Series C Perpetual
Preferred Units (the "Series C Perpetual Preferred Units"). The quarterly
distribution which equates to an annualized 8.3% of the face amount of the
Series B Perpetual Preferred Units and an annualized 9.45% of the face amount of
the Series C Perpetual Preferred Units was paid on April 3, 2000.
8
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
5. Investment in Joint Ventures and Unconsolidated Subsidiary
Included in investments in joint ventures and unconsolidated subsidiary are
the Company's 50% interest in the joint venture owning the Broadmoor Austin
Properties, the Company's 60% interest in the joint venture owning the Oaklands
21/27 Development Properties, the Company's 20% interest in the joint venture
owning the Burnett Plaza Property and the Company's 95% interest in the Manager.
The following information summarizes the financial position at March 31, 2000
and December 31, 1999 and the results of operations for the three months ended
March 31, 2000 and 1999 of the unconsolidated joint ventures and subsidiary of
the Company which are accounted for using the equity method of accounting during
the periods presented:
<TABLE>
<CAPTION>
Company's
Summary of Financial Position: Total Assets Total Debt Total Equity Investment
(in thousands) ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, Dec. 31, March 31, Dec. 31, March 31, Dec. 31, March 31, Dec. 31,
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
Broadmoor Austin Properties/(1)/ $119,785 $121,813 $154,000 $154,000 $(34,918) $(34,544) $ 5,388 $ 5,638
Oaklands 21/27/(2)/ 5,007 4,597 2,641 1,943 2,064 2,057) 1,239 1,216
Burnett Plaza Property 92,795 94,066 47,000 47,000 44,035 44,327 8,840 8,899
Manager 15,863 15,827 4,192 4,190 3,951 3,951
-------- -------- -------- -------- -------- -------- ------- -------
$233,450 $236,303 $203,641 $202,943 $ 15,373 $ 16,030 $19,418 $19,704
======== ======== ======== ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
Company's
Summary of Operations Total Revenue Net Income Share of Net Income
------------- ---------- -------------------
(in thousands)
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Broadmoor Austin Properties $ 4,948 $4,947 $ 966 $1,002 $ 483 $ 501
Oaklands 21/27/(2)/ 57 19 11
Burnett Plaza Property/(3)/ 4,071 583 117
Manager 5,366 4,864 338 641 338 641
------- ------ ------ ------ ----- ------
$14,442 $9,811 $1,906 $1,643 $ 949 $1,142
======= ====== ====== ====== ===== ======
</TABLE>
/(1)/The difference between the carrying value of the Company's interest in the
Broadmoor Austin Properties and the book value of the underlying equity is
being amortized over 40 years.
/(2)/Oaklands 21/27 consist of two Development Properties in the suburban
Philadelphia area. The Properties had no operations during the three months
ended March 31, 1999 and at March 31, 2000 are in the lease-up phase of
development.
/(3)/The Company's 20% interest in the Burnett Plaza Property was acquired on
March 25, 1999. The Company's recognition of its proportionate share of
earnings from the Burnett Plaza Property began in April 1999.
In addition to the above, in November 1999, the Company invested $1.0
million in Urban Media Communications Corporation which provides broadband
internet access to tenants of commercial office buildings. During the first
quarter of 2000, the Company's investment was reduced to $537,500, as a result
of the sale of a portion of the Company's investment in Urban Media
Communication Corporation to certain key employees of the Company. The sale,
which is subject to certain restrictions, is part of the Company's long-term
incentive plan to
9
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
retain such employees. The Company's net investment in Urban Media
Communications Corporation is accounted for using the cost method of accounting.
6. Capital Shares
On January 4, 2000, the Company's board of trustees authorized a 1.5
million share increase in the number of shares that the Company was authorized
to repurchase (the "Share Repurchase Program") bringing the total authorization
to 3.5 million shares. Following such authorization, the Company repurchased
1.5 million shares from an institutional owner at $19.00 per share which was
funded with borrowings under the Company's line of credit. Pursuant to the
Share Repurchase Program, the Company has purchased approximately 3.0 million
shares at an average price of $20.85 per share.
During the period, the Company issued 91,500 restricted shares of the
Company's common stock to various key employees as part of the Company's long-
term incentive plan to retain such employees. The restricted shares vest after
three years. An amount equal to the market price on the date of grant is
included as unearned compensation in the shareholders' equity section of the
Company's balance sheet. The unearned compensation is amortized quarterly as
compensation expense over the 3-year vesting period of the restricted share
grants.
7. Supplemental Disclosure of Non-Cash Activities
During the three months ended March 31, 2000, the Company declared cash
distributions totaling $18.3 million payable to holders of common shares,
Operating Partnership units and Series A Convertible Preferred Shares. The
distributions were paid April 14, 2000. In addition, a distribution totaling
$3.2 million in the aggregate was declared on March 15, 2000 payable to holders
of the Company's Series B Perpetual Preferred Units and Series C Perpetual
Preferred Units. The distribution was paid on April 3, 2000.
