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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 March 31, 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.
832574.2
<PAGE>
As of April 30, 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.
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<PAGE>
METROPOLIS REALTY TRUST, INC.
INDEX
<TABLE>
PAGE
<S> <C>
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 March 31, 1999 (unaudited) and
December 31, 1998 (audited) 1
Consolidated Statements of Income for the quarters ended March 31, 1999 and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the quarters ended March 31, 1999 and 1998 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
ITEM 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 13
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 2. Changes in Securities 14
ITEM 3. Defaults Upon Senior Securities 14
ITEM 4. Submission of Matters to a Vote of Security Holders 14
ITEM 5. Other Information 14
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES S-1
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
METROPOLIS REALTY TRUST, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited) (Audited)
-------------- -----------------
ASSETS
<S> <C> <C>
Rental property - net of accumulated depreciation of $647,966 $651,003
$33,833 and $30,172, respectively
Cash and cash equivalents 34,172 25,357
Escrow deposits 10,297 3,084
Tenants' security deposits 577 644
Due from tenants - net of allowance for doubtful accounts 3,233 4,088
of $2,696 and $2,696, respectively
Deferred financing costs - net of amortization of 5,515 6,062
$5,410 and $4,863, respectively
Real estate tax refunds 3,175 3,175
Notes receivable - net of unamortized discount of 9,360 9,307
$126 and $187, respectively
Deferred rent receivable 41,638 39,831
Prepaid real estate taxes 7,069 14,138
Deferred leasing costs, net of accumulated amortization of 11,502 10,628
$664 and $538, respectively
Other assets 254 454
----- --------
TOTAL ASSETS $774,758 $767,771
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Secured notes $408,750 $410,625
Accounts payable and accrued expenses 12,458 11,927
Dividends Payable 6,485 0
Tenants' security deposits and unearned revenue 2,850 3,292
----- -----
Total Liabilities 430,543 425,844
------- -------
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 23,810 21,522
-------- --------
Total Stockholders' Equity 329,360 327,072
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $774,758 $767,771
======== ========
</TABLE>
See notes to consolidated financial statements.
1
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<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share amounts)
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<TABLE>
<CAPTION>
Quarter Ended March 31,
1999 1998
---- ----
REVENUES:
<S> <C> <C>
Base rental income $28,872 $29,400
Escalation income 3,505 3,431
Miscellaneous income 436 483
Interest income 800 641
---------- ----------
Total revenues 33,613 33,955
-------- --------
OPERATING EXPENSES:
Real estate taxes 7,074 6,792
Operating and maintenance 1,628 1,929
Utilities 1,538 1,330
Payroll 1,103 1,128
General and administrative 306 411
Management fees 579 588
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Total operating expenses 12,228 12,178
-------- --------
OTHER ITEMS:
Interest expense (8,196) (8,346)
Depreciation and amortization (4,417) (4,075)
---------- ----------
Total other items (12,613) (12,421)
--------- ---------
NET INCOME $8,772 $9,356
====== ======
NET INCOME PER COMMON SHARE:
Net Income $0.68 $0.72
===== =====
Weighted Average Common Shares Outstanding 12,970,646 12,966,646
========== ==========
NET INCOME PER COMMON SHARE (assuming
dilution):
Net Income $0.68 $0.72
===== =====
Weighted Average Common Shares Outstanding 12,998,646 12,991,646
(including 28,000 and 25,000 shares of Common Stock ========== ==========
issuable upon the exercise of outstanding options as of
March 31, 1999 and 1998, respectively)
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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<TABLE>
<CAPTION>
Quarter Ended March 31,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $8,772 $9,356
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,417 4,075
Amortization of discount - notes receivable (143) (132)
Change in:
Increase in escrow deposits (7,213) (7,408)
(Increase)/Decrease in due from tenants 855 (330)
Decrease in prepaid expenses and other assets 7,188 6,902
Increase in deferred rent receivable (1,807) (2,381)
Increase/(Decrease) in accounts payable and accrued expenses 531 (2,410)
(Decrease)/Increase in unearned revenue (376) 795
---------- ----------
Net cash provided by operating activities 12,224 8,467
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to building and equipment (624) (2,570)
Additions to leasing costs (1,000) (122)
Collections on notes receivable 90 82
----------- -----------
Net cash used in investing activities (1,534) (2,610)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on secured notes (1,875) (1,875)
Dividends paid -- --
----------- --------
Net cash used in financing activities (1,875) (1,875)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 8,815 3,982
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,357 24,627
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $34,172 $28,609
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during period $8,278 $8,429
====== ======
Dividends declared $6,485 $6,483
====== ======
</TABLE>
See notes to consolidated financial statements.
