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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______
Commission File Number 0-21849
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METROPOLIS REALTY TRUST, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 13-3910684
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
c/o Victor Capital Group
605 Third Avenue
26th Floor
New York, New York 10016
(Address of principal executive offices, including zip code)
(212) 655-0220
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
710748.2
<PAGE>
The Common Stock is not listed on any exchange, the Company does not intend to
list the Common Stock on any exchange in the near term, there is not currently a
public market for the Common Stock and there can be no assurance that an active
trading market for the Common Stock will develop or be sustained.
As of April 30, 1998, there were issued and outstanding 7,990,586 shares of the
Company's Class A Common Stock, par value $10.00 per share; 4,936,060 shares of
the Company's Class B Common Stock, par value $10.00 per share; and 40,000
shares of the Company's Class C Common Stock, par value $10.00 per share.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, which
involve certain risks and uncertainties. The Company's actual results or
outcomes may differ materially from those anticipated. Each forward-looking
statement that the Company believes is material is accompanied by a cautionary
statement or statements identifying important factors that could cause actual
results to differ materially from those described in the forward-looking
statement. The cautionary statements are set forth following the forward-looking
statement, and/or elsewhere in this Form 10-Q and the Company's other documents
filed with the Securities and Exchange Commission, whether or not such documents
are incorporated herein by reference. In assessing the forward-looking
statements contained in this Form 10-Q, readers are urged to read carefully all
cautionary statements.
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710748.2
<PAGE>
METROPOLIS REALTY TRUST, INC.
INDEX PAGE
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PART I--FINANCIAL INFORMATION
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ITEM 1. Financial Statements
The accompanying unaudited, interim financial
statements have been prepared in accordance
with the instructions to Form 10-Q. In the
opinion of management, all adjustments
necessary for a fair presentation have been
included.
Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997 (audited) 1
Consolidated Statements of Income for the quarters
ended March 31, 1998 and 1997 (unaudited) 2
Consolidated Statements of Cash Flows for the
quarters ended March 31, 1998 and 1997 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
ITEM 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 13
PART II--OTHER INFORMATION
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ITEM 1. Legal Proceedings 14
ITEM 2. Changes in Securities 14
ITEM 3. Defaults Upon Senior Securities 14
ITEM 4. Submission of Matters to a Vote of Security Holders 14
ITEM 5. Other Information 14
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES S-1
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iii
710748.2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
METROPOLIS REALTY TRUST, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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<S> <C> <C>
March 31, 1998 December 31, 1997
(Unaudited) (Audited)
----------- ---------
ASSETS
Rental property - net of accumulated depreciation of $648,247 $649,107
$19,595 and $16,165, respectively
Cash and cash equivalents 28,609 24,627
Escrow deposits 10,317 2,909
Tenants' security deposits 627 640
Due from tenants - net of allowance for doubtful accounts 3,335 3,005
of $2,730 and $2,745, respectively
Deferred financing costs - net of amortization of 7,700 8,247
$3,225 and $2,678, respectively
Real estate tax refunds 14,088 14,088
Notes receivable - net of unamortized discount of 9,152 9,101
$363 and $420, respectively
Deferred rent receivable 29,236 26,855
Prepaid real estate taxes 6,787 13,575
Deferred leasing costs, net of accumulated amortization of 5,296 5,266
$201 and $110, respectively
Other assets 391 512
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TOTAL ASSETS $763,785 $757,932
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Secured notes $416,250 $418,125
Accounts payable and accrued expenses 14,558 16,968
Tenants' security deposits and unearned revenue 2,791 2,009
Dividends payable 6,483 --
-------- --------
Total Liabilities 440,082 437,102
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Subordinated Minority Interest 14,855 14,855
-------- --------
Stockholders' Equity
Common Stock - $10 par value 129,666 129,666
(Class A - outstanding - 7,990,586 shares;
Class B - outstanding - 4,936,060 shares; and
Class C - outstanding - 40,000 shares)
Paid-in capital 175,736 175,736
Retained earnings 3,446 573
-------- --------
Total Stockholders' Equity 308,848 305,975
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $763,785 $757,932
======== ========
See notes to consolidated financial statements.