During the period, the Company sold a portion of its investment in Urban
Media Communications Corporation to certain key employees of the Company as part
of the Company's long-term incentive plan to retain such employees. In return
for the investment in Urban Media Communications Corporation, the Company
received, from each employee participating in the plan, an individual note
receivable. The individual note receivables from the employees total $462,500
in the aggregate.
Pursuant to the Company's long-term incentive plan, during the period, the
Company issued 91,500 restricted shares of the Company's stock to various key
employees of the Company. An amount equal to the market price of the shares on
the date of grant, $1.9 million, was recorded as unearned compensation in the
shareholders' equity section of the Company's balance sheet. The unearned
compensation is amortized quarterly as compensation expense over the three-year
vesting period.
8. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 133 was originally effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS No. 137 deferred the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. The impact of SFAS No. 133 will be dependent upon the extent of
derivative instruments held by the Company and the market for such instruments
as of the effective date of SFAS No. 133.
9. Segment Information
10
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company's primary business is the ownership and operation of Office
Properties and Industrial Properties throughout the United States. The Company
has determined that its reportable segments are those that are based on the
Company's method of internal reporting, which disaggregates its business by
geographic region. During the three month period ended March 31, 2000, the
Company consolidated the Southeast region into the operations of the Mid-
Atlantic region for reporting purposes. The Company's reportable segments are
the Company's five regions which include (1) Mid-Atlantic; (2) Midwest; (3)
Northeast; (4) Southwest; and (5) West.
The table below presents information about net income/loss and segment
assets used by the chief operating decision maker of the Company as of and for
the three months ended March 31, 2000 and March 31, 1999:
<TABLE>
2000
- ----
Corporate
Mid- Total Not Allocable Consolidated
(in thousands) Atlantic Midwest Northeast Southwest West Segments to Segments Total
-------- ------- --------- --------- ---- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 18,984 $ 19,289 $ 7,105 $ 19,481 $ 16,030 $ 80,889 $ 224 $ 81,113
======== ======== ======== ======== ======== ========== ======== ==========
Income (loss) before
extraordinary items $ 8,952 $ 10,872 $ 3,342 $ 7,580 $ 8,091 $ 38,837 $(21,890) $ 16,947
======== ======== ======== ======== ======== ========== ======== ==========
Assets $449,627 $412,994 $215,590 $472,307 $426,684 $1,977,202 $ 32,335 $2,009,537
======== ======== ======== ======== ======== ========== ======== ==========
1999
- ----
Corporate
Mid- Total Not Allocable Consolidated
(in thousands) Atlantic Midwest Northeast Southwest West Segments to Segments Total
-------- ------- --------- --------- ---- -------- ----------- -----
Revenues $ 17,219 $ 14,166 $ 6,369 $ 16,517 $ 16,935 $ 71,206 $ 186 $ 71,392
======== ======== ======== ======== ======== ========== ======== ==========
Income (loss) before
extraordinary items $ 8,326 $ 6,680 $ 3,518 $ 7,269 $ 8,509 $ 34,302 $(17,045) $ 17,257
======== ======== ======== ======== ======== ========== ======== ==========
Assets $445,344 $355,120 $201,607 $425,452 $442,567 $1,870,090 $ 34,350 $1,904,440
======== ======== ======== ======== ======== ========== ======== ==========
</TABLE>
11
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
10. Earnings per Share
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings per Share." SFAS No. 128 requires a dual presentation of basic and
diluted Earnings per Share on the face of the income statements. Additionally,
SFAS No. 128 requires a reconciliation of the numerator and denominator used in
computing basic and diluted Earnings per Share.
<TABLE>
<CAPTION>
Reconciliation of Earnings per Share Numerator Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
(in thousands, except per share data)
<S> <C> <C>
Net income............................................ $16,947 $17,257
Preferred dividends................................... (1,660) (1,509)
------- -------
Net income available to common shareholders........... $15,287 $15,748
======= =======
Reconciliation of Earnings per Share Denominator
Weighted average common shares outstanding............ 36,067 38,101
======= =======
Basic Earnings per Share.............................. $ 0.42 $ 0.41
======= =======
Dilutive Effect of Common Share Equivalents
Dilutive options...................................... 56 16
Dilutive preferred shares............................. /(A)/ 3,774
Weighted average common shares outstanding............ 36,067 38,101
------- -------
Weighted average common shares and common share
equivalents........................................ 36,123 41,891
======= =======
Diluted Earnings per Share............................ $ 0.42 $ 0.41
======= =======
</TABLE>
/(A)/Preferred shares for the quarter ended March 31, 2000 are excluded from the
calculation of Dilutive Earnings per Share as such shares are anti-dilutive for
the period.
11. Subsequent Events
On April 14, 2000, the Company completed a 3-year $23.3 million
construction loan. The borrowings under the loan bear interest at LIBOR plus
175 basis points per annum and are collateralized by the Barton Skyway II
Development Property.
On May 10, 2000, the Company's board of trustees approved a plan to
increase the regular quarterly dividend to $.485 per share beginning in the
second quarter, 2000.
