- ------------------------------------------------------------------------------
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 June 30, 1999
.......................................
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.
864583.4
<PAGE>
As of August 10, 1999, there were issued and outstanding 8,034,586 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.
864583.4
ii
<PAGE>
METROPOLIS REALTY TRUST, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE
PART I--FINANCIAL INFORMATION
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 June 30, 1999 (unaudited) and
December 31, 1998 (audited) 1
Consolidated Statements of Income for the quarters and six months ended June 30, 1999
and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the quarters and six months ended June 30, 1999
and 1998 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
ITEM 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 12
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 2. Changes in Securities 13
ITEM 3. Defaults Upon Senior Securities 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES S-1
</TABLE>
864583.4
iii
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
METROPOLIS REALTY TRUST, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 1999 December 31, 1998
(Unaudited) (Audited)
------------- ------------
ASSETS
Rental property - net of accumulated depreciation of $652,712 $651,003
$37,498 and $30,172, respectively
Cash and cash equivalents 28,290 25,357
Lease termination fee receivable 25,855 0
Escrow deposits 753 3,084
Tenants' security deposits 579 644
Due from tenants - net of allowance for doubtful accounts 4,400 4,088
of $2,280 and $2,696, respectively
Deferred financing costs - net of amortization of 4,969 6,062
$5,956 and $4,863, respectively
Real estate tax refunds 3,175 3,175
Notes receivable - net of unamortized discount of 9,412 9,307
$64 and $187, respectively
Deferred rent receivable 39,569 39,831
Prepaid real estate taxes 14,456 14,138
Deferred leasing costs, net of accumulated amortization of 20,579 10,628
$831 and $538, respectively
Other assets 256 454
------------ -----------
TOTAL ASSETS $805,005 $767,771
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Secured notes $406,875 $410,625
Accounts payable and accrued expenses 17,334 11,927
Dividends Payable 6,485 0
Tenants' security deposits and unearned revenue 1,455 3,292
----- -----
Total Liabilities 432,149 425,844
------- -------
Subordinated Minority Interest 14,855 14,855
-------- --------
Stockholders' Equity
Common Stock - $10 par value
(Class A - outstanding - 8,034,586 and 8,034,586
shares, respectively
Class B - outstanding - 4,936,060 and 4,936,060
shares, respectively) 129,706 129,706
Paid-in capital 175,844 175,844
Retained earnings 52,451 21,522
-------- --------
Total Stockholders' Equity 358,001 327,072
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $805,005 $767,771
======== ========
</TABLE>
864583.4
1
<PAGE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share amounts)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter Ended June 30, Six Months Ended June 30,
----------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- ---------------- --------------- ------------------
REVENUES:
Base rental income $26,240 $30,332 $55,112 $59,732
Escalation income 4,221 4,015 7,726 7,447
Lease termination income 25,855 25,855
Miscellaneous income 2,829 430 3,266 913
Interest income 787 822 1,587 1,463
-------- -------- -------- --------
Total revenues $59,932 $35,599 $93,546 $69,555
------- ------- ------- -------
OPERATING EXPENSES:
Real estate taxes 7,074 6,792 14,147 13,585
Operating and maintenance 1,773 1,844 3,400 3,773
Utilities 1,376 1,561 2,914 2,891
Payroll 1,122 1,057 2,226 2,185
General and administrative 349 367 656 778
Management fees 486 558 1,065 1,145
--------- -------- -------- --------
Total operating expenses $12,180 $12,179 $24,408 $24,357
OTHER ITEMS:
Interest expense (8,248) (8,400) (16,444) (16,746)
Depreciation and amortization (4,378) (4,168) (8,795) (8,243)
-------- -------- -------- ---------
Total other expenses (12,626) (12,568) (25,239) (24,989)
-------- --------- --------- ---------
NET INCOME $35,126 $10,852 $43,899 $20,209
======= ======= ======= =======
NET INCOME PER COMMON SHARE:
Net Income $2.71 $0.84 $3.38 $1.56
====== ============ ============ =============
Weighted Average
Common Shares Outstanding 12,970,646 12,966,646 12,970,646 12,966,646
========== ========== ========== ==========
NET INCOME PER COMMON SHARE
(assuming dilution):
Net Income $2.70 $0.84 $3.38 $1.56
======= ============= ============= =============
Weighted Average Common Shares
Outstanding (including 28,000 and 25,000
shares of Common Stock issuable upon the
exercise of outstanding options as of June 30,
1999 and 1998, respectively) 12,998,646 12,991,646 12,998,646 12,991,646
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
864583.4
2
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months ended June 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $43,899 $20,209
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,795 8,243
Amortization of discount - notes receivable (288) (267)
Change in:
(Increase) in lease termination fee receivable (25,855) 0
Decrease/(Increase) in escrow deposits 2,331 (757)
(Increase) in due from tenants (312) (801)
(Increase) in prepaid expenses and other assets (205) (387)
Decrease/(Increase) in deferred rent receivable (2,262) (6,612)
Increase/(Decrease) in accounts payable and accrued expenses 5,408 (1,826)
(Decrease)/Increase in unearned revenue (1,771) 371
------------ ----------
Net cash provided by operating activities 32,264 18,173
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to building and equipment (9,034) (8,103)
Additions to leasing costs (10,245) (1,592)
Collections on notes receivable 183 165
------------ -----------
Net cash used in investing activities (19,096) (9,530)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on secured notes (3,750) (3,750)
Dividends paid (6,485) (6,483)
-------- ----------
Net cash used in financing activities (10,235) (10,233)
----------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,933 (1,590)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,357 24,627
---------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $28,290 $23,037
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during period $16,518 $16,820
======= =======
Dividends declared $12,970 $ 6,483
======= =======
</TABLE>
See notes to consolidated financial statements.