3
832574.2
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share information)
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1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization - Metropolis Realty Trust, Inc., a Maryland corporation
("Metropolis" or the "Company"), was formed on May 13, 1996 to facilitate
the consummation of the Second Amended Joint Plan of Reorganization of
237 Park Avenue Associates, L.L.C. ("237 LLC") and 1290 Associates,
L.L.C. ("1290 LLC" and, together with 237 LLC, the "Predecessors"), dated
September 20, 1996 (the "Plan"). Pursuant to the Plan, on October 10,
1996, the date operations commenced ("Effective Date"), the Company
acquired the interests of 237 LLC and 1290 LLC in the properties located
at 237 Park Avenue (the "237 Property") and 1290 Avenue of the Americas
(the "1290 Property," and together with the 237 Property, the
"Properties"). The Predecessors were two of the many companies,
partnerships and joint ventures that collectively constituted the United
States operations of the Olympia & York group of companies.
The Company owns a 95% interest, as general partner, and .05% interest,
as limited partner (through its 1% general partnership interest in Upper
Tier Associates, L.P.), in 237/1290 Lower Tier Associates, L.P., a
Delaware limited partnership (the "Lower Tier Limited Partnership") which
owns a 99% partnership interest, as limited partner in each of 237 Park
Partners, L.P., a Delaware limited partnership, and 1290 Partners, L.P.,
a Delaware limited partnership (together with the 237 Park Partners L.P.,
the "Property Owning Partnerships"). The Property Owning Partnerships
were formed to own the Properties. The remaining 1% general partnership
interest in each of the Property Owning Partnerships is owned by 237 GP
Corp. and 1290 GP Corp. (the "GP Corps") which are wholly-owned
subsidiaries of the Company.
Basis of Presentation - The consolidated balance sheets include
Metropolis, the Lower Tier Limited Partnership, the GP Corps and each of
the Property Owning Partnerships.
The presentation of the consolidated balance sheets requires estimates
and assumptions that affect the reported amounts of assets and
liabilities at the balance sheet date. Actual results could differ from
those estimates.
Rental Property - Rental property is carried at cost, net of accumulated
depreciation and amortization, and includes land, building, tenant
improvements and building improvements. Land is valued at $134,518 as of
March 31, 1999 and 1998 and building, tenant improvements and building
improvements are carried at $547,282 and $534,649 as of March 31, 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.
4
832574.2
<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 in 1999, the Company's
financial statements 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 March 31, 1999.
3. NOTES RECEIVABLE
Included in Notes Receivable is the estimated fair value of two tenant
notes aggregating approximately $9,360 and $9,152 as of March 31, 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
$5,203 as of March 31, 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 $4,157 as of
March 31, 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.