</TABLE>
1
<PAGE>
METROPOLIS REALTY TRUST, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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<S> <C> <C>
Quarter Ended March 31,
1998 1997
---- ----
REVENUES:
Base rental income $29,400 $28,261
Escalation income 3,431 3,461
Miscellaneous income 483 272
Interest income 641 828
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Total revenues 33,955 32,822
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OPERATING EXPENSES:
Real estate taxes 6,792 6,683
Operating and maintenance 1,929 1,904
Utilities 1,330 1,576
Payroll 1,128 1,174
General and administrative 411 563
Management fees 588 396
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Total operating expenses 12,178 12,296
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OTHER ITEMS:
Interest expense (8,346) (8,386)
Depreciation and amortization (4,075) (3,844)
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Total other items (12,421) (12,230)
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NET INCOME $ 9,356 $ 8,296
======= =======
NET INCOME PER COMMON SHARE:
Net Income $0.72 $0.64
===== =====
Weighted Average Common Shares Outstanding 12,966,646 12,963,046
========== ==========
NET INCOME PER COMMON SHARE (assuming
dilution):
Net Income $0.72 $0.64
===== =====
Weighted Average Common Shares Outstanding 12,991,646 12,990,046
========== ==========
(including 25,000 and 27,000 shares of Common Stock
issuable upon the exercise of outstanding options as of
March 31, 1998 and 1997, respectively)
See notes to consolidated financial statements.
</TABLE>
2
710748.2
<PAGE>
METROPOLIS REALTY TRUST, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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<S> <C> <C>
Quarter Ended March 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,356 $ 8,296
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,075 3,844
Amortization of discount - notes receivable (132) (122)
Change in:
Increase in escrow deposits (7,408) (5,743)
(Increase)/Decrease in due from tenants (330) 725
Decrease in prepaid expenses and other assets 6,902 6,951
Increase in deferred rent receivable (2,381) (7,087)
Decrease in accounts payable and accrued expenses (2,410) (1,035)
Increase in unearned revenue 795 891
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Net cash provided by operating activities 8,467 6,720
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to building and equipment (2,570) (211)
Additions to leasing costs (122) (41)
Collections on notes receivable 82 74
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Net cash used in investing activities (2,610) (178)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on secured notes (1,875) --
Dividends paid -- (6,481)
Net cash used in financing activities (1,875) (6,481)
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INCREASE IN CASH AND CASH EQUIVALENTS 3,982 61
CASH AND CASH EQUIVALENTS, BEGINNING OF 24,627 42,215
-------- -------
PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD $28,609 $42,276
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during period $ 8,429 $ 8,200
======== ========
Dividends declared $ 6,483 $ 3,241
======== ========
See notes to consolidated financial statements.
</TABLE>
3
710748.2
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share information)
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1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization - Metropolis Realty Trust, Inc., a Maryland corporation
("Metropolis" or the "Company"), was formed on May 13, 1996 to facilitate
the consummation of the Second Amended Joint Plan of Reorganization of 237
Park Avenue Associates, L.L.C. ("237 LLC") and 1290 Associates, L.L.C.
("1290 LLC" and, together with 237 LLC, the "Predecessors"), dated
September 20, 1996 (the "Plan"). Pursuant to the Plan, on October 10,
1996, the date operations commenced ("Effective Date"), the Company
acquired the interests of 237 LLC and 1290 LLC in the properties located
at 237 Park Avenue (the "237 Property") and 1290 Avenue of the Americas
(the "1290 Property," and together with the 237 Property, the
"Properties"). The Predecessors were two of the many companies,
partnerships and joint ventures that collectively constituted the United
States operations of the Olympia & York group of companies.
The Company owns a 95% interest, as general partner, and .05% interest, as
limited partner (through its 1% general partnership interest in Upper Tier
Associates, L.P.), in 237/1290 Lower Tier Associates, L.P., a Delaware
limited partnership (the "Lower Tier Limited Partnership") which owns a
99% partnership interest, as limited partner in each of 237 Park Partners,
L.P., a Delaware limited partnership, and 1290 Partners, L.P., a Delaware
limited partnership (together with the 237 Park Partners L.P., the
"Property Owning Partnerships"). The Property Owning Partnerships were
formed to own the Properties. The remaining 1% general partnership
interest in each of the Property Owning Partnerships is owned by 237 GP
Corp. and 1290 GP Corp. (the "GP Corps") which are wholly-owned
subsidiaries of the Company.
Basis of Presentation - The consolidated balance sheets include
Metropolis, the Lower Tier Limited Partnership, the GP Corps and each of
the Property Owning Partnerships.
The presentation of the consolidated balance sheets requires estimates and
assumptions that affect the reported amounts of assets and liabilities at
the balance sheet date. Actual results could differ from those estimates.
