<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-13115
EQUITY OFFICE PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND
(State or other jurisdiction of incorporation or organization)
36-4151656
(I.R.S. Employer Identification No.)
TWO NORTH RIVERSIDE PLAZA,
SUITE 2200, CHICAGO, ILLINOIS
(Address of principal executive offices)
60606
(Zip Code)
(312) 466-3300
(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. __
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
At November 14, 1997, 161,987,228 of the Registrant's Common Shares of
Beneficial Interest were outstanding.
<PAGE> 2
EQUITY OFFICE PROPERTIES TRUST CONSOLIDATED BALANCE SHEET
AND EQUITY OFFICE PREDECESSORS COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
EQUITY OFFICE EQUITY OFFICE
PROPERTIES TRUST PREDECESSORS
SEPTEMBER 30, DECEMBER 31,
1997 1996
(UNAUDITED) (UNAUDITED)
------------------ -----------------
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
Investment in real estate.................................. $5,022,946 $3,549,708
Accumulated depreciation................................... (22,787) (257,893)
---------- ----------
5,000,159 3,291,815
Cash and cash equivalents.................................. 132,649 410,420
Tenant and other receivables (net of allowance for doubtful
accounts of $774 and $55, respectively).................. 7,488 8,675
Deferred rent receivable................................... 8,702 49,986
Escrow deposits and restricted cash........................ 42,966 32,593
Investment in unconsolidated joint ventures................ 93,826 26,910
Deferred financing costs (net of accumulated amortization
of $107 and $3,351, respectively)........................ 1,232 8,372
Deferred leasing costs (net of accumulated amortization of
$0 and $18,455, respectively)............................ 19,648 62,593
Prepaid expenses and other assets.......................... 49,252 21,201
---------- ----------
TOTAL ASSETS..................................... $5,355,922 $3,912,565
========== ==========
LIABILITIES AND SHAREHOLDERS'/OWNERS' EQUITY
Mortgage debt.............................................. $1,325,333 $1,837,767
Unsecured notes............................................ 180,000 --
Line of credit............................................. 211,125 127,125
Accounts payable and accrued expenses...................... 98,369 81,995
Due to affiliates.......................................... 1,292 2,074
Distribution payable....................................... 42,964 96,500
Other liabilities.......................................... 33,087 29,022
---------- ----------
TOTAL LIABILITIES................................ 1,892,170 2,174,483
---------- ----------
Commitments and contingencies (Note 15).................... -- --
Minority interests:
Operating Partnership.................................... 281,927 --
Partially owned properties............................... 28,118 11,080
---------- ----------
TOTAL MINORITY INTERESTS......................... 310,045 11,080
---------- ----------
Owners' equity............................................. -- 1,727,002
Shareholders' equity:
Preferred Shares, $0.01 par value; 100,000,000 shares
authorized, none issued and outstanding............... -- --
Common Shares, $0.01 par value; 750,000,000 shares
authorized, 152,302,194 issued and 151,799,454
outstanding........................................... 1,523 --
Additional paid in capital............................... 3,160,116 --
Distributions in excess of accumulated earnings.......... (7,932) --
---------- ----------
TOTAL SHAREHOLDERS'/OWNERS' EQUITY......................... 3,153,707 1,727,002
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'/OWNERS' EQUITY......... $5,355,922 $3,912,565
========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 3
EQUITY OFFICE PROPERTIES TRUST CONSOLIDATED STATEMENT OF OPERATIONS
AND EQUITY OFFICE PREDECESSORS COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY OFFICE
PROPERTIES
TRUST FOR THE EQUITY OFFICE EQUITY OFFICE
PERIOD FROM PREDECESSORS PREDECESSORS
JULY 11, 1997 FOR THE PERIOD FOR THE THREE
TO FROM JULY 1, MONTHS ENDED
SEPTEMBER 30, 1997 TO SEPTEMBER 30,
1997 JULY 10, 1997 1996
------------- --------------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Rental............................................. $ 124,962 $14,410 $ 98,186
Tenant reimbursements.............................. 23,614 2,985 16,103
Parking............................................ 12,653 1,141 6,746
Other.............................................. 1,061 269 1,848
Fees from noncombined affiliates................... 1,331 70 886
Interest........................................... 947 443 2,348
------------ ------- --------
Total revenues..................................... 164,568 19,318 126,117
------------ ------- --------
Expenses:
Interest:
Expense incurred................................ 25,793 4,180 33,540
Amortization of deferred financing costs........ 1,374 410 2,193
Depreciation....................................... 22,787 4,718 20,912
Amortization....................................... -- 497 2,556
Real estate taxes.................................. 18,317 2,326 12,246
Insurance.......................................... 1,255 245 1,344
Repairs and maintenance............................ 19,651 2,412 18,418
Property operating................................. 23,662 2,193 18,885
General and administrative......................... 5,855 2,475 5,008