12
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Prentiss Properties Trust is a Maryland Real Estate Investment Trust
("REIT") that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States. The REIT operates
principally through Prentiss Properties Acquisition Partners, L.P. and its
subsidiaries (the "Operating Partnership") and Prentiss Properties Limited, Inc.
(the "Manager" and together with the REIT and the Operating Partnership, the
"Company"). The Company is self-administered in that it provides its own
administrative services, such as accounting, tax and legal, internally through
its own employees. The Company is self-managed in that it internally provides
all the management and maintenance services that its properties require through
its own employees, such as property managers, leasing professionals and
engineers.
At December 31, 1999, the Company owned 199 properties consisting of 133
office and 66 industrial properties containing in the aggregate 19.8 million net
rentable square feet. During the three months ended March 31, 2000, the
Company: (i) took ownership of and concurrently sold an office building totaling
225,000 square feet in the Chicago area (ii) sold a 1.8 acre parcel of land that
was acquired in connection with the site acquisition for the Del Mar Gateway
development project; (iii) transitioned three properties, totaling 350,000
square feet, from development into operations; and (iv) began development of a
167,000 square foot office project in the Austin area. Inclusive of the
Company's development projects, at March 31, 2000, the Company owned 200
properties (the "Properties") totaling approximately 20.0 million net rentable
square feet.
Results of Operations
The results of operations for the three-month periods ended March 31, 2000
and 1999 include the respective operations of the Company.
General. In comparing the results of operations for the three months ended
March 31, 2000 to the three months ended March 31, 1999, the following should be
considered:
. 168 Properties that consolidated into the Company's results of
operations were owned and fully operational at January 1, 1999 and
remained in the Company's portfolio at March 31, 2000;
. 8 Properties, including the Broadmoor Austin Properties and the
Burnett Plaza Property, are accounted for using the equity method of
accounting;
. 6 Properties, including Burnett Plaza, were acquired subsequent to
January 1, 1999 and remained in the Company's portfolio at March 31,
2000;
. 45 properties were sold subsequent to January 1, 1999;
. 11 Properties that were developed by the Company became operational
subsequent to January 1, 1999 and remained in the portfolio at March
31, 2000; and
. 8 Properties were in various stages of development or in various
stages of lease-up at March 31, 2000.
During the three month period ended March 31, 2000, the Company
consolidated the Southeast region into the operations of the Mid-Atlantic region
for reporting purposes.
Comparison of the Three Months Ended March 31, 2000 to the Three Months Ended
March 31, 1999
Rental Revenue. Rental revenues increased by $9.5 million, or 13.4%, to
$80.4 million from $71.0 million primarily as a result of Properties acquired or
development Properties becoming operational subsequent to January 1, 1999,
offset by properties that were sold subsequent to January 1, 1999. Rental income
for the 168 Properties that were owned and fully operational at January 1, 1999
and remained in the Company's portfolio at March 31, 2000 increased by $2.3
million, or 3.6%, from $64.6 million for the three months ended March 31, 1999
to $66.9 million
13
<PAGE>
for the three months ended March 31, 2000. The increase for such 168 Properties
was attributable to the Company's five regions as follows:
. 31 Properties in the Mid-Atlantic Region increased $534,000, or 3.5%;
. 18 Properties in the Midwest Region increased $38,000, or .31%;
. 27 Properties in the Northeast Region decreased $8,000, or .12%;
. 30 Properties in the Southwest Region increased $1.0 million, or 6.3%;
and
. 62 Properties in the West Region increased $714,000, or 4.9%.
Property Operating and Maintenance. Property operating and maintenance
increased by $1.7 million, or 11.0%, to $17.8 million from $16.1 million
primarily as a result of Properties acquired or development Properties becoming
operational subsequent to January 1, 1999, offset by properties that were sold
subsequent to January 1999. Property operating and maintenance for the 168
Properties that were owned and fully operational at January 1, 1999 and remained
in the Company's portfolio at March 31, 2000 increased by $950,000, or 6.5%,
from $14.6 million for the three months ended March 31, 1999 to $15.6 million
for the three months ended March 31, 2000. The increase for such 168 Properties
was attributable to the Company's five regions as follows:
. 31 Properties in the Mid-Atlantic Region increased $178,000, or 5.0%;
. 18 Properties in the Midwest Region increased $183,000, or 7.5%;
. 27 Properties in the Northeast Region increased $167,000, or 14.7%;
. 30 Properties in the Southwest Region increased $53,000, or 1.2%; and
. 62 Properties in the West Region increased $368,000, or 12.2%.
Real Estate Taxes. Real estate taxes increased by $1.3 million, or 15.7%,
to $9.9 million from $8.6 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to January 1, 1999,
offset by properties that were sold subsequent to January 1, 1999. Real estate
taxes for the 168 Properties that were owned and fully operational at January 1,
1999 and remained in the Company's portfolio at March 31, 2000 decreased by
$98,000, or 1.2%, from $8.1 million for the three months ended March 31, 1999,
to $8.0 million for the three months ended March 31, 2000. The decrease for such
168 Properties was attributable to the Company's five regions as follows:
. 31 Properties in the Mid-Atlantic Region increased $34,000, or 2.8%;
. 18 Properties in the Midwest Region decreased $151,000, or 6.4%;
. 27 Properties in the Northeast Region increased $30,000, or 6.4%;
. 30 Properties in the Southwest Region decreased $8,000, or .30%; and
. 62 Properties in the West Region decreased $3,000, or .25%.