Rental Property - Rental property is carried at cost, net of accumulated
depreciation and amortization, and includes land, building, tenant
improvements and building improvements. Land is valued at $134,518 as of
March 31, 1998 and 1997 and building, tenant improvements and building
improvements are carried at $534,649 and $524,301 as of March 31, 1998 and
1997, respectively. In accordance with SFAS No. 121, impairment of
property is determined to exist when estimated amounts recoverable through
future operations and sale of property on an undiscounted basis are below
that property's carrying value. If a property is determined to be
impaired, it must be written down to its estimated fair value. Fair value
is defined as the amount for which the asset could be bought or sold in a
current transaction, that is, other than a forced or liquidation sale.
Cash and Cash Equivalents - Cash and cash equivalents includes investments
purchased with an original maturity of three months or less.
Depreciation and Amortization - Building and building improvements are
depreciated over their useful lives of 40 years. Furniture and fixtures
are depreciated over their useful lives, ranging from 5 to 7 years. Tenant
improvements are amortized on a straight-line basis over the terms of the
respective leases.
4
710748.2
<PAGE>
Deferred Charges - Deferred financing costs are amortized over the term of
the related loan. Deferred costs related to leasing are amortized over the
related lease term on a straight-line basis.
Rental Income - Rental income is recognized on a straight-line basis over
the terms of the related leases. Differences between actual base amounts
due from tenant leases and the straight-line basis are included in
deferred rent receivable.
Escrow Deposits - Escrow deposits include reserves for certain claims made
in conjunction with the Plan and escrow deposits for tenant improvements,
insurance and real estate taxes.
Income Taxes - The Company qualifies as a REIT under the Internal Revenue
Code, as amended, and will generally not be taxed at the corporate level
on income it currently distributes to its stockholders so long as it,
among other things, distributes at least 95% of its REIT taxable income.
Amounts Per Share - In 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share (SFAS 128). SFAS 128 replaced
the calculation of primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented to conform to the
requirements of SFAS 128.
2. REAL ESTATE TAX REFUNDS
Real estate tax refunds represent real estate tax proceeds expected to be
recovered by the Company as a result of real estate tax certiorari
proceedings commenced by the Predecessors, net of any fees and expenses
incurred to collect such proceeds (the "Tax Proceeds"). The Company has
reserved approximately $6,414 for tenant claims against the Tax Proceeds.
This reserve is included in accounts payable and accrued expenses on the
accompanying balance sheets.
3. NOTES RECEIVABLE
Included in Notes Receivable is the estimated fair value of two tenant
notes aggregating approximately $9,152. The first note, dated April 1,
1989 with a face amount of $6,500 and a maturity date of September 1,
1999, is carried at $5,313, based on certain payment terms net of
unamortized discount. Such payment terms include a stated interest rate of
10%. In 1991 and 1992, the tenant claimed certain concessions regarding
the payment terms of such note. Without the Company expressing an opinion
with regard thereto, if such concessions were granted, the note would bear
interest at 7.5% per annum and would require level monthly payments of
interest and principal of $75. The second note, dated August 20, 1985,
with a face value of $4,355, is carried at $3,838, net of unamortized
discount. The second note does not bear interest and is payable on October
31, 1999.
4. SECURED NOTES
Secured Notes consist of promissory notes ("Loan") issued by the Property
Owning Partnerships in the original principal amount of $420,000 pursuant
to a Credit Agreement ("Agreement") among the Property Owning
Partnerships, the lenders as signatories thereto in the Agreement and the
lead lender. Of the aggregate original principal amount of the loan,
$250,000 of the Loan is allocated to the 1290 Property and $170,000 is
allocated to the 237 Property. The Loan is cross-collateralized by the
Properties. The Loan will terminate on October 10, 2001 unless sooner
terminated by the occurrence of an Event of Default as defined in the
Agreement. The Loan requires the Property Owning Partnerships to make
interest only payments through October 7, 1997 and then make principal
payments of $1,875, $7,500, $8,125, $11,250 and $11,250 in each of 1997,
1998, 1999,
5
710748.2
<PAGE>
2000 and 2001, respectively. Scheduled principal payments of $625 were
made each month since October 7, 1997. If any such scheduled principal
payments would cause the Company to fail to comply with any income test
requirements necessary for the Company to maintain its status as a REIT,
then the Property Owning Partnerships may, in lieu of such principal
payment, post an irrevocable letter of credit in the amount of such
payment. The Property Owning Partnerships have entered into lock box
agreements for the collection of rents and have established escrow
accounts for real estate taxes and insurance.