------------ ------- --------
Total expenses..................................... 118,694 19,456 115,102
------------ ------- --------
Income before allocation to minority interests,
income from investment in unconsolidated joint
ventures, and extraordinary items.................. 45,874 (138) 11,015
Minority interests:
Operating Partnership.............................. (2,587) -- --
Partially owned properties......................... (279) (33) (468)
Income from unconsolidated joint ventures............ 1,426 (43) 477
------------ ------- --------
Income before extraordinary items.................... 44,434 (214) 11,024
Extraordinary items.................................. (12,930) -- --
------------ ------- --------
Net income (loss).................................... $ 31,504 $ (214) $ 11,024
============ ======= ========
Net income per Common Share:
Income before extraordinary items.................. $ 0.29 $ -- $ --
Extraordinary items................................ (0.08) -- --
------------ ------- --------
Net income per Common Share.......................... $ .21 $ -- $ --
============ ======= ========
Weighted average Common Shares outstanding........... 151,691,121 -- --
============ ======= ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
EQUITY OFFICE PROPERTIES TRUST CONSOLIDATED STATEMENT OF OPERATIONS
AND EQUITY OFFICE PREDECESSORS COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY OFFICE
PROPERTIES EQUITY OFFICE
TRUST FOR THE PREDECESSORS EQUITY OFFICE
PERIOD FROM FOR THE PERIOD PREDECESSORS
JULY 11, 1997 FROM FOR THE NINE
TO JANUARY 1, MONTHS ENDED
SEPTEMBER 30, 1997 TO SEPTEMBER 30,
1997 JULY 10, 1997 1996
------------- --------------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Rental............................................. $ 124,962 $256,146 $275,156
Tenant reimbursements.............................. 23,614 43,241 43,239
Parking............................................ 12,653 21,091 18,975
Other.............................................. 1,061 6,539 6,290
Fees from noncombined affiliates................... 1,331 2,510 3,126
Interest........................................... 947 9,577 6,451
------------ -------- --------
Total revenues..................................... 164,568 339,104 353,237
------------ -------- --------
Expenses:
Interest:
Expense incurred................................ 25,793 80,481 87,551
Amortization of deferred financing costs........ 1,374 2,771 3,438
Depreciation....................................... 22,787 57,379 59,246
Amortization....................................... -- 5,884 6,509
Real estate taxes.................................. 18,317 34,000 37,208
Insurance.......................................... 1,255 3,060 3,463
Repairs and maintenance............................ 19,651 45,540 49,594
Property operating................................. 23,662 44,685 51,558
General and administrative......................... 5,855 17,201 16,278
------------ -------- --------
Total expenses..................................... 118,694 291,001 314,845
------------ -------- --------
Income before allocation to minority interests,
income from investment in unconsolidated joint
ventures, gain on sales of real estate and
extraordinary items................................ 45,874 48,103 38,392
Minority interests:
Operating Partnership.............................. (2,587) -- --
Partially owned properties......................... (279) (912) (2,166)
Income from unconsolidated joint ventures............ 1,426 1,982 1,554
Gain on sales of real estate......................... -- 12,510 5,262
------------ -------- --------
Income before extraordinary items.................... 44,434 61,683 43,042
Extraordinary items.................................. (12,930) (274) --
------------ -------- --------
Net income........................................... $ 31,504 $ 61,409 $ 43,042
============ ======== ========
Net income per Common Share:
Income before extraordinary items.................. $ 0.29 $ -- $ --
Extraordinary items................................ (0.08) -- --
------------ -------- --------
Net income per Common Share.......................... $ 0.21 $ -- $ --
============ ======== ========
Weighted average Common Shares outstanding........... 151,691,121 -- --
============ ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
EQUITY OFFICE PROPERTIES TRUST CONSOLIDATED STATEMENT OF CASH FLOWS
AND EQUITY OFFICE PREDECESSORS COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY OFFICE
PROPERTIES
TRUST FOR THE EQUITY OFFICE
PERIOD FROM EQUITY OFFICE PREDECESSORS
JULY 11, 1997 PREDECESSORS FOR FOR THE NINE
TO THE PERIOD FROM MONTHS ENDED
SEPTEMBER 30, JANUARY 1, 1997 TO SEPTEMBER 30,
1997 JULY 10, 1997 1996
------------- ------------------ -------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income.............................................. $ 31,504 $ 61,409 $ 43,042
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 24,161 66,034 69,193
(Income) from unconsolidated joint ventures........... (1,426) (1,982) (1,554)
(Gain) on sale of real estate......................... -- (12,510) (5,262)
Extraordinary loss from early extinguishments of
debt............................................... 12,930 274 --
Provision for doubtful accounts....................... 1,556 1,175 549
Allocation to minority interests...................... 2,866 912 2,166
