- -------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
........................................................
METROPOLIS REALTY TRUST, INC.
-----------------------------
(Exact name of Registrant as specified in its charter)
MARYLAND 13-3910684
.......................................... ..........................
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
c/o Victor Capital Group, L.P.
605 Third Avenue
26th Floor
New York, New York 10016
..................................................
(Address of principal executive offices)
( 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 [ ]
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.
771035.4
<PAGE>
As of November 3, 1998, there were issued and outstanding 8,030,586 shares of
the Company's Class A Common Stock, par value $10.00 per share and 4,936,060
shares of the Company's Class B 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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771035.4
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METROPOLIS REALTY TRUST, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
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 September 30, 1998 (unaudited) and
December 31, 1997 (audited) 1
Consolidated Statements of Income for the quarters and nine months ended
September 30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES S-1
</TABLE>
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771035.4
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
METROPOLIS REALTY TRUST, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
- -------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
(Unaudited) (Audited)
------------- ------------
<S> <C> <C>
ASSETS
Rental property - net of accumulated depreciation of
$26,624 and $16,165, respectively $647,819 $649,107
Cash and cash equivalents 37,814 24,627
Escrow deposits 15,961 2,909
Tenants' security deposits 641 640
Due from tenants - net of allowance for doubtful accounts
of $2,729 and $2,745, respectively 3,482 3,005
Deferred financing costs - net of amortization of
$4,317 and $2,678, respectively 6,608 8,247
Real estate tax refunds 3,175 14,088
Notes receivable - net of unamortized discount of
$247 and $420, respectively 9,255 9,101
Deferred rent receivable 37,079 26,855
Prepaid real estate taxes 7,019 13,575
Deferred leasing costs, net of accumulated amortization of
$465 and $110, respectively 7,688 5,266
Other assets 274 512
----------- -----------
TOTAL ASSETS $776,815 $757,932
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Secured notes $412,500 $418,125
Accounts payable and accrued expenses 16,850 16,968
Tenants' security deposits and unearned revenue 3,201 2,009
----------- -----------
Total Liabilities 432,551 437,102
----------- -----------
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 24,007 573
----------- -----------
Total Stockholders' Equity 329,409 305,975
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $776,815 $757,932
=========== ===========
See notes to consolidated financial statements.
</TABLE>
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METROPOLIS REALTY TRUST, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share amounts)
- -----------------------------------------------------------------------------------------------------------------------
Quarter Ended Nine Months
September 30, Ended September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Base rental income $29,697 $28,940 $89,430 $85,589
Escalation income 3,540 3,349 10,987 11,086
Miscellaneous income 3,522 451 4,435 966
863 961 2,325 2,740
Interest income -------------- ---------- ----------- -----------
$37,622 $33,701 $107,177 $100,381
Total revenues -------------- ---------- ----------- -----------
OPERATING EXPENSES:
Real estate taxes $7,025 $6,861 $20,610 $20,079
Operating and maintenance 1,437 1,738 5,210 5,844
Utilities 2,519 2,323 5,410 5,344
Payroll 1,074 1,003 3,259 3,205
General and administrative 2,598 987 3,375 2,531
574 537 1,720 1,551
Management fees -------------- ---------- ----------- -----------
Total operating expenses $15,227 $13,449 $39,584 $38,554
OTHER ITEMS:
Interest expense 8,454 8,576 25,200 25,480
4,233 3,880 12,476 11,583
Depreciation and amortization -------------- ---------- ----------- -----------
12,687 12,456 37,676 37,063
Total other items -------------- ---------- ----------- -----------
NET INCOME $9,708 $7,796 $29,917 $24,764
============== ========== =========== ===========
NET INCOME PER COMMON SHARE:
Net Income $0.75 $0.60 $2.31 $1.91
============== ========== =========== ===========
Weighted Average Common Shares Outstanding 12,966,646 12,963,066 12,966,646 12,963,053
============== ========== =========== ===========
NET INCOME PER COMMON SHARE
(assuming dilution):
Net Income $0.75 $0.60 $2.30 $1.91
============== ========== =========== ===========
Weighted Average Common Shares Outstanding
(including 25,000 and 27,000 shares of
Common Stock issuable upon the exercise of
outstanding options as of September 30, 1998
and 1997, respectively) 12,991,646 12,990,066 12,991,646 12,990,053
============== ========== =========== ===========
</TABLE>
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771035.4