864583.4
3
<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
June 30, 1999 and 1998 and building, tenant improvements and building
improvements are carried at $555,692 and $540,288 as of June 30, 1999 and
1998, 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.
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, real estate taxes and utility taxes.
864583.4
4
<PAGE>
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.
Organization Costs - In 1998, the AICPA issued SOP 98-5, "Reporting on
the Costs of Start-up Activities." This SOP provides guidance on the
financial reporting of start-up and organizational costs. Specifically,
it requires costs of start-up activities and organization costs to be
expensed as incurred and is effective for financial statements for fiscal
years beginning after December 15, 1998. Beginning 1999, the Company's
financial statement reflect the application of this SOP.
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 Company has reflected real estate
tax proceeds of $3,175 and the corresponding tenant reimbursements, fees
and expenses of $2,800 related to the 1290 Property in the balance sheet
as of June 30, 1999.
3. NOTES RECEIVABLE
Included in Notes Receivable is the estimated fair value of two tenant
notes aggregating approximately $9,412 and $9,203 as of June 30, 1999 and
1998, respectively. 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
$5,173 as of June 30, 1999, 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 $4,239 as of
June 30, 1999, 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 required the Property Owning Partnerships to make
interest only payments through October 7, 1997 and principal payments of
$1,875 and $7,500 in 1997 and 1998, respectively. Principal payments of
$8,125, $11,250 and $11,250 are required to be made in each of 1999, 2000
and 2001, respectively. Scheduled principal payments have been 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
864583.4
5
<PAGE>
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 real estate tax proceeds, brokerage commissions
payable and property operating expenses payable.
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 June 30, 1999 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 June 30, 1999 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
June 30, 1999, 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 June 30, 1999),
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:
864583.4
6
<PAGE>
(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. Of the 12,970,646 shares issued
and outstanding, 8,034,586 represent shares of Class A Common Stock and
4,936,060 represent shares of Class B Common Stock. 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.
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 and December 1998 in consideration for services
rendered to the Company during the Company's first and second fiscal
years 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 each subsequent annual meeting of the
Company stockholders.
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. Total outstanding options at June
30, 1999 aggregated 28,000, of which 27,000 were exercisable.
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
864583.4
7
<PAGE>
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 three and six months ended June 30, 1999 and 1998
aggregated approximately $75 and $150, 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 six months ended June 30, 1999 aggregated
approximately $2,626 and $3,213, respectively. Fees incurred for the
three and six month period ended June 30, 1998 aggregated approximately
$806 and $1,303, respectively.
An affiliate of the Property Manager/Leasing Agent provides cleaning
services for the Properties. Fees paid for cleaning services for the
three and six months ended June 30, 1999 totaled $986 and $2,081,
respectively. Fees incurred for the three and six month period ended June
30, 1998 aggregated approximately $1,006 and $2,034, 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 three and six months ended June 30, 1999 aggregated $31 and $63,
respectively. Fees incurred for the three and six month period ended June
30, 1998 aggregated $36 and $79, 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 receivable 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 receivable approximates the
carrying value at June 30, 1999.
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 June 30, 1999.
The fair value estimates presented herein are based on pertinent
information available to management as of June 30, 1999.