Changes in assets and liabilities:
Decrease (increase) in rents receivable............ 5,297 2,664 (10,398)
(Increase) in deferred rent receivables............ (10,213) (8,061) --
(Increase) in other assets......................... (27,742) (8,839) (4,154)
Increase in accounts payable and accrued
expenses......................................... 12,504 2,916 190
(Decrease) increase in due to affiliates........... (1,678) (722) 2,240
Increase (decrease) in other liabilities........... 9,906 (7,310) (6,327)
-------- --------- --------
Net cash provided by operating activities.......... 59,665 95,960 89,685
-------- --------- --------
Investing activities:
Property acquisitions................................... (26,025) (531,968) (485,715)
Payments for capital and tenant improvements............ (42,587) (59,511) (78,690)
Proceeds from sale of real estate....................... -- 72,078 14,504
Distributions from (investments in) unconsolidated joint
ventures.............................................. 1,535 (44,260) 1,443
Payments of lease acquisition costs..................... (6,331) (9,260) (15,827)
(Increase) decrease in escrow deposits and restricted
cash.................................................. (12,226) 1,853 (25,055)
-------- --------- --------
Net cash (used for) investing activities......... (85,634) (571,068) (589,340)
-------- --------- --------
Financing activities:
Proceeds from common stock, net of offering costs....... 564,506 -- --
Capital contributions................................... -- 287,949 253,771
Capital distributions................................... -- (288,652) (26,408)
Distributions to minority interest partners............. (1,355) (3,401) (21,177)
Cash contributed from net assets........................ 181,163 -- --
Proceeds from mortgage notes............................ 1,697 154,090 483,116
Proceeds from unsecured notes........................... 180,000 -- --
Proceeds from line of credit............................ 425,125 218,000 140,225
Principal payments on mortgage notes.................... (691,714) (47,472) (205,406)
Principal payments on lines of credit................... (486,625) (72,500) (89,100)
Payments of loan costs.................................. (1,327) (1,889) (4,741)
Prepayment penalties on early extinguishments of debt... (12,877) (274) --
-------- --------- --------
Net cash provided by financing activities........ 158,593 245,851 530,280
-------- --------- --------
Net increase (decrease) in cash and cash equivalents...... 132,624 (229,257) 30,625
Cash and cash equivalents at the beginning of the
period.................................................. 25 410,420 111,121
-------- --------- --------
Cash and cash equivalents at the end of the period........ $132,649 $ 181,163 $141,746
======== ========= ========
Supplemental information:
Interest paid during the period, including capitalized
interest of $1,711, $3,669 and $532,
respectively....................................... $ 30,273 $ 82,969 $ 86,794
======== ========= ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
As used herein, "Company" means Equity Office Properties Trust, a Maryland
real estate investment trust, together with its subsidiaries including EOP
Operating Limited Partnership, a Delaware limited partnership (the "Operating
Partnership"), and the predecessors thereof ("Equity Office Predecessors"). The
Company was formed on October 9, 1996, to continue and expand the national
office property business organized by Mr. Samuel Zell, Chairman of the Board of
Trustees of the Company. The Company is a fully integrated, self-administered
and self-managed real estate company engaged in acquiring, owning, managing,
leasing and renovating office properties and parking facilities. The Company
expects to qualify as a real estate investment trust ("REIT") for federal income
tax purposes. As of September 30, 1997, the Company owned or had an interest in
93 office properties (the "Office Properties") containing 33.4 million rentable
square feet and 16 stand-alone parking facilities (the "Parking Facilities" and
together with the Office Properties, the "Properties") containing 16,037 parking
spaces. The Office Properties are located in 48 submarkets in 35 markets
throughout the United States.
The Company's assets, which include investments in joint ventures, are
owned by, and its operations are conducted through, the Operating Partnership.
The Company is the managing general partner of the Operating Partnership.
On July 11, 1997, the Company completed the consolidation of the entities
which comprised Equity Office Predecessors (the "Consolidation") and its initial
public offering (the "Offering"). The Company consummated the Offering having
sold 28,750,000 of its common shares of beneficial interest, $0.01 par value per
share ("Common Shares") (including 3,750,000 Common Shares relating to the
underwriters overallotment option) at $21 per Common Share generating proceeds
of $603,750,000. The Company contributed the net proceeds from the Offering
(after deducting the underwriting discount of $39,243,750) of $564,506,250 to
the Operating Partnership in exchange for 28,750,000 units of partnership
interest in the Operating Partnership ("Units"). The Company used the net
proceeds of the Offering and available cash reserves to repay debt of
approximately $678,394,000, of which $598,394,000 was mortgage debt and
$80,000,000 was a revolving line of credit.