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METROPOLIS REALTY TRUST, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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Nine Months Ended
September 30,
--------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $29,917 $24,764
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 12,476 11,583
Issuance of capital stock as compensation -- 157
Amortization of discount - notes receivable (405) (374)
Change in:
Increase in escrow deposits (13,052) (4,191)
(Increase)/Decrease in due from tenants (477) 701
Decrease in prepaid expenses and other assets 6,772 7,152
Increase in deferred rent receivable (10,225) (17,838)
Decrease in accounts payable and accrued expenses (117) (601)
Decrease in real estate tax refunds 10,913 --
1,191 1,080
Increase in unearned revenue --------- ---------
Net cash provided by operating activities 36,993 22,433
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to building and equipment (9,171) (1,497)
Additions to leasing costs (2,778) (1,626)
251 228
Collections on notes receivable --------- ---------
Net cash used in investing activities (11,698) (2,895)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on secured notes (5,625) --
Dividends paid (6,483) (16,204)
--------- ---------
Net cash used in financing activities (12,108) (16,204)
INCREASE IN CASH AND CASH EQUIVALENTS 13,187 3,334
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,627 42,215
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $37,814 $45,549
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
$25,265 $25,439
Interest paid during period ========= =========
Dividends declared $6,483 $22,689
========= =========
See notes to consolidated financial statements.
</TABLE>
3
771035.4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share information)
- -------------------------------------------------------------------------------
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
September 30, 1998 and 1997 and building, tenant improvements and building
improvements are carried at $541,362 and $525,547 as of September 30, 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
771035.4
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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; escrow deposits for tenant improvements,
insurance and real estate taxes; and reserves for tenant claims against
the Tax Proceeds related to 2 Broadway, as hereinafter defined.
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 related to the 1290 Property,
net of any fees and expenses incurred to collect such proceeds, totaling
$2,801 as of September 30, 1998; and tenant claims against real estate tax
proceeds recovered by the Company as a result of real estate tax
certiorari proceedings related to 2 Broadway, New York, NY, a property
previously owned by the Predecessors, totaling $5,215 as of September 30,
1998 (collectively, the "Tax Proceeds"). This reserve is included in
accounts payable and accrued expenses on the accompanying balance sheets.
On July 14, 1998, the Company received Tax Proceeds in settlement of tax
certiorari proceedings related to 2 Broadway that resulted in a net refund
of approximately $8,342 to the Company, after reserving for tenant claims,
and additional income of $3,280. Fees and expenses incurred to collect
such proceeds totaled $2,238.
3. NOTES RECEIVABLE
Included in Notes Receivable is the estimated fair value of two tenant
notes aggregating approximately $9,255 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 $5,261, 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 $3,994, net of unamortized
discount. The second note does not bear interest and is payable on October
31, 1999.
5
771035.4
<PAGE>
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, 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. 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 September 30, 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
September 30, 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
6
771035.4
<PAGE>
the Company is entitled as general partner of the Lower Tier Limited
Partnership. As of September 30, 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, 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 September 30, 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
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771035.4
<PAGE>
(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. As of November
3, 1998, as a result of the conversion of 40,000 shares of Class C Common
Stock into Class A Common Stock, of the 12,966,646 shares issued and
outstanding, 8,030,586 shares represent shares of Class A Common Stock,
4,936,060 shares represent shares of Class B Common Stock, with no
remaining shares of Class C Common Stock outstanding. Of the 8,030,586
shares of Class A Common Stock issued and outstanding, approximately
923,077 shares 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 shares were subsequently distributed, and 3,600 shares
were issued to the members of the Board of Directors as part of their
annual compensation. The Class A Common Stock and the Class B 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.