The Property Owning Partnerships and the lead lender entered into an
Interest Rate Exchange Agreement effective October 10, 1996 (the "Swap
Agreement"). The Swap Agreement has a term of 5 years and provides that
the Property Owning Partnerships will pay interest at an effective rate of
7.987% per annum on the notional amount of $420,000. Management believes
the risk of incurring losses related to the credit risk is remote and any
losses would be immaterial.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include funded reserves held by the
Company for utility tax claims, certain claims related to the Plan, tenant
claims against Tax Proceeds and property operating expenses payable. The
utility tax claims include approximately $2,422 of claims pertaining to a
property owned by an affiliate of the Predecessors which was disposed of
prior to October 10, 1996.
6. SUBORDINATED MINORITY INTEREST
The Subordinated Minority Interest represents 4.95% of the net
reorganization value of the Lower Tier Limited Partnership, reflecting the
99% limited partnership interest of JMB/NYC Office Building Associates,
L.P. ("JMB LP") in the limited partnership (the "Upper Tier Limited
Partnership") which owns a subordinated 5% limited partnership interest in
the Lower Tier Limited Partnership (the "Subordinated Minority Interest").
Management believes, however, that no economic obligation exists to JMB LP
as of March 31, 1998 and, that, pursuant to the distribution priorities
set forth in the limited partnership agreement of the Lower Tier Limited
Partnership (the "Lower Tier Limited Partnership Agreement"), unless the
Company's Properties were sold for an amount significantly in excess of
the net reorganization value, JMB LP would only be entitled to receive
approximately $450 in respect of the Subordinated Minority Interest.
Pursuant to the Lower Tier Limited Partnership Agreement, JMB LP would be
entitled to distributions only after the Company has received certain
priority distributions as more fully described below. As of March 31, 1998
the Company, as general partner of the Lower Tier Limited Partnership, is
entitled to receive $400,000 and a 12% cumulative compounded return (from
October 10, 1996) on such amount (net of distributions) from the Lower
Tier Limited Partnership, before any distributions are made in respect of
the Subordinated Minority Interest.
The Upper Tier Limited Partnership has the right to require the Company to
acquire the Subordinated Minority Interest at a price based upon a
multiple of the net operating income of the Properties for the immediately
preceding calendar year reduced by the debt encumbering the Properties and
any priority distributions to which the Company is entitled as general
partner of the Lower Tier Limited Partnership. As of March 31, 1998, no
significant economic obligation exists based upon such formula.
The Lower Tier Limited Partnership Agreement provides that the aggregate
Available Cash (as defined in the Lower Tier Limited Partnership
Agreement), from distributions from the Property Owning Partnerships will
be distributed no less frequently than quarterly to the partners of the
Lower Tier Limited Partnership as follows:
(i) 100% to the Company, as general partner, until it has received,
together with all prior distributions pursuant to this clause and
clauses (i) and (iv) of the succeeding paragraph,
6
710748.2
<PAGE>
aggregate distributions equal to a cumulative compounded return,
commencing on October 10, 1996 (or with respect to capital
contributions made after October 10, 1996, the date of such capital
contributions), of 12% per annum on the sum of (x) $280,000, (y) any
additional capital contributions made by the Company, as general
partner, to the Lower Tier Limited Partnership ($20,000 as of March
31, 1998), and (z) a $100,000 preference amount (the "Preference
Amount") (the amounts in (x), (y) and (z), as reduced by
distributions in respect of such amounts, referred to herein as the
"Adjusted GP Contribution");
(ii) 100% to the Company, as general partner, until it has received
in total, taking into account distributions made to it from Available
Cash and sale or refinancing proceeds, the Adjusted GP Contribution;
and
(iii) the balance, 95% to the Company, as general partner, and 5% to
the Upper Tier Limited Partnership, as limited partner.
The Lower Tier Limited Partnership Agreement also provides that net
proceeds from any distributions from the Property Owning Partnerships
related to any sale, refinancing, condemnation or insurance recovery of
the Properties or any loan made to the Partnership will be distributed by
the Lower Tier Limited Partnership to its partners as follows:
(i) 100% to the Company, as general partner, until it has received,
together with all prior distributions pursuant to this clause (i) and
clause (i) of the immediately preceding paragraph, aggregate
distributions equal to the product of (x) 0.5 and (y) a 12% per annum
cumulative compounded return on the Adjusted GP Contribution from
October 10, 1996 (or with respect to capital contributions made after
October 10, 1996, the date of such capital contributions);
(ii) 100% to the Company, as general partner, until it has received,
together with all prior distributions pursuant to this clause (ii)
and clause (ii) of the immediately preceding paragraph, aggregate
distributions equal to the product of (x) .75 and (y) the Adjusted GP
Contribution;
(iii) from the next $500, 90% (i.e., $450) to the Upper Tier Limited
Partnership, as limited partner, and 10% to the Company, as general
partner;
(iv) 100% to the Company, as general partner, until it has received,
together with all prior distributions pursuant to this clause (iv),
clause (i) of this paragraph and clause (i) of the immediately
preceding paragraph, a 12% per annum cumulative compounded return on
the Adjusted GP Contribution commencing with respect to each capital
contribution, on the date such Capital Contribution was made;
(v) 100% to the Company, as general partner, until it has received,
together with all prior distributions pursuant to this clause (v),
clause (ii) of this paragraph and clause (ii) of the immediately
preceding paragraph, aggregate distributions equal to the Adjusted GP
Contribution; and
(vi) 95% to the Company, as general partner, and 5% to the Upper Tier
Limited Partnership, as limited partner.