5
832574.2
<PAGE>
The Property Owning Partnerships and the lead lender entered into an
Interest Rate Exchange Agreement effective October 10, 1996 (the "Swap
Agreement"). The Swap Agreement has a term of 5 years and provides that
the Property Owning Partnerships will pay interest at an effective rate
of 7.987% per annum on the notional amount of $420,000. Management
believes the risk of incurring losses related to the credit risk is
remote and any losses would be immaterial.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include funded reserves held by the
Company for utility tax claims, certain claims related to the Plan,
tenant claims against real estate tax proceeds 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 March 31, 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 March 31, 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
March 31, 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 March 31, 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
6
832574.2
<PAGE>
Properties or any loan made to the Partnership will be distributed by the
Lower Tier Limited Partnership to its partners as follows:
(i) 100% to the Company, as general partner, until it has received,
together with all prior distributions pursuant to this clause (i)
and clause (i) of the immediately preceding paragraph, aggregate
distributions equal to the product of (x) 0.5 and (y) a 12% per
annum cumulative compounded return on the Adjusted GP Contribution
from October 10, 1996 (or with respect to capital contributions
made after October 10, 1996, the date of such capital
contributions);
(ii) 100% to the Company, as general partner, until it has
received, together with all prior distributions pursuant to this
clause (ii) and clause (ii) of the immediately preceding paragraph,
aggregate distributions equal to the product of (x) .75 and (y) the
Adjusted GP Contribution;
(iii) from the next $500, 90% (i.e., $450) to the Upper Tier
Limited Partnership, as limited partner, and 10% to the Company, as
general partner;
(iv) 100% to the Company, as general partner, until it has
received, together with all prior distributions pursuant to this
clause (iv), clause (i) of this paragraph and clause (i) of the
immediately preceding paragraph, a 12% per annum cumulative
compounded return on the Adjusted GP Contribution commencing with
respect to each capital contribution, on the date such Capital
Contribution was made;
(v) 100% to the Company, as general partner, until it has received,
together with all prior distributions pursuant to this clause (v),
clause (ii) of this paragraph and clause (ii) of the immediately
preceding paragraph, aggregate distributions equal to the Adjusted
GP Contribution; and
(vi) 95% to the Company, as general partner, and 5% to the Upper
Tier Limited Partnership, as limited partner.
7. STOCKHOLDERS' EQUITY
The Company has the authority to issue 50,000,000 shares of common stock,
par value $10 per share (the "Common Stock"), and 10,000,000 shares of
Preferred Stock, par value $10 per share. 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. On November 3, 1998,
all of the issued and outstanding shares of Class C Common Stock were
converted to shares of Class A 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.
7
832574.2
<PAGE>
8. STOCK PLAN AND REGISTRATION RIGHTS
The Board of Directors of the Company adopted a Directors' Stock Plan
effective October 10, 1996. Pursuant to the Stock Plan, the Board of
Directors of the Company has the authority to issue to members of the
Company's Board of Directors Common Stock and options to purchase, in the
aggregate, 100,000 shares of Common Stock. On the Effective Date, the
initial members of the Company's Board of Directors were granted options
entitling each director to purchase an aggregate of 3,000 shares of
Common Stock at an exercise price of $25 per share in accordance with the
Plan.
Pursuant to the Stock Plan, each Director received 400 shares of Common
Stock in September 1997 in consideration for services rendered to the
Company during the Company's first fiscal year of operations. The value
of such shares was based upon the most recent price at which shares of
the Company's Common Stock were traded prior to such grant of shares.
Each Director received an additional 400 shares of Common Stock at the
1998 annual meeting of the Company's stockholders and will receive shares
at each subsequent annual meeting.
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
March 31, 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 all of the Company's stockholders with the
right to participate proportionally in any public offering of the
Company's securities.
9. RELATED PARTY TRANSACTIONS
Asset Management - The Company has entered into an Asset Management
Agreement with a company ("Asset Manager") that is directly affiliated
with two of Metropolis' shareholders. One of these shareholders is also a
Director and Officer of the Company. The Asset Manager provides asset
advisory, consultation and management services for the Company. Fees for
such services are payable at a rate of $25 per month, in arrears. The
Asset Management Agreement also provides for reimbursement of costs and
expenses for contractors and professionals, as incurred. Asset management
fees incurred for each of the quarters ended March 31, 1999 and 1998
aggregated approximately $75.