Concurrent with the Offering, the Company also completed the following
formation transactions which resulted in the Consolidation of the Equity Office
Predecessors into the Company:
- Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership,
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership
II, Zell/Merrill Lynch Real Estate Opportunity Partners Limited
Partnership III and Zell/Merrill Lynch Real Estate Opportunity Partners
Limited Partners IV (collectively the "ZML Opportunity Partnerships"),
the predecessor owners of the Properties, contributed their interests in
the Properties to the Operating Partnership in exchange for 126,419,397
Units.
- ZML Investors Inc., ZML Investors II, Inc., Zell/Merrill Lynch Real
Estate Opportunity Partners III Trust and Zell/Merrill Lynch Real Estate
Opportunity Partners IV Trust (collectively the "ZML REITs") merged into
the Company, with the Company succeeding to their interests in, and
becoming the managing general partners of each of the ZML Opportunity
Partnerships. Shareholders of the ZML REITs received 122,900,572 Common
Shares of the Company in exchange for their interests in the ZML REITs.
- Equity Group Investments, Inc., an Illinois corporation ("EGI"), and
Equity Office Holdings, L.L.C., a Delaware limited liability company
("EOH" and together with EGI, the "Equity Group") contributed
substantially all of their interests in their office property and asset
management business and parking facilities management business
(collectively the "Management Business") to the Operating Partnership in
exchange for 8,358,822 Units.
6
<PAGE> 7
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
- The Operating Partnership transferred a portion of the office property
management business of EOH, the office property asset management business
and the parking asset management business of the Equity Group that
relates to the property management of the properties owned by the Equity
Group, together with the 18 Properties held in partnerships or subject to
participation agreements with unaffiliated parties (the "Joint Venture
Properties") (collectively, the "Managed Property Business") to Equity
Office Properties Management Corp., a Delaware corporation (the
"Management Corp."), in exchange for non-voting stock representing 95% of
the economic value in the Management Corp. and EOH contributed $150,000
to the Management Corp. in exchange for voting stock representing 5% of
the economic value of the Management Corp.
- ZML Partners Limited Partnership, ZML Partners Limited Partnership II,
ZML Partners Limited Partnership III and ZML Partners Limited Partnership
IV (the "ZML Partners"), each of which is the general partner of one of
the ZML Opportunity Partnerships, each transferred their 5% interest in
certain corporations which owned a 1% general partnership interest in
certain of the property title holding entities to a newly formed
qualified REIT subsidiary ("QRS") in exchange for 26,458 Common Shares.
- The Operating Partnership transferred its 95% interest in certain
corporations which owned a 1% general partner interest in certain of the
property title holding entities to a newly formed QRS in exchange for
502,740 Common Shares. Such Common Shares have been treated as treasury
stock in the accompanying financial statements.
The table below summarizes the ownership of the Company and the Operating
Partnership upon the completion of the transactions described above:
<TABLE>
<CAPTION>
NUMBER OF
OWNERSHIP OF EQUITY OFFICE PROPERTIES TRUST: COMMON SHARES PERCENTAGE
-------------------------------------------- ------------- ----------
(CURRENT OWNERSHIP)
<S> <C> <C>
Original capitalization (by Mr. Samuel Zell)................ 1,000 --
Shares sold in the Offering................................. 28,750,000 18.9%
Shares issued to shareholders of ZML REITs.................. 122,900,572 80.8%
Shares issued to the ZML Partners........................... 26,458 --
Shares issued to the Operating Partnership.................. 502,740 .3%
------------ ------
Total........................................ 152,180,770 100.0%
============ ======
(Assuming all Units are converted to Common Shares):
Shares sold in the Offering................................. 28,750,000 17.6%
Shares issued to shareholders of ZML REITs.................. 122,928,030 75.2%
Units convertible to Common Shares.......................... 11,877,647 7.2%
------------ ------
Total........................................ 163,555,677 100.0%
------------ ------
</TABLE>
<TABLE>
<CAPTION>
OWNERSHIP OF EOP OPERATING LIMITED PARTNERSHIP NUMBER OF UNITS PERCENTAGE
---------------------------------------------- --------------- ----------
<S> <C> <C>
Equity Office Properties Trust (held directly).............. 28,777,458 17.6%
Equity Office Properties Trust (held through its interests
in the ZML Opportunity Partnerships)...................... 122,900,572 75.1%
------------ ------
Equity Office Properties Trust subtotal..................... 151,678,030 92.7%
ZML Partners (held through its interests in ZML Opportunity
Partnerships)............................................. 3,229,001 2.0%
Other limited partner (held through its interest in ZML
Opportunity Partnership II)............................... 289,824 0.2%
Equity Group Investments, Inc............................... 3,737,438 2.3%
Equity Office Holdings, L.L.C............................... 4,621,384 2.8%
------------ ------
Total..................................................... 163,555,677 100.0%
============ ======
</TABLE>
7
<PAGE> 8
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
2. BASIS OF PRESENTATION
The consolidated financial statements of the Company reflect the Properties
at their carryover historical basis of accounting to the extent that interests
in the Properties were transferred from Equity Office Predecessors to the
Company by the Equity Group. The remaining interests acquired by the Company
from other owners of Equity Office Predecessors have been accounted for as a
purchase and the excess of the purchase price over the related historical basis
of the net assets acquired was allocated primarily to investment in real estate.