7. STOCKHOLDERS' EQUITY
The Company has the authority to issue 50,000,000 shares of common stock,
par value $10 per share (the "Common Stock"), and 10,000,000 shares of
Preferred Stock, par value $10 per share. Stockholders' equity consists of
12,966,646 shares of Common Stock issued and outstanding. Of the
12,966,646 shares issued and outstanding, 7,990,586 represent shares of
Class A Common Stock, 4,936,060 represent shares of Class B Common Stock,
and 40,000 represent shares of Class
7
710748.2
<PAGE>
C Common Stock which were issued to affiliates of the Company's Asset
Manager. Of the 7,990,586 shares of Class A Common Stock issued and
outstanding, approximately 923,077 were issued as part of a subscription
rights offering under the Plan. 12,962,046 shares were issued on the
Effective Date pursuant to the Plan, 1,000 were subsequently distributed,
and 3,600 were issued to the members of the Board of Directors as part of
their annual compensation. The Class A Common Stock, the Class B Common
Stock and the Class C Common Stock have identical rights and privileges,
and are treated as a single class, with respect to all matters (other than
certain voting rights) including, without limitation, the payment of
dividends and distributions upon liquidation.
On January 20, 1997, the Company made a special distribution of $.50 per
share of Common Stock to shareholders of record on December 31, 1996.
On April 15, 1997, the Company made a regular distribution of $.25 per
share of Common Stock to shareholders of record on March 31, 1997.
On July 15, 1997, the Company made a regular distribution of $.50 per
share of Common Stock to shareholders of record on June 30, 1997.
On October 15, 1997, the Company made a distribution of $1.00 per share of
Common Stock to shareholders of record on September 30, 1997, consisting
of a regular distribution of $.50 per share of Common Stock and a special
distribution of $.50 per share of Common Stock.
On December 31, 1997, the Company made a distribution of $1.00 per share
of Common Stock to shareholders of record on December 26, 1997, consisting
of a regular distribution of $.50 per share of Common Stock and a special
distribution of $.50 per share of Common Stock.
On April 15, 1998, the Company made a regular distribution of $.50 per
share of Common Stock to shareholders of record on March 31, 1998.
8. STOCK PLAN AND REGISTRATION RIGHTS
The Board of Directors of the Company adopted a Directors' Stock Plan
effective October 10, 1996. Pursuant to the Stock Plan, the Board of
Directors of the Company has the authority to issue to members of the
Company's Board of Directors Common Stock and options to purchase, in the
aggregate, 100,000 shares of Common Stock. On the Effective Date, the
initial members of the Company's Board of Directors were granted options
entitling each director to purchase an aggregate of 3,000 shares of Common
Stock at an exercise price of $25 per share in accordance with the Plan.
Pursuant to the Stock Plan, each Director received 400 shares of Common
Stock in September 1997 in consideration for services rendered to the
Company during the Company's first fiscal year of operations. The value of
such shares was based upon the most recent price at which shares of the
Company's Common Stock were traded prior to such grant of shares. Each
Director will receive an additional 400 shares of Common Stock at the 1998
annual meeting of the Company's stockholders and at each subsequent annual
meeting. Total outstanding options at March 31, 1998 aggregated 25,000, of
which 17,000 are exercisable currently and 8,000 are exercisable as of
October 10, 1998. In March 1998, a new director was granted 400 shares of
Common Stock and options entitling him to purchase an aggregate of 3,000
shares of Common Stock at an exercise price of $42.50 per share. Such
shares and options were issued in May 1998. Of such options, 1,000 will be
immediately exercisable and 1,000 become exercisable on each of October
10, 1998 and October 10, 1999.