On July 1, 1998 the Company suspended its regular quarterly dividend
pending consideration of strategic alternatives to maximize stockholder
value. On July 13, 1998 the Company announced the retention of Victor
Capital Group, L.P. and Eastdil Realty Company, LLC to explore the sale of
the Company or its two principal assets - the 1290 Property and the 237
Property. On November 16, 1998, the Company announced that after
considering strategic alternatives in order to maximize stockholder value,
it has postponed the marketing of the Company's properties. The Company
also announced the reinstatement of its regular quarterly dividend of $.50
per share and that the Board of Directors has declared a dividend of $1.00
per share, consisting of a regular quarterly dividend of $.50 per share
and a special dividend of $.50 per share, payable on December 31, 1998 to
stockholders of record on December 18, 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
8
771035.4
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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 September 30, 1998 aggregated
28,000, of which 27,000 were 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 July 1998. Of such options, 1,000 were immediately
exercisable, 1,000 became exercisable on October 10, 1998 and 1,000 become
exercisable on 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 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 three and nine months ended September 30,
1998 and 1997 aggregated approximately $75 and $225, respectively.
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 three and
nine months ended September 30, 1998 aggregated approximately $873 and
$2,176, respectively. Fees incurred for the three and nine months ended
September 30, 1997 aggregated approximately $432 and $1,670, respectively.
An affiliate of the Property Manager/Leasing Agent provides cleaning
services for the Properties. Fees paid for cleaning services for the three
and nine months ended September 30, 1998 totaled $1,002 and $3,036,
respectively. Fees paid for the three and nine months ended September 30,
1997 totaled $964 and $3,232.
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
9
771035.4
<PAGE>
of a monthly fee and reimbursement of documented out-of-pocket expenses.
Fees incurred under the REIT Management Agreement for the three and nine
months ended September 30, 1998 aggregated $31 and $110, respectively.
Fees incurred for the three and nine months ended September 30, 1997
aggregated $31 and $109, 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 September 30, 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 term. Management
believes the fair market value of the Secured Notes approximates the
carrying value at September 30, 1998.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 1998.
10
771035.4
<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
third 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 98.7% occupied. Through December 2002,
approximately 17% 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 98.7% occupied. Through December 2002,
approximately 21% 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 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,
11
771035.4
<PAGE>
1998, the Company made a regular distribution of $.50 per share of Common Stock
to shareholders of record on March 31, 1998. As of November 3, 1998, 12,966,646
shares of common stock were issued and outstanding.
On July 1, 1998 the Company announced that it had suspended its regular
quarterly dividend pending consideration of strategic alternatives to maximize
stockholder value. On July 13, 1998 the Company announced the retention of
Victor Capital, L.P. and Eastdil Realty Company, LLC to explore the sale of the
Company or its two principal assets - the 1290 Property and the 237 Property. On
November 16, 1998, the Company announced that after considering strategic
alternatives in order to maximize stockholder value, it has postponed the
marketing of the Company's properties. The Company also announced the
reinstatement of its regular quarterly dividend of $.50 per share and that the
Board of Directors has declared a dividend of $1.00 per share, consisting of a
regular quarterly dividend of $.50 per share and a special dividend of $.50 per
share, payable on December 31, 1998 to stockholders of record on December 18,
1998.
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
Nine Months Ended September 30, 1998 and 1997
---------------------------------------------
Base rental income increased by approximately $3,841 for the nine
months ended September 30, 1998 as compared to the same period in the prior
year. This increase of 4.5% is attributable to an overall increase in occupancy
at the Properties. Miscellaneous income has increased by approximately $3,469
for the nine months ended September 30, 1998 as compared to the same period in
the prior year. This increase is primarily attributable to the receipt of real
estate tax proceeds related to 2 Broadway, a property previously owned by the
Predecessors.
Operating expenses for the nine months ended September 30, 1998 were
$39,585, an increase of 3.4% from the nine months ended September 30, 1997. This
increase is primarily attributable to fees and expenses incurred in connection
with the settlement of tax certiorari proceedings related to 2 Broadway,
totaling $2,238. Operating expenses as a percentage of base rental income and
escalation income decreased from 40% to 39% for the nine months ended September
30, 1997 and 1998, respectively.
Depreciation and amortization for the nine months ended September 30,
1998 was $12,476 as compared to $11,583 for the same period in the prior year.
The increase of $893 is primarily the result of building and tenant improvements
made subsequent to the third quarter of 1997.