The combined financial statements of Equity Office Predecessors prior to
the Consolidation included interests in the Properties of the ZML Opportunity
Partnerships together with their limited and general partners (collectively, the
"ZML Funds" which includes ZML Fund I, ZML Fund II, ZML Fund III and ZML Fund
IV) and the Management Business. The combined financial statements of Equity
Office Predecessors are presented on a combined basis, at historical cost,
because the ZML Funds and the Management Business were under common control and
management of the owners of the Equity Group through general partnership
interests in the ZML Funds and through their ownership of the Management
Business. Minority interests have been recorded for those entities that were not
wholly owned by the ZML Funds. Where controlling interests were not held by the
ZML Funds, the entities were accounted for as investments in unconsolidated
joint ventures utilizing equity accounting. All intercompany transactions and
balances have been eliminated in combination.
The consolidated financial statements of the Company and the combined
financial statements of Equity Office Predecessors have been prepared pursuant
to the Securities and Exchange Commission ("SEC") rules and regulations. The
following notes highlight significant changes to the notes to the December 31,
1996 audited combined financial statements of Equity Office Predecessors
included in the Company's Prospectus dated July 7, 1997, and present interim
disclosures as required by the SEC.
3. USE OF ESTIMATES
The preparation of the consolidated financial statements of the Company and
the combined financial statements of Equity Office Predecessors in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
4. UNAUDITED INTERIM STATEMENTS
The consolidated financial statements of the Company as of September 30,
1997 and for the period from July 11, 1997 to September 30, 1997, and the
combined financial statements of Equity Office Predecessors for the periods from
July 1, 1997 to July 10, 1997, January 1, 1997 to July 10, 1997 and for the
three and nine months ended September 30, 1996 and related footnote disclosures
are unaudited. In the opinion of management, such financial statements reflect
all adjustments necessary for a fair presentation of the results of the interim
periods. All such adjustments are of a normal, recurring nature.
5. RECLASSIFICATIONS
Certain reclassifications have been made to the previously reported 1996
statements in order to provide comparability with the 1997 statements reported
herein. These reclassifications have not changed the 1996 results or owners'
equity.
8
<PAGE> 9
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
6. INCOME TAXES
Commencing with the year ended December 31, 1997, the Company intends to
make an election to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company
generally will not be subject to federal income tax if it distributes at least
95% of its taxable income for each tax year to its shareholders. REITs are
subject to a number of organizational and operational requirements. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate tax rates. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to state and local
income taxes and to federal income tax and excise tax on its undistributed
income.
7. SHARE OPTION AND RESTRICTED SHARE PLANS
The Company adopted the 1997 Employee Share Option and Share Award Plan
(the "Employee Plan") for the purpose of attracting and retaining highly
qualified executive officers, trustees, employees and consultants. The Company
reserved 11,121,786 Common Shares for issuance pursuant to the Employee Plan, an
amount equal to approximately 6.8% of the total outstanding Common Shares,
calculated on a fully diluted basis immediately following the Offering and the
Consolidation. Pursuant to the Employee Plan, the Company granted options to
purchase Common Shares to certain officers, trustees, employees and consultants
of the Company.
Grants under the Employee Plan have been and will continue to be exempt
under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Employee Plan will be administered by the Compensation
Committee and provide for the granting of share options, share appreciation
rights or restricted shares. At the closing of the Offering, the Company granted
share options to purchase approximately 2.56% of the Company's outstanding
Common Shares (calculated on a fully diluted basis) to executives or other key
employees and consultants of the Company. Share options may be granted in the
form of "incentive stock options" (as defined in Section 422 of the Code), or
non-statutory share options, and are exercisable for up to 10 years following
the date of grant. The exercise price of each option will be set by the
Compensation Committee; provided, however, that the price per share must be
equal to or greater than the fair market value of the Common Shares on the grant
date.