Interest Expense. Interest expense increased by $3.5 million, or 26.2%, to
$17.0 million from $13.5 million primarily as a result of the increase of the
debt on real estate from $800.3 million at January 1, 1999 to $954.0 million at
March 31, 2000. The increase in debt on real estate resulted primarily from
borrowings incurred for the repurchase by the Company of 3,099,336 common shares
and the Company's development and acquisition activity during the period, offset
by net proceeds received from the issuance of 2,000,000, $25 par value, Series C
Perpetual Preferred Units ("Series C Perpetual Preferred Units") and asset
dispositions during the period.
Depreciation and Amortization. Depreciation and amortization increased by
$2.7 million, or 22.2%, to $14.8 million from $12.1 million primarily as a
result of Properties acquired or development Properties becoming operational
subsequent to January 1, 1999, offset by properties that were sold subsequent to
January 1, 1999. Depreciation and amortization for the 168 Properties that were
owned and fully operational at January 1, 1999 and remained in the Company's
portfolio at March 31, 2000 increased by $1.2 million, or 11.2%, from $10.5
million for the three months ended March 31, 1999, to $11.7 million for the
three months ended March 31, 2000. The increase for such 168 Properties was
attributable to the Company's five regions as follows:
. 31 Properties in the Mid-Atlantic Region increased $239,000, or 8.8%;
14
<PAGE>
. 18 Properties in the Midwest Region decreased $11,000, or .65%;
. 27 Properties in the Northeast Region increased $103,000, or 9.4%;
. 30 Properties in the Southwest Region increased $600,000, or 22.1%;
and
. 62 Properties in the West Region increased $250,000, or 11.0%.
Equity in Income of Joint Ventures and Unconsolidated Subsidiary. Equity in
income of joint ventures and unconsolidated subsidiary decreased from $1.1
million for the three months ended March 31, 1999 to $949,000 for the three
months ended March 31, 2000. The net decrease was attributable to decreases of
$303,000 in the Company's proportionate share of net income from the Manager and
$18,000 in the Company's proportionate share of the net income from the
Broadmoor Austin Properties, offset by increases of $117,000 attributable to the
Company's proportionate share of the Burnett Plaza Property which was acquired
March 25, 1999 and $11,000 attributable to the Company's proportionate share of
the net income of the Oaklands 21/27 development Properties.
Gain on Sales. Gain on sales increased by $951,000, to $1.05 million from
$96,000. During the three months ended March 31, 1999, the Company sold a 12.6
acre parcel of land in the Chicago area. During the three months ended March 31,
2000, the Company sold a 225,000 square foot building in the Chicago area and a
1.8 acre parcel of land adjacent to the Company's Del Mar Gateway development
Property.
Minority Interests. Minority interests increased by $1.2 million, or 43.6%,
from $2.7 million for the three months ended March 31, 1999, to $3.9 million for
the three months ended March 31, 2000. The increase was primarily attributable
to the income allocation from the issuance by the Operating Partnership of
2,000,000, $25 par value, Series C Perpetual Preferred Units which were issued
in September 1999.
Liquidity and Capital Resources
Cash and cash equivalents were $12.2 million and $13.3 million at March 31,
2000 and March 31, 1999, respectively. The decrease in cash and cash equivalents
is primarily a result of cash flows used in investing activities exceeding those
provided by operating and financing activities. Net cash provided by operating
activities was $11.8 million for the three months ended March 31, 2000 compared
to $18.7 million for the three months ended March 31, 1999. The decrease is due
primarily to the net operating income generated in the first quarter of 1999
from Properties acquired in 1998 exceeding the net operating income in the first
quarter of 2000 from Properties acquired in 1999.
Net cash used in investing activities decreased from $35.1 million for the
three months ended March 31, 1999 to $22.6 million for the three months ended
March 31, 2000. This decrease is due primarily to a decrease in cash invested
in joint ventures and an increase in proceeds from the sale of real estate,
offset by an increase in the cash expended in the purchase of real estate.
Net cash provided by financing activities of $9.7 million for the three
months ended March 31, 2000 decreased from $28.0 million for the three months
ended March 31, 1999. This decrease is primarily attributable to a decrease in
net borrowings, an increase in cash expended for the purchase of treasury shares
and an increase in distributions paid during the period.
As of March 31, 2000, the Company had outstanding total indebtedness,
including its pro rata share of joint venture debt and construction loans of
approximately $1.0 billion, or approximately 49.3% of total market
capitalization based on a common share price of $22.3125 per common share. The
Company's policy is to limit combined indebtedness plus its pro rata share of
joint venture debt and construction loans so that at the time such debt is
incurred, it does not exceed 50% of the Company's total market capitalization.