The Company has entered into a Registration Rights Agreement between the
Company and the holders of Common Stock. The Registration Rights Agreement
permits certain of the Company's stockholders to demand, subject to
certain conditions, that the Company register their Common
8
710748.2
<PAGE>
Stock for sale and provides all of the Company's stockholders with the
right to participate proportionally in any public offering of the
Company's securities.
9. RELATED PARTY TRANSACTIONS
Asset Management - The Company has entered into an Asset Management
Agreement with a company ("Asset Manager") that is directly affiliated
with two of Metropolis' shareholders. One of these shareholders is also a
Director and Officer of the Company. The Asset Manager provides asset
advisory, consultation and management services for the Company. Fees for
such services are payable at a rate of $25 per month, in arrears. The
Asset Management Agreement also provides for reimbursement of costs and
expenses for contractors and professionals, as incurred. Asset management
fees incurred for each of the quarters ended March 31, 1998 and 1997
aggregated approximately $75.
Property Management - The Company has entered into a Management and
Leasing Agreement with a company ("Property Manager/Leasing Agent") that
is an affiliate of a shareholder. The Property Manager/Leasing Agent
manages and operates the property and provides all supervisory, management
and leasing services. The Management and Leasing Agreement provides for a
fee of 1.5% of Gross Revenues, payable monthly and reimbursement for
overhead and all reasonable out-of-pocket expenses incurred. The
Management and Leasing Agreement also provides for leasing commissions to
be calculated on a sliding scale percentage basis of a lease's base rent.
Fees incurred under the Management and Leasing Agreement for the quarters
ended March 31, 1998 and 1997 aggregated approximately $498 and $404,
respectively.
An affiliate of the Property Manager/Leasing Agent provides cleaning
services for the Properties. Fees paid for cleaning services for the
quarters ended March 31, 1998 and 1997 totaled $1,028 and $1,182,
respectively.
REIT Management - The Company has entered into a REIT Management Agreement
with the Property Manager/Leasing Agent ("REIT Manager"). The REIT Manager
performs certain accounting, administrative and monitoring services. The
REIT Management Agreement provides for compensation to the REIT Manager of
a monthly fee and reimbursement of documented out-of-pocket expenses. Fees
incurred under the REIT Management Agreement for the quarters ended March
31, 1998 and 1997 aggregated $43 and $46, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, escrow deposits, tenant
security deposits, tax refunds receivable, and accounts receivable are a
reasonable estimate of their fair value due to their short-term nature.
The Company believes the fair value of the Swap Agreement generally
offsets gains or losses on the Secured Notes being hedged and changes the
nature of such underlying financial instruments. Because the maturity date
of the Secured Notes and the termination date of the Swap Agreement are
identical and the Company has no intention of terminating either the
Secured Notes or the Swap Agreement, the fair value of the Swap Agreement
may be of limited usefulness.
The fair value of the notes receivables has been estimated by discounting
cash flows at the current rate at which similar instruments would be
issued with similar credit ratings for the remaining term. Management
believes the fair market value of the notes receivables approximates the
carrying value at March 31, 1998.
The fair value of the Secured Notes has been estimated by discounting cash
flows at the current rate at which similar loans would be made to
borrowers with similar credit ratings for the remaining
9
710748.2
<PAGE>
term. Management believes the fair market value of the Secured Notes
approximates the carrying value at March 31, 1998.
The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1998.
10
710748.2
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(In thousands, except share information)
General
The discussion below relates primarily to the financial condition and
results of operations of Metropolis Realty Trust, Inc. (the "Company") for the
first quarter of 1998. Stockholders are encouraged to review the financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1997 contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 for a
more complete understanding of the Company's financial condition and results of
operations.
Overview
The Company was formed on May 13, 1996 and commenced operations on
October 10, 1996, upon acquisition of the 237 Property and the 1290 Property,
pursuant to the Plan. The Company is a Maryland corporation that qualifies as a
REIT for tax purposes. The Company's principal business objective is to operate
the Properties in a manner that will maximize the Properties' revenues and value
and in turn maximize funds from operations and stockholder value.
The 1290 Property is a 43-story Class A commercial office building with
approximately 1.9 million rentable square feet of space. The building is
centrally located in midtown Manhattan and is connected to the famed
"Rockefeller Center" complex via an underground passageway. The 1290 Property
serves as the corporate headquarters for The Equitable Life Assurance Society of
the United States, and is currently 98.5% occupied. Through December 2002,
approximately 21% of the total rentable area of the building is subject to
expiring leases.