The Employee Plan also provides for the issuance of share appreciation
rights which will generally entitle a holder to receive cash or shares, as
determined by the Compensation Committee at the time of exercise, equal to the
difference between the exercise price and the fair market value of the Common
Shares. In addition, the Employee Plan permits the Company to issue restricted
Common Shares to executive or other key employees upon such terms and conditions
as shall be determined by the Compensation Committee in its sole discretion.
9
<PAGE> 10
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
8. INVESTMENT IN RENTAL PROPERTY
During the quarter ended September 30, 1997, the Company acquired the four
Properties listed below. Each Property was purchased from an unaffiliated party.
<TABLE>
<CAPTION>
TOTAL
DATE SQUARE PARKING
ACQUIRED PROPERTY LOCATION FEET SPACES PURCHASE PRICE
-------- -------- -------- --------- ------- --------------
<C> <S> <C> <C> <C> <C>
8/11/97 Adams-Wabash Parking Garage Chicago, IL -- 670 $ 25,000,000(1)
9/3/97 Columbus America Properties 140,000,000(2)
LL&E Tower New Orleans, LA 545,157 -- --
Texaco Center New Orleans, LA 619,714 -- --
601 Tchoupitoulas New Orleans, LA -- 759 --
--------- ----- ------------
1,164,871 1,429 $165,000,000
========= ===== ============
</TABLE>
- ---------------
(1) The total purchase price was paid from available cash.
(2) The purchase price was paid with $90.9 million in cash funded primarily from
the $600 million credit facility and $49.1 million in Units (1,692,546 Units
at $29 per Unit).
9. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
Equity Office Predecessors acquired a mortgage receivable secured by the
500 Orange Tower office property ("500 Orange") and purchased land underlying
and adjacent to 500 Orange in July 1994, and acquired a 50% limited partnership
interest in Civic Parking, L.L.C. in April 1997. These transactions were
accounted for utilizing the equity method of accounting. Under this method of
accounting, the net equity investment of the Company is reflected on the
consolidated and combined balance sheets, and the consolidated and combined
statements of operations include the Company's share of net income or loss from
500 Orange and Civic Parking, L.L.C. The Company's share of net income or loss
from 500 Orange and Civic Parking, L.L.C. is approximately 100% and 50%,
respectively. Selected balance sheets and statements of operations data for the
Company's interest in 500 Orange and Civic Parking, L.L.C. is as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
500 ORANGE TOWER CIVIC PARKING, L.L.C.
---------------------------- ----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1997 1996 1997 1996
------------- ------------ ------------- ------------
($ IN THOUSANDS)
(NOTE A)
<S> <C> <C> <C> <C>
ASSETS:
Investment in real estate, net.............. $42,082 $26,555 $51,383 --
Cash and cash equivalents................... 538 147 1,173 --
Rents and other receivables................. 46 150 65 --
Other assets................................ 190 720 33 --
------- ------- ------- -------
TOTAL ASSETS................... $42,856 $27,572 $52,654 --
======= ======= ======= =======
LIABILITIES AND OWNERS' EQUITY:
Accounts payable and accrued expenses....... $ 897 $ 364 $ 367 --
Due to affiliates........................... -- 19 34 --
Other liabilities........................... 369 279 17 --
------- ------- ------- -------
TOTAL LIABILITIES.............. 1,266 662 418 --
------- ------- ------- -------
Shareholders'/owners' equity................ 41,590 26,910 52,236 --
------- ------- ------- -------
TOTAL LIABILITIES AND OWNERS'
EQUITY....................... $42,856 $27,572 $52,654 --
======= ======= ======= =======
</TABLE>
10
<PAGE> 11
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
500 ORANGE TOWER CIVIC PARKING, L.L.C.
----------------------------- -----------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
($ IN THOUSANDS)
(NOTE A)
<S> <C> <C> <C> <C>
Revenues:
Rental..................................... $1,073 $1,123 $ 70 --
Tenant reimbursements...................... 63 14 6 --
Parking.................................... 1 -- 1,164 --
Other...................................... 152 12 14 --
------ ------ ------ -------
Total revenues................ 1,289 1,149 1,254 --
------ ------ ------ -------
Expenses:
Interest................................... -- -- -- --
Depreciation............................... 196 217 313 --
Amortization............................... 8 35 -- --
Real estate taxes and insurance............ 87 43 113 --
Repairs and maintenance.................... 102 160 2 --
Property operating......................... 339 217 -- --
------ ------ ------ -------
Total expenses................ 732 672 428 --
------ ------ ------ -------
Net income................................... $ 557 $ 477 $ 826 --
====== ====== ====== =======
<CAPTION>
500 ORANGE TOWER CIVIC PARKING, L.L.C.
----------------------------- -----------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
($ IN THOUSANDS)
(NOTE A)
<S> <C> <C> <C> <C>
Revenues:
Rental..................................... $3,579 $3,461 $ 195 --
Tenant reimbursements...................... (20) 73 6 --
Parking.................................... 1 -- 2,137 --
Other...................................... 178 22 14 --
------ ------ ------ -------
Total revenues................ 3,738 3,556 2,352 --
------ ------ ------ -------
Expenses:
Interest................................... -- -- -- --
Depreciation............................... 710 618 528 --
Amortization............................... 92 74 -- --
Real estate taxes and insurance............ 17 298 210 --
Repairs and maintenance.................... 436 484 3 --
Property operating......................... 686 528 -- --
------ ------ ------ -------
Total expenses................ 1,941 2,002 741 --
------ ------ ------ -------
Net income.................... $1,797 $1,554 $1,611 --
====== ====== ====== =======
</TABLE>
Note A: The balance sheet data as of December 31, 1996 and operational data for
the three and nine months ended September 30, 1996 is not applicable
since Civic Parking, L.L.C. was not owned by the Company or Equity
Office Predecessors at or during these periods.
11
<PAGE> 12
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
10. MORTGAGE NOTES, UNSECURED NOTES AND LINES OF CREDIT
On July 15, 1997, the Company obtained a $600 million unsecured revolving
credit facility (the "$600 million Credit Facility") which is used for
acquisitions and general corporate purposes. Amounts were drawn on the $600
million Credit Facility to repay the outstanding balance on the previous ZML
Fund IV line of credit (the "$475 Million Line") which was terminated when the
$600 million Credit Facility was obtained. The $600 million Credit Facility
matures on July 15, 2000. The Company paid a commitment fee on the $600 million
Credit Facility at closing of approximately $645,000. In addition, until the
Company receives a long term debt rating of BBB- or Baa3 or higher by two rating
agencies, an unused commitment fee is payable quarterly in arrears based upon
the unused amount of the $600 million Credit Facility as follows: .15% per annum
if the unused amount is between 0 to 33%; .20% per annum if the unused amount is
more than 33% but less than 66%; .25% per annum if the unused amount is more
than 66%. The $600 million Credit Facility carries an interest rate equal to
LIBOR plus 110 basis points. Once the Company receives the rating as described
above, a competitive bid option will become available for up to $250 million of
the facility amount, the interest rate spread will be reduced on a sliding scale
based upon the Company's senior unsecured debt rating and the unused commitment
fee will be replaced by a facility fee of .20% per annum. As of November 14,
1997, no amounts were outstanding under the $600 million Credit Facility.
On September 3, 1997, the Company completed a private debt offering of $180
million (the "$180 Million Private Debt Offering") with an unaffiliated party.
The terms of the $180 million Private Debt Offering consist of four tranches
with maturities from seven to ten years which were priced at an interest rate
spread over the corresponding U.S. Treasury rate. The Company used the proceeds
of the $180 million Private Debt Offering to repay a portion of the $600 million
Credit Facility. In addition, the Company terminated $150 million of hedge
agreements at a cost of approximately $3.9 million in connection with the $180
million Private Debt Offering. This amount will be amortized to interest expense
over the respective terms of each tranche. A summary of the terms of the $180
Million Private Debt Offering is as follows:
<TABLE>
<CAPTION>
TRANCHE AMOUNT STATED RATE EFFECTIVE RATE(A)
------- ------------ ----------- -----------------
<C> <C> <C> <C>
7 Year Senior Notes due 2004 $ 30,000,000 7.24% 7.24%
8 Year Senior Notes due 2005 50,000,000 7.36% 7.67%
9 Year Senior Notes due 2006 50,000,000 7.44% 7.73%
10 Year Senior Notes due 2007 50,000,000 7.42% 7.69%
------------
$180,000,000
============
</TABLE>
- ---------------
(A) Includes the cost of the amortized terminated interest rate protection
agreements.
As of September 30, 1997, the Company had outstanding mortgage indebtedness
of approximately $1.3 billion encumbering 48 of the Properties. The carrying
value of such Properties, net of accumulated depreciation of approximately $12
million, was approximately $2.6 billion.