864583.4
8
<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
second quarter of 1999. 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, 1998 contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 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% leased. Through December 2005,
approximately 25% 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 and
Credit Suisse Asset Management ("CSAM"). The 237 Property is currently 98%
leased and through December 2005, approximately .6% of the total rentable area
of the building is subject to expiring leases.
On July 20, 1999, the Company announced the retention of Victor
Capital Group, L.P. and Eastdil Realty Company, LLC to explore the sale of the
237 Property.
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.
As of June 30, 1999, 12,970,646 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 term.
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
Quarters Ended June 30, 1999 and 1998
-------------------------------------
Base rental income and escalation income decreased by approximately
$3,886 for the quarter ended June 30, 1999 as compared to the same period in the
prior year. This decrease is primarily attributable to the write off of $900 of
deferred rent receivables related to the early partial termination of the lease
with Warburg Pincus at the 237 Property $2,545 related to the lease assumption
of BT Alex Brown at the 1290 property and the expiration of two leases at the
1290 Property.
864583.4
9
<PAGE>
As of June 30, 1999, the Company terminated the lease with Swiss
Reinsurance America Corporation ("Swiss Re"), a tenant of the 237 Property. The
termination of the lease resulted in the payment by Swiss Re to the Company of a
one-time lease termination fee of $25,855, which fee was received by the Company
in July of 1999. Contemporaneously with the termination of the Swiss Re lease,
the Company entered into a 15-year lease with Credit Suisse Asset Management
("CSAM") with respect to approximately 343,000 square feet of space including
all of the former Swiss Re leased space. The Company incurred leasing
commissions of $6,910 in connection with the CSAM lease that are payable prior
to year end and agreed to make tenant improvements in the amount of $11,491. The
CSAM lease also provides for a free rent period through December 31, 1999.
Effective with the delivery of the rental space which ABN-AMRO
Incorporated assumed the rights to and obligations of BT Alex-Brown under lease
as modified for a 15 year and 4 mos. term with respect to approximately 80,880
feet of space. The company incurred leasing commissions of $2,945 in connection
with the assignment. The ABN-AMRO lease also provides for months of free rent.
During the quarter ended June 30, 1999, the Company settled certain New
York City and New York State utility tax claims with respect to the property
located at 2 Broadway that was owned by the Predecessor for all tax years up to
December 31, 1995 for an amount that was approximately $2,900 less than the
amount the Company had previously reserved for such claims. The reversal of that
reserve resulted in an increase in miscellaneous income of approximately $2,900
million for such period. The Company continues to maintain adequate reserves for
utility tax claims with respect to open tax years.
Operating expenses for the quarter ended June 30, 1999 were $12,180,
representing no material change from operating expenses for the quarter ended
June 30, 1998. Operating expenses as a percentage of base rental income and
escalation income increased to 40% for the quarter ended June 30, 1999 from 35%
for the quarter ended June 30, 1998. This increase is due to the previously
discussed decrease in base rental income for the quarter ended June 30, 1998 to
the quarter ended June 30, 1999.
Depreciation and amortization for the quarter ended June 30, 1999 was
$4,378 as compared to $4,168 for the same period in the prior year. The increase
of $210 is primarily the result of building and tenant improvements made
subsequent to the first quarter of 1998, as well as the amortization of
remaining organizational costs in accordance with SOP 98-5, as described in Note
1 to the Company's financial statements.
Results of Operations
Six Months Ended June 30, 1999 and 1998
---------------------------------------
Base rental income and escalation income decreased by approximately
$1,796 for the six months ended June 30, 1999 as compared to the same period in
the prior year. This decrease is primarily attributable to the write off of $900
of deferred rent receivables related to the early partial termination of the
lease with Warburg Pincus at the 237 Property $2,545 related to the lease
assumption of BT Alex Brown at the 1290 property, and the expiration of two
leases at the 1290 Property.
As of June 30, 1999, the Company terminated the lease with Swiss
Reinsurance America Corporation ("Swiss Re"), a tenant of the 237 Property. The
termination of the lease resulted in the payment by Swiss Re to the Company of a
one-time lease termination fee of $25,855, which fee was received by the Company
in July of 1999. Contemporaneously with the termination of the Swiss Re lease,
the Company entered into a 15-year lease with Credit Suisse Asset Management
("CSAM") with respect to approximately 343,000 square feet of space including
all of the former Swiss Re leased space. The Company incurred leasing
commissions of $6,910 in connection with the CSAM lease that are payable prior
to year end and agreed to make tenant improvements in the amount of $11,491. The
CSAM lease also provides for a free rent period through December 31, 1999.