The 237 Property is a 21-story Class A commercial office building with
approximately 1.1 million rentable square feet of space. The building, centrally
located in midtown Manhattan, is situated off one of New York City's most
prestigious thoroughfares and is within close proximity to Grand Central
Station, a transportation hub. The 237 Property serves as the corporate
headquarters for J. Walter Thompson Company, a major advertising agency, as well
as Swiss Reinsurance Company ("Swiss Re"), an insurance/financial services
organization, and is currently 98.8% occupied. Through December 2002,
approximately 25% of the total rentable area of the building is subject to
expiring leases.
The Company, through the Property Owning Partnerships, has retained
Tishman Speyer Properties, L.P. to serve as the Property Manager / Leasing
Agent, which is responsible for managing the daily operations of the Properties,
and 970 Management, LLC, an affiliate of Victor Capital Group, L.P., to serve as
the Asset Manager. The Company has also entered into a REIT Management Agreement
with Tishman Speyer Properties, L.P. to perform certain accounting,
administrative and REIT compliance monitoring services.
On March 6, 1997, the Board of Directors adopted a distribution policy
calling for a regular quarterly dividend. On January 20, 1997, the Company made
a special distribution of $.50 per share of Common Stock to shareholders of
record on December 31, 1996. On April 15, 1997, the Company made a regular
distribution of $.25 per share of Common Stock to shareholders of record on
March 31, 1997. On July 15, 1997, the Company made a regular distribution of
$.50 per share of Common Stock to shareholders of record on June 30, 1997. On
October 15, 1997, the Company made a distribution of $1.00 per share of Common
Stock to shareholders of record on September 30, 1997, consisting of a regular
distribution of $.50 per share of Common Stock and a special distribution of
$.50 per share of Common Stock. On December 31, 1997, the Company made a
distribution of $1.00 per share of
11
710748.2
<PAGE>
Common Stock to shareholders of record on December 26, 1997, consisting of a
regular distribution of $.50 per share of Common Stock and a special
distribution of $.50 per share of Common Stock. On April 15, 1998, the Company
made a regular distribution of $.50 per share of Common Stock to shareholders of
record on March 31, 1998. As of April 30, 1998, 12,966,646 shares of common
stock were issued and outstanding. The Common Stock of the Company is not listed
on any exchange, and the Company does not intend to list the Common Stock on any
exchange in the near future.
The assets and results of operations of the Properties are reported in
the consolidated financial statements of the Company using the consolidation
method of accounting.
Results of Operations
Base rental income and escalation income increased by approximately
$1,109 for the quarter ended March 31, 1998 as compared to the same period in
the prior year. This increase of 3.5% is primarily attributable to an overall
increase in occupancy at the Properties.
Operating expenses for the quarter ended March 31, 1998 were $12,178, a
decrease of .9% from the quarter ended March 31, 1997. Operating expenses as a
percentage of base rental income and escalation income decreased to 37% for the
quarter ended March 31, 1998 from 38% for the quarter ended March 31, 1997.
Depreciation and amortization for the quarter ended March 31, 1998 was
$4,075 as compared to $3,844 for the same period in the prior year. The increase
of $232 is primarily the result of building and tenant improvements made
subsequent to the first quarter of 1997.
Liquidity and Capital Resources
During the quarter ended March 31, 1998, cash flows from operations
totaled $8,467. The Company used this cash flow from operations to fund building
and tenant improvements of approximately $2,570, principal payments on the Loan
of $1,875 and leasing costs of approximately $122.
At March 31, 1998, the Company had unrestricted cash on hand of
approximately $28,609 of which $6,483 was used to pay a dividend on April 15,
1998 to holders of record of the Company's Common Stock on March 31, 1998.
On October 10, 1996, the Property Owning Partnerships borrowed $420,000
secured by the 1290 Property and the 237 Property. The Loan is
cross-collateralized by the Properties and prohibits the Property Owning
Partnerships from incurring any additional indebtedness. The Company may,
however, be able to incur unsecured indebtedness, although it has no present
plans to do so. The Company believes that cash on hand and existing cash flow
from operations are sufficient to satisfy the Company's foreseeable cash
requirements which consist primarily of property operating expenses, real estate
taxes, capital expenditures, debt service on the Loan and distributions
necessary to enable the Company to continue to qualify as a REIT. The Loan
matures on October 10, 2001. If not repaid or refinanced prior to such date, the
Property Owning Partnerships will be required to refinance the Loan on that
date. There can be no assurance, however, that the Company will be able to
refinance the Loan on that date or what the terms of any refinancing will be.