Quarter Ended September 30, 1998 and 1997
-----------------------------------------
Base rental income and escalation income increased by approximately
$948 for the quarter ended September 30, 1998 as compared to the same period in
the prior year. This increase of 2.9% is attributable to an overall increase in
occupancy at the Properties. Miscellaneous income has increased by approximately
$3,071 for the quarter ended September 30, 1998 as compared to the same period
in the prior year. This increase is primarily attributable to the receipt of
real estate tax proceeds related to 2 Broadway, a property previously owned by
the Predecessors.
Operating expenses for the quarter ended September 30, 1998 were
$15,227, an increase of 13.6% from the quarter ended September 30, 1997. This
increase is primarily attributable to fees and expenses incurred in connection
with the settlement of tax certiorari proceedings related to 2 Broadway,
totaling $2,238. Operating
12
771035.4
<PAGE>
expenses as a percentage of base rental income and escalation income increased
to 46% for the quarter ended September 30, 1998 from 41% for the quarter ended
September 30, 1997.
Depreciation and amortization for the quarter ended September 30, 1998
was $4,233 as compared to $3,880 for the same period in the prior year. The
increase of $353 is primarily the result of building and tenant improvements
made subsequent to the third quarter of 1997.
Liquidity and Capital Resources
During the quarter ended September 30, 1998, cash flow from operations
totaled $18,821. The Company used this cash flow from operations to fund
building and tenant improvements of approximately $1,068, principal payments on
the Loan of $1,875 and leasing costs of approximately $1,186.
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 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
13
771035.4
<PAGE>
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.
Funds from Operations is summarized in the following table.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net Income $9,708 $7,796 $29,917 $24,764
Add:
Depreciation attributable to real property and
amortization attributable to leasing costs 3,679 3,314 10,815 9,898
----------- ---------- ----------- ----------
Funds from Operations $13,387 $11,110 $40,732 $34,662
----------- ---------- ----------- ----------
Weighted average number of shares of Common
Stock outstanding (includes 25,000 and 27,000 shares
of Common Stock issuable upon the exercise of
outstanding options as of September 30, 1998 and
1997, respectively). 12,991,646 12,990,066 12,991,646 12,990,053
=========== ========== =========== ==========
</TABLE>
14
771035.4
<PAGE>
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.
15
771035.4
<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.
On July 13, 1998 the Company announced the retention of Victor
Capital Group, L.P. and Eastdil Realty Company, LLC to explore the
sale of the Company or its two principal assets - the 1290 Property
and the 237 Property. On November 16, 1998, the Company announced
that after considering strategic alternatives in order to maximize
stockholder value, it has postponed the marketing of the Company's
properties. The Company also announced the reinstatement of its
regular quarterly dividend of $.50 per share and that the Board of
Directors has declared a dividend of $1.00 per share, consisting of a
regular quarterly dividend of $.50 per share and a special dividend
of $.50 per share, payable on December 31, 1998 to stockholders of
record on December 18, 1998.
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, September 30, 1998.
(b) Reports on Form 8-K.
None.
16
771035.4
<PAGE>
SIGNATURES
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.
METROPOLIS REALTY TRUST, INC.
Dated: November 16, 1998 By: /s/ Lee S. Neibart
--------------------------------------
Name: Lee S. Neibart
Title: President
Dated: November 16, 1998 By: /s/ Stuart Koenig
--------------------------------------
Name: Stuart Koenig
Title: Vice President and Treasurer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> No
</LEGEND>
<CIK> 0001028198
<NAME> Louis Vitali
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-30-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 54,416
<SECURITIES> 0
<RECEIVABLES> 15,466
<ALLOWANCES> 2,729
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 674,443
<DEPRECIATION> 26,624
<TOTAL-ASSETS> 776,815
<CURRENT-LIABILITIES> 20,051
<BONDS> 0
0
0
<COMMON> 129,666
<OTHER-SE> 175,736
<TOTAL-LIABILITY-AND-EQUITY> 776,815
<SALES> 33,237
<TOTAL-REVENUES> 37,622
<CGS> 0
<TOTAL-COSTS> 15,227
<OTHER-EXPENSES> 4,233
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,454
<INCOME-PRETAX> 9,708
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