As of March 31, 2000, the Company had the approximate capacity to borrow up to
an additional $31.2 million under the debt limitation. The amount of
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.
15
<PAGE>
The following table sets forth the Company's debt balance as of March 31,
2000:
<TABLE>
<CAPTION>
Current Interest
Description Balance Amortization Rate Maturity
- ----------- ------- ------------ -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Line of Credit $ 184,000 None LIBOR + 1.375% January 2, 2001
Executive Center Del Mar 13,267 None LIBOR + 1.350% December 19, 2001 /(11)/
Burnett Plaza/(1)/ 9,400 None 7.50% February 1, 2002
Bank Term Facility 100,000 None LIBOR + 1.375% October 13, 2002
Del Mar Gateway 3,073 None LIBOR + 1.750% March 21, 2003
Bachman West 2,964 25 yr. 8.63% December 1, 2003
Northeast Portfolio Loan/(2)/ 59,847 25 yr. 6.80% December 10, 2003
One Westchase Center 24,830 25 yr. 7.84% February 1, 2004
Crescent Centre 12,000 None 7.95% March 1, 2004
Bank Term Loan/(3)/ 72,500 None/(7)/ LIBOR + 1.625% September 30, 2004
Walnut Glen Tower 35,000 None/(8)/ 6.92% April 1, 2005
Highland Court 4,914 25 yr. 7.27% April 1, 2006
Oaklands Corporate Center/(4)/ 1,313 20 yr. 8.65% August 1, 2006
Westheimer Central Plaza 5,941 25 yr. 8.38% August 1, 2006
Creamery Way/(4)/ 3,691 20 yr. 8.30% September 19, 2006
PPREFI Portfolio Loan/(5)/ 180,100 None 7.58% February 26, 2007
Oaklands Corporate Center/(4)/ 6,276 25 yr. 8.55% July 1, 2007
Oaklands Corporate Center/(4)/ 2,646 25 yr. 8.40% November 1, 2007
Corporetum Office Campus 25,735 30 yr. 7.02% February 1, 2009
Natomas Corporate Center 37,613 30 yr. 7.02% February 1, 2009
7101 Wisconsin Avenue 21,309 30 yr. 7.25% April 1, 2009
2500 Cumberland Parkway 14,500 None/(9)/ 7.46% July 15, 2009
World Savings Center 29,425 30 yr. 7.91% November 1, 2010
Park West C2 35,225 30 yr. 6.63% November 10, 2010
One O'Hare Centre 41,726 30 yr. 6.80% January 10, 2011
3130 Fairview Park Drive Loan 23,302 30 yr. 7.00% April 1, 2011
Broadmoor Austin/(6)/ 77,000 None/(10)/ 7.04% April 10, 2011
Southpoint (III)/(4)/ 7,586 20 yr. 7.75% April 14, 2014
Other Corporate Debt 5,269 None 7.40% Various
----------
Total $1,040,452
==========
</TABLE>
/(1)/The Company, through the Operating Partnership, owns a 20% non-controlling
partnership interest in the entity that owns the Burnett Plaza Property,
which interest is accounted for using the equity method of accounting. The
amount shown reflects the Company's proportionate share of the mortgage
indebtedness collateralized by the Property.
/(2)/The Northeast Portfolio Loan is collateralized by the following 11
Properties: Valleybrooke (five Properties), Lake Center (two Properties),
certain of the Southpoint Properties (two Properties), and certain of the
Woodland Falls Properties (two Properties).
/(3)/The Bank Term Loan is collateralized by the following four Properties:
Willow Oaks I & II (two Properties), 8521 Leesburg Pike and Croton Road
Corporate Center.
/(4)/The mortgage loan is collateralized by certain of the Properties in the
respective office Property grouping.
/(5)/The PPREFI Portfolio Loan is collateralized by the following 36 Properties:
certain of the Los Angeles Industrial Properties (18 Properties), certain
of the Chicago Industrial Properties (four Properties), the Cottonwood
Office Properties (three Properties), Park West E1 and E2 (two Properties),
One Northwestern Plaza, 3141 Fairview Park Drive, 2455 Horsepen Road,
O'Hare Plaza II, 1717 Deerfield Road, 2411 Dulles Corner Road, 4401 Fair
Lakes Court, the WestPoint Office Building and the PacifiCare Building.
/(6)/The Company, through the Operating Partnership, owns a 50% non-controlling
partnership interest in the entity that owns the Broadmoor Austin
Properties, which interest is accounted for using the equity method of
accounting. The amount shown reflects the Company's proportionate share of
the mortgage indebtedness collateralized by the Properties.
/(7)/The loan, which was entered into in October 1999, has no principal
amortization during the first 24 months of the loan term. Principal and
interest are payable for the remaining loan term based on a 25-year
amortization.
/(8)/The loan, which was entered into in March 1998, has no principal
amortization during the first 24 months of the loan term. Principal and
interest are payable for the remaining loan term based on a 30-year
amortization.