Property Management - The Company has entered into a Management and
Leasing Agreement with a company ("Property Manager/Leasing Agent") that
is an affiliate of a shareholder. The Property Manager/Leasing Agent
manages and operates the property and provides all supervisory,
management and leasing services. The Management and Leasing Agreement
provides for a fee of 1.5% of Gross Revenues, payable monthly and
reimbursement for overhead and all reasonable out-of-pocket-expenses
incurred. The Management and Leasing
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832574.2
<PAGE>
Agreement also provides for leasing commissions to be calculated on a
sliding scale percentage basis of a lease's base rent. Fees incurred
under the Management and Leasing Agreement for the quarters ended March
31, 1999 and 1998 aggregated approximately $482 and $498 respectively.
An affiliate of the Property Manager/Leasing Agent provides cleaning
services for the Properties. Fees paid for cleaning services for the
quarters ended March 31, 1999 and 1998 totaled $1,084 and $1,028
respectively.
REIT Management - The Company has entered into a REIT Management
Agreement with the Property Manager/Leasing Agent ("REIT Manager"). The
REIT Manager performs certain accounting, administrative and monitoring
services. The REIT Management Agreement provides for compensation to the
REIT Manager of a monthly fee and reimbursement of documented
out-of-pocket expenses. Fees incurred under the REIT Management Agreement
for the quarters ended March 31, 1999 and 1998 aggregated $31 and $43
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 March 31, 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 March 31, 1999.
The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1999.
9
832574.2
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(In thousands, except share information)
General
The discussion below relates primarily to the financial condition and
results of operations of Metropolis Realty Trust, Inc. (the "Company") for the
first quarter of 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 2003,
approximately 19% 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 is
currently 98% leased. Through December 2003, approximately 20% 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 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
the 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.
As of March 31, 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.
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832574.2
<PAGE>
Results of Operations
Quarters Ended March 31, 1999 and 1998
--------------------------------------
Base rental income decreased by approximately $529 for the quarter
ended March 31, 1999 as compared to the same period in the prior year. This
decrease of 1.8% is primarily attributable to the expiration of two leases at
the 1290 Property.
Operating expenses for the quarter ended March 31, 1999 were $12,228,
an increase of .4% from the quarter ended March 31, 1998. Operating expenses as
a percentage of base rental income and escalation income increased to 38% for
the quarter ended March 31, 1999 from 37% for the quarter ended March 31, 1998.
Depreciation and amortization for the quarter ended March 31, 1999
was $4,417 as compared to $4,075 for the same period in the prior year. The
increase of $342 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.
Liquidity and Capital Resources
During the quarter ended March 31, 1999, cash flow from operations
totaled $12,223. The Company used this cash flow from operations to fund
building and tenant improvements of approximately $624, principal payments on
the Loan of $1,875 and leasing costs of approximately $1,000.
At March 31, 1999, the Company had unrestricted cash on hand of
approximately $34,172 of which $6,485 was used to pay a dividend on April 15,
1999 to holders of record of the Company's Common Stock on March 31, 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.
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<PAGE>
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 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.
Quarter Ended March 31,
1999 1998
--------- ---------
Net Income $8,772 $9,356
Add:
Depreciation attributable to real property and
amortization attributable to leasing costs 3,787 3,516
-------- ---------
Funds from Operations $12,559 $12,872
======= =======
Weighted average number of shares of Common Stock 12,998,646 12,991,646
========== ==========
outstanding(1)
- --------------------------
(1)Includes 28,000 and 25,000 shares of Common Stock issuable upon the exercise
of outstanding options as of March 31, 1999 and 1998, respectively.
12
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<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.
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<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,
March 31, 1999.
(b) Reports on Form 8-K.
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METROPOLIS REALTY TRUST, INC.
By: /s/John R. Klopp
-------------------------------------
Name: John R. Klopp
Title: Vice President
By: /s/Stuart Koenig
-------------------------------------
Name: Stuart Koenig
Title: Vice President and Treasurer
Dated: May 14, 1999
S-1
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