Year 2000 Compliance
The Company began preparations for the Year 2000 in 1996 and has identified
all significant applications that will require modification to ensure
compliance. Internal and external resources have been and continue to be used to
make the required modifications and test Year 2000 Compliance. The
12
710748.2
<PAGE>
modification process of all significant applications is substantially complete.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
There can be no assurance, however, that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company. The
total cost to the Company of these Year 2000 Compliance activities has not been
and is not anticipated to be material to its financial position or results of
operations in any given year.
Funds from Operations
The Company generally considers Funds from Operations to be a useful
measure of the operating performance of an equity REIT because, together with
net income and cash flows, Funds from Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt and
to fund acquisitions and other capital expenditures. Funds from Operations does
not represent net income or cash flows from operations as defined by generally
accepted accounting principles ("GAAP") and does not necessarily indicate that
cash flows will be sufficient to fund cash needs. It should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. Funds from Operations
does not measure whether cash flow is sufficient to fund all of the Company's
cash needs, including principal amortization, capital improvements and
distributions to shareholders. Funds from operations also does not represent
cash flows generated from operating, investing or financing activities as
defined by GAAP. Further, Funds from Operations as disclosed by other REITs may
not be comparable to the Company's calculation of Funds from Operations. The
Company adopted the National Association of Real Estate Investment Trusts
("NAREIT") definition of Funds from Operations in 1996 and has used it for all
periods presented. Funds from Operations is calculated as net income (loss)
computed in accordance with GAAP adjusted for depreciation expense attributable
to real property, amortization expense attributable to capitalized leasing
costs, tenant allowances and improvements, gains and losses on sales of real
estate investments and extraordinary and nonrecurring items.
13
710748.2
<PAGE>
Funds from Operations is summarized in the following table.
<TABLE>
<CAPTION>
Quarter Ended March 31,
1998 1997
---- ----
<S> <C> <C>
Net Income $ 9,356 $ 8,296
Add:
Depreciation attributable to real property and
amortization attributable to leasing costs 3,516 3,284
--------- --------
Funds from Operations $12,872 $11,580
======= =======
Weighted average number of shares of Common Stock 12,991,646 12,990,046
outstanding1 ========== ==========
</TABLE>
- --------------------------
1 Includes 25,000 and 27,000 shares of Common Stock issuable upon the exercise
of outstanding options as of March 31, 1998 and 1997, respectively.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Property Owning Partnerships and the lead lender under the Loan entered
into an Interest Rate Exchange Agreement effective October 10, 1996 (the
"Swap Agreement"). The Swap Agreement has a term of 5 years and provides that
the Property Owning Partnerships will pay interest at an effective rate of
7.987% per annum on the notional amount of $420,000. Management believes the
risk of incurring losses related to the credit risk is remote and that any
losses would be immaterial.
The Company believes the fair value of the Swap Agreement generally offsets
gains or losses on the Loan being hedged and changes the nature of such
underlying financial instruments. Because the maturity date of the Loan and
the termination date of the Swap Agreement are identical and the Company has
no intention of terminating either the Loan or the Swap Agreement, the fair
value of the Swap Agreement may be of limited usefulness.
14
710748.2
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, against or
involving the Company, the Partnerships or the Properties.
Retention of Jurisdiction by Bankruptcy Court
In July 1997, the United States Bankruptcy Court for the Southern District
of New York entered a final decree closing the reorganization cases of the
Predecessors.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters To a Vote of Security Holders
No matters have been submitted to a vote of the Company's security
holders since October 10, 1996.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
27.1 Financial Data Schedule as of, and for the quarter ended
March 31, 1998
(b) Reports on Form 8-K.
None.
15
710748.2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
METROPOLIS REALTY TRUST, INC.
By:/s/ John R. Klopp
--------------------
Name: John R. Klopp
Title: Vice President
By:/s/ Stuart Koenig
--------------------
Name: Stuart Koenig
Title: Vice President and Treasurer
Dated: May 15, 1998
S-1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> No
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 39,553
<SECURITIES> 0
<RECEIVABLES> 15,217
<ALLOWANCES> 2,730
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 667,842
<DEPRECIATION> 19,595
<TOTAL-ASSETS> 763,785
<CURRENT-LIABILITIES> 17,349
<BONDS> 0
0
0
<COMMON> 129,666
<OTHER-SE> 175,736
<TOTAL-LIABILITY-AND-EQUITY> 763,785
<SALES> 32,831
<TOTAL-REVENUES> 33,955
<CGS> 0
<TOTAL-COSTS> 12,178
<OTHER-EXPENSES> 4,075
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,346
<INCOME-PRETAX> 9,356
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