/(9)/The loan, which was entered into in May 1999, has no principal amortization
during the first 58 months of the loan term. Principal and interest are
payable for the remaining loan term based on a 30-year amortization.
16
<PAGE>
/(10)/The loan, which was entered into in March 1998, has no principal
amortization during the first 36 months of the loan term. Principal and
interest are payable for the remaining loan term based on a 16.25-year
amortization.
/(11)/December 19, 2001 represents a maturity date based on the Company's
anticipated execution of its option to extend the term of the loan one
year beyond the original maturity date of December 19, 2000.
In September 1997, the Company entered into a seven-year interest rate swap
locking in cost of funds of 6.25% (before the spread over LIBOR) on $110
million. In June 1999, the Company entered into a four-year interest rate swap
locking in cost of funds of 6.16% (before the spread over LIBOR) on $50 million
(collectively, the "Interest Rate Swaps"). The Interest Rate Swaps consist of
four separate agreements intended to manage the relative mix of the Company's
debt between fixed and variable rate instruments. The Interest Rate Swaps
modify a portion of the interest characteristics of the Company's variable rate
debt effectively converting in the aggregate, $160.0 million of variable rate
debt to fixed rate debt. The fixed rates to be paid, the effective fixed rate
and the variable rate to be received by the Company, are summarized in the
following table:
<TABLE>
<CAPTION>
Swap Rate Received
Swap Rate Paid Effective Fixed (Variable) at
Notional Amount (Fixed) Rate March 31, 2000 Swap Maturity
--------------- ------- ---- -------------- -------------
<S> <C> <C> <C> <C>
$20 million 6.155% 7.780% 6.133% June 2, 2003
$30 million 6.155% 7.780% 6.133% June 2, 2003
$50 million 6.253% 7.628% 6.133% September 30, 2004
$60 million 6.248% 7.623% 6.133% September 30, 2004
</TABLE>
The differences to be paid or received by the Company under the terms of
the Interest Rate Swaps are accrued as interest rates change and recognized as
an adjustment to interest expense by the Company pursuant to the terms of the
agreements and will have a corresponding effect on its future cash flows.
Agreements such as these contain a credit risk that the counterparties may be
unable to meet the terms of the agreement. The Company minimizes that risk by
evaluating the creditworthiness of its counterparties, which is limited to major
banks and financial institutions, and does not anticipate non-performance by the
counterparties.
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
Internal Revenue 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 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 through
the issuance of additional debt and equity securities. 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 service business.
The Company has in place a $300 million unsecured line of credit with a
group of 12 banks (the "Line of Credit"). The Line of Credit has an interest
rate on borrowings of LIBOR plus 137.5 basis points. The Line of Credit is
unsecured and matures on January 2, 2001. Additionally, the Company is required
to pay an average daily unused commitment fee of 20 basis points per annum if
the daily unused portion of the Line of Credit is greater than the related daily
balance outstanding. The fee is reduced to 15 basis points per annum if the
daily-unused portion is less than the daily balance outstanding. The Company had
net borrowings from the Line of Credit during the period
17
<PAGE>
of $55.0 million and an outstanding balance of $184.0 million at March 31, 2000,
resulting in an available balance of $116.0 million.
The Company's Properties require periodic investments of capital for
tenant-related capital expenditures and for general capital improvements. For
the three months ended March 31, 2000, the Company's recurring non-incremental
revenue-generating capital expenditures totaled $4.5 million. The Company's
recurring non-incremental revenue-generating capital expenditures were
attributable to the Company's five regions as follows: (1) Mid-Atlantic-$1.2
million; (2) Midwest-$760,000; (3) Northeast-$513,000; (4) Southwest-$1.2
million; and (5) West-$817,000.
Funds from Operations
"Funds from Operations" as defined by the National Association of Real
Estate Investment Trusts ("NAREIT"), means net income, computed in accordance
with generally accepted accounting principles ("GAAP") excluding extraordinary
items (as defined by GAAP) and gains (or losses) from sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that Funds from
Operations is helpful to investors as a measure of the performance of an equity
REIT because, along with cash flow from operating activities, financing and
investing activities, it provides investors with an indication of the ability of
the Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company's Funds from Operations is not comparable to
Funds from Operations reported by other REITs that do not define that term using
the current NAREIT definition. The Company believes that in order to facilitate
a clear understanding of its operating results, Funds from Operations should be
examined in conjunction with net income as presented in the Consolidated
Financial Statements of the Company. 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.
<TABLE>
<CAPTION>
(in thousands) Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
--------------------- ---------------------
Funds from Operations
<S> <C> <C>
Net income............................................... $16,947 $17,257
Add:
Real estate depreciation and amortization............... 14,815 12,135
Real estate depreciation and amortization of............
unconsolidated joint ventures.......................... 676 532
Minority interests/(1)/................................. 3,865 2,686
Less:
Gain on sales of property............................... (1,047) (96)
Dividend on perpetual preferred units................... (3,153) (1,971)
------- -------
Funds from Operations.................................... $32,103 $30,543
======= =======
</TABLE>
/(1)/ Represents the minority interest applicable to the common and
preferred unit holders of the Operating Partnership.