As of June 30, 1999 the Company entered into an assignment and
assumption agreement where B.T. Alex Brown, a tenant at the 1290 Property
assigned its lease to ABN/AMRO, Incorporated. The assignment of the lease
resulted in Alex Brown delivering its rental space to ABN-AMRO, Incorporated,
and the payment to Alex Brown of a one time payment of $8,000, which fee was
paid by the Company in June 1999.
During the quarter ended June 30, 1999, the Company settled certain New
York City and New York State utility tax claims with respect to the property
located at 2 Broadway that was owned by the Predecessor for all tax years up to
December 31, 1995 for an amount that was approximately $2,900 less than the
amount the Company had previously reserved for such claims. The reversal of that
reserve resulted in an increase in miscellaneous income of approximately $2,900
million for such period. The Company continues to maintain adequate reserves for
utility tax claims with respect to open tax years.
Operating expenses for the six months ended June 30, 1999 were
$24,408, an increase of .2% from the six months ended June 30, 1998. Operating
expenses as a percentage of base rental income and escalation income increased
to 39% for the six months ended June 30, 1999 from 36% for the six months ended
June 30, 1998.
864583.4
10
<PAGE>
Depreciation and amortization for the six months ended June 30, 1999
was $8,795 as compared to $8,243 for the same period in the prior year. The
increase of $552 is primarily the result of building and tenant improvements
made subsequent to the second quarter of 1998.
Liquidity and Capital Resources
During the six months ended June 30, 1999, cash flow from operations
totaled $32,264. The Company used this cash flow from operations for leasing
costs of approximately $9,245, $8,000 to acquire tenant improvements related to
the early termination of a tenant lease at the 1290 Property, principal payments
on the Loan of $1,875 and $410 to fund building and tenant improvements.
At June 30, 1999, the Company had unrestricted cash on hand of
approximately $28,290 of which $6,485 was used to pay a dividend on July 15,
1999 to holders of record of the Company's Common Stock on June 30, 1999. The
lease termination payment of $25,855 was received by the Company in July of
1999.
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 inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
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. However, there can be no guarantee 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. These costs to complete the
Year 2000 modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
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
864583.4
11
<PAGE>
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.
Funds from Operations is summarized in the following table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter Ended June 30, Six Months Ended June 30,
--------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ----------------- --------------- -------------------
Net income $35,126 $10,852 $43,899 $20,209
Add:
Depreciation attributable to real
property and amortization
attributable to leasing costs 3,831 3,619 7,618 7,135
---------------- ----------------- --------------- -------------------
Subtract:
Write off deferred rent 3,500 0 3,500 0
receivable
Lease termination income 25,855 0 25,855 0
---------------- ----------------- --------------- -------------------
Funds from Operations 9,602 14,471 22,162 27,344
================ ================= =============== ===================
Weighted average number of shares of 12,998,646 12,991,646 12,998,646 12,991,646
Common Stock outstanding1
================ ================= =============== ===================
</TABLE>
- --------------------------
1 Includes 28,000 and 25,000 shares of Common Stock issuable upon the exercise
of outstanding options as of June 30, 1999 and 1998, 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.
864583.4
12
<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 December 18, 1998.
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 ending,
June 30, 1999.
(b) Reports on Form 8-K.
None.
864583.4
13
<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/ Lee S. Neibart
------------------
Date: August 16, 1999 Name: Lee S. Neibart
Title: President and Director
By: /s/ Stuart Koenig
------------------
Name: Stuart Koenig
Date: August 16, 1999 Title: Vice President and Treasurer
S-1
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> No
</LEGEND>
<CIK> 0001028198
<NAME> John Jadhon
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 55,477
<SECURITIES> 0
<RECEIVABLES> 13,812
<ALLOWANCES> 2,280
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 690,210
<DEPRECIATION> 37,498
<TOTAL-ASSETS> 805,005
<CURRENT-LIABILITIES> 25,274
<BONDS> 0
0
0
<COMMON> 129,706
<OTHER-SE> 175,844
<TOTAL-LIABILITY-AND-EQUITY> 805,005
<SALES> 33,006
<TOTAL-REVENUES> 59,932
<CGS> 0
<TOTAL-COSTS> 12,180
<OTHER-EXPENSES> (4,378)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,248)
<INCOME-PRETAX> 35,126
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