Funds from Operations increased by $1.6 million for the three months ended
March 31, 2000 from the three months ended March 31, 1999, as a result of the
factors discussed in the analysis of operating results.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 133 was originally effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS No. 137 deferred the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. The
18
<PAGE>
impact of SFAS No. 133 will be dependent upon the extent of
derivative instruments held by the Company and the market for such instruments
as of the effective date of SFAS No. 133.
Potential Changes in Law Regarding Ownership of Subsidiaries
At any time, future legislation or administrative or judicial decisions or
actions could affect our tax treatment or qualification as a REIT. The REIT
Modernization Act ("RMA"), signed into law in late 1999 and effective for 2001
and later years, contains several provisions affecting REITs. Currently, a REIT
may not hold more than 10% of the voting stock of another company. Under RMA,
this limitation is expanded to include 10% of the value of another company's
securities, with these exceptions: (1) subsidiary's stock held by the REIT on
July 12, 1999; (2) straight debt; and (3) stock of a taxable REIT subsidiary (as
defined below). Thus, the Manager's stock should be grandfathered.
RMA allows a REIT subsidiary to perform services for REIT tenants without
disqualifying the rents received (as under current law). These subsidiaries
called taxable REIT subsidiaries ("TRS"), will be subject to taxation and will
be limited in the amount of debt and rental and other payments between the REIT
and the TRS. Existing subsidiaries, such as the Manager, will be grandfathered
in a one-time tax-free conversion as TRS. They will not be subject to these
limitations, unless engaging in a new line of business or increasing assets. If
either of these events occurs, new restrictions on debt and rental payments will
apply to these entities as well. It is anticipated that any new lines of
business will be conducted in a new TRS, therefore not negatively impacting the
Manager.
Under the new law, the fair market value of all TRS securities cannot
exceed 20% of the REIT's fair market value. At this time, the Company does not
believe its investments in all future TRS will exceed 20% of the value of the
Company. The RMA returns the REIT distribution requirement to 90% from 95%,
putting REITs back in line with mutual fund distribution requirements. It is
unclear at this time what impact this change will have on future dividends made
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 month to 18 years, further reducing the impact on the
Company of the adverse effects of inflation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposure is to changes in interest rates
as a result of its Line of Credit and long-term debt. At March 31, 2000, the
Company had outstanding total indebtedness, including its pro rata share of
joint venture debt and construction loans of approximately $1.0 billion, or
approximately 49.3% of total market capitalization. The Company's interest rate
risk objective is to limit the impact of interest rate fluctuations on earnings
and cash flows and to lower its overall borrowing costs. To achieve this
objective, the Company manages its exposure to fluctuations in market interest
rates for its borrowings through the use of fixed rate debt instruments to the
extent that reasonably favorable rates are obtainable with such arrangements and
may enter into derivative financial instruments such as interest rate swaps,
caps and treasury locks to mitigate its interest rate risk on a related
financial instrument or to effectively lock the interest rate on a portion of
its variable debt. The Company does not enter into derivative or interest rate
transactions for speculative purposes. Approximately 63.7% of the Company's
outstanding debt was subject to fixed rates with a weighted average interest
rate of 7.29% at March 31, 2000. An additional $160.0 million, or 15.4%, of the
Company's outstanding debt at March 31, 2000 was effectively locked at an
interest rate (before the spread over LIBOR) of 6.22% through its Interest Rate
Swap agreements. The Company regularly reviews interest rate exposure on its
outstanding borrowings in an effort to minimize the risk of interest rate
fluctuations.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including Interest
Rate Swaps and debt obligations. For debt obligations outstanding at March 31,
2000, the table presents principal cash flows and related weighted average
interest rates by expected maturity dates including the Company's pro rata share
of joint venture debt totaling $86.4 million. For Interest Rate
19
<PAGE>
Swaps, the table presents notional amounts and weighted average interest rates
by expected contractual maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve as of March
31, 2000. The fair value of the Company's fixed rate debt indicates the
estimated principal amount of debt having similar debt service requirements,
which could have been borrowed by the Company at March 31, 2000. The rate
assumed in the fair value calculation of fixed rate debt is equal to 8.03% which
consist of the 7-year treasury equal to 6.28% at March 31, 2000 plus 175 basis
points. The fair value of the Company's variable to fixed Interest Rate Swaps
indicates the estimated amount that would have been received by the Company had
they been sold at March 31, 2000.
<TABLE>
<CAPTION>
Expected Maturity Date
(in thousands)
-----------------------------------------------------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------ -------- -------- ------- -------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-Term Debt:
Fixed Rate $3,649 $ 7,187 $ 17,888 $67,814 $ 43,073 $522,732 $662,343 $634,793
Average Interest 7.29% 7.29% 7.28% 7.29% 7.30% 7.20%
Rate
Variable Rate 4,033 198,606 100,591 3,712 71,167 378,109 378,109
Average Interest 7.57% 7.61% 7.59% 7.76% 7.76%
Rate
Interest Rate Derivatives
Interest Rate Swaps:
Variable to Fixed $50,000 $110,000 $160,000 $ 4,345
Avg. Pay Rate 6.22% 6.22% 6.22% 6.23% 6.25% 6.25%
Avg. Receive Rate 6.13% 6.13% 6.13% 6.13% 6.13% 6.13%
</TABLE>
The table incorporates only those exposures that exist as of March 31, 2000
and does not consider exposures or positions which could arise after that date.
In addition, because firm commitments are not represented in the table above,
the information presented therein has limited predictive value. As a result,
the Company's ultimate realized gain or loss with respect to interest rate
fluctuations will depend on the exposures that arise during the future period,
prevailing interest rates, and the Company's hedging strategies at that time.
There is inherent rollover risk for borrowings as they mature and are renewed at
current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's financing requirements.
20
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Mortgages and Notes Payable
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 -- Form of Amended and Restated Declaration of Trust of
the Registrant (filed as Exhibit 3.1 to the Company's
Registration Statement on Amendment No. 1 of Form S-11,
File No. 333-09863, and incorporated by reference herein).
3.2 -- Bylaws of the Registrant (filed as Exhibit 3.2 to the
Company's Registration Statement on Amendment No. 1 of
Form S-11, File No. 333-09863, and incorporated by
reference herein).
3.3 -- Articles Supplementary, dated December 18, 1997,
Classifying and Designating a Series of Preferred Shares
of Beneficial Interest as Series A Cumulative Convertible
Redeemable Preferred Shares of Beneficial Interest and
Fixing Distribution and Other Preferences and Rights of
Such Shares (filed as Exhibit 3.1 to the Company's Current
Report on Form 8-K, filed January 15, 1998, SEC File No.
001-14516).
3.4 -- Articles Supplementary, dated February 17, 1998,
Classifying and Designating a Series of Preferred Shares
of Beneficial Interest as Junior Participating Cumulative
Convertible Redeemable Preferred Shares of Beneficial
Interest, Series B, and Fixing Distribution and Other
Preferences and Rights of Such Shares (filed as an Exhibit
to the Company's Registration Statement on Form 8-A filed
on February 17, 1998, SEC File No. 000-23813).
3.5 -- Articles Supplementary, dated June 25, 1998,
Classifying and Designating a Series of Preferred Shares
of Beneficial Interest as Series B Cumulative Redeemable
Perpetual Preferred Shares of Beneficial Interest and
Fixing Distribution and Other Preferences and Rights of
Such Shares (filed as an exhibit to the Company's Form 10-
Q filed on August 12, 1998).
3.6 -- Articles Supplementary, dated September 17, 1999,
Classifying and Designating a Series of Preferred Shares
of Beneficial Interest as Series C Cumulative Redeemable
Perpetual Preferred Shares of Beneficial Interest and
Fixing Distribution and other Preferences and Rights of
Such Shares (filed as Exhibit 3.6 to the Company's Report
on Form 10-Q, filed November 11, 1999).
21
<PAGE>
4.1 -- Form of Common Share Certificate (filed as Exhibit 4.1
to the Company's Registration Statement on Amendment No. 1
of Form S- 11, File No. 333-09863, and incorporated by
reference herein).
4.2 -- Rights Agreement, dated February 6, 1998, between the
Company and First Chicago Trust Company of New York, as
Rights Agent (filed as an Exhibit 4.1 to the Company's
Registration Statement on Form 8-A filed on February 17,
1998, File No.(000-23813).
4.3 -- Form of Rights Certificate (included as Exhibit A to
the Rights Agreement (Exhibit 4.2).
4.4 -- Form of Series A Preferred Share Certificate (filed as
Exhibit 4.2 to the Company's Registration Statement on
Form S-3, file No. 333-65793, filed on October 16, 1998)
27.1* -- Financial Data Schedule.
----- ---------------------------
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K for or during the
period January 1, 2000 through March 31, 2000.
22
<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: May 10, 2000 By: /s/ Thomas P. Simon
---------------------------------------
Thomas P. Simon
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized
Officer of the Company)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS OF THE COMPANY AS OF MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999,
STATEMENTS OF INCOME FOR THE PERIODS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-1-2000 JAN-1-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 12,210 13,313
<SECURITIES> 0 0
<RECEIVABLES> 33,130 31,167
<ALLOWANCES> 2,634 2,890
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,913,562 1,898,482
<DEPRECIATION> 101,637 91,461
<TOTAL-ASSETS> 2,009,537 1,994,663
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
100,000 100,000
<COMMON> 402 401
<OTHER-SE> 702,037 731,092
<TOTAL-LIABILITY-AND-EQUITY> 2,009,537 1,994,663
<SALES> 0 0
<TOTAL-REVENUES> 81,113 71,392
<CGS> 0 0
<TOTAL-COSTS> 62,257 52,653
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 17,026 13,494
<INCOME-PRETAX> 16,947 17,257
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 16,947 17,257
<EPS-BASIC> .42 .41
<EPS-DILUTED> .42 .41
</TABLE>