In order to limit the market risk associated with variable rate debt, the
Company entered into several interest rate protection agreements. These
agreements effectively convert floating rate debt to a fixed rate basis, as well
as hedge anticipated financing transactions. Net amounts paid or received under
these agreements are recognized as an adjustment to interest expense when such
amounts are incurred or earned. Settlement amounts paid or received under these
agreements are deferred and amortized over the term of the related financing
transaction on the straight-line method which approximates the effective yield
method. A summary of the various interest rate hedge agreements is as follows:
(1) On June 4, 1997, the Company entered into interest rate protection
agreements for $700 million of indebtedness. As a result of this arrangement,
the Company has essentially "locked into" U.S. Treasury rates in effect as of
June 4, 1997, for
12
<PAGE> 13
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
$700 million in indebtedness. In August 1997, the Company terminated $150
million of the $700 million of hedge agreements at a cost of $3.9 million. The
terminated agreements pertained to the $180 million Private Debt Offering. The
portion of the Private Debt Offering protected by these agreements consisted of
three tranches with maturities of eight, nine and ten years, respectively. The
cost of the terminated hedge agreements will be amortized to interest expense
over the respective terms of each tranche. (2) On October 6, 1997, the Company
entered into an additional $450 million of interest rate protection agreements
based on the U.S. Treasury rates in effect at that date. The Company intends to
terminate these agreements and the remaining $550 million hedge agreements
described above at such time as it incurs fixed rate indebtedness. Upon the
occurrence of such termination, the Company will either owe money or be entitled
to receive money depending on whether U.S. Treasury rates have increased
(resulting in a payment to the Company) or decreased (resulting in a payment
obligation of the Company) subsequent to the date of the hedge. The
counterparties to these arrangements are major U.S. financial institutions. (3)
Equity Office Predecessors entered into an interest rate swap agreement in
October 1995 which effectively fixed the interest rate on a $93.6 million
mortgage loan at 6.94% through the maturity of the loan on June 30, 2000.
11. SHAREHOLDERS' EQUITY
On June 13, 1997, the Declaration of Trust of the Company was amended to
authorize the issuance of 750,000,000 Common Shares and 100,000,000 preferred
shares of beneficial interest ("Preferred Shares"). The Company had 152,302,194
Common Shares issued and 151,799,454 Common Shares outstanding at September 30,
1997. The number of Common Shares issued includes 502,740 Common Shares issued
to the Operating Partnership that are deemed not to be outstanding for
accounting purposes and accordingly, are eliminated in consolidation. The
Company had no issued and outstanding Preferred Shares at September 30, 1997.
On September 26, 1997, the Company declared a distribution of $.26 per
Common Share and Unit outstanding, representing a pro rata distribution since
the closing of the Offering on July 11, 1997, based upon a full quarterly
distribution of $0.30 per share and an annual distribution of $1.20 per share,
totaling approximately $42,964,500. The distribution was paid on October 9, 1997
to shareholders and Unit holders of record on September 29, 1997.
12. NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional supplemental disclosures of non-cash investing and financing
activities for the nine months ended September 30, 1997 and 1996 are as follows:
(1) The following summarizes the assets and liabilities contributed by
Equity Office Predecessors in exchange for 122,928,030 Common Shares of
the Company and 11,877,647 Units of the Operating Partnership at the
Consolidation on July 11, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Investment in real estate................................... $ 4,815,234
Investment in unconsolidated joint ventures................. 93,935
Cash contributed to the Company............................. 181,163
-----------
$ 5,090,332
===========
Debt........................................................ $ 2,196,708
Other liabilities over assets, net.......................... 62,706
Owners' equity.............................................. 2,830,918
-----------
$ 5,090,332
===========
</TABLE>
13
<PAGE> 14
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY OFFICE EQUITY OFFICE
PROPERTIES TRUST FOR PREDECESSORS EQUITY OFFICE
THE PERIOD FROM FOR THE PERIOD FROM PREDECESSORS FOR THE
JULY 11, 1997 TO JANUARY 1, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997 JULY 10, 1997 SEPTEMBER 30, 1996
-------------------- ------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans assumed through acquisition
of Properties:.......................... $90,000 $-- $55,000
======= === =======
Issuance of 1,692,546 Units in connection
with the acquisition of Properties:..... $49,100 $-- $ --
======= === =======
</TABLE>
13. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE COMMON SHARE
In February, 1997, the Financial Accounting Standards Board issued
statement No. 128, Earning Per Share ("FASB 128"). FASB 128 is effective for
fiscal years and interim periods ending after December 15, 1997. Early adoption
is not permitted except in pro forma presentations. The Company adopted the new
requirements of FASB 128 for the pro forma statements of operations (Note 14).
Under the new requirements for calculating primary earning per share, the
dilutive effect of stock options will be excluded. The weighted average Common
Shares outstanding for the period from July 11, 1997 to September 30, 1997
excludes 502,740 Common Shares issued to the Operating Partnership at the time
of the Consolidation. The Common Shares owned by the Operating Partnership are
eliminated in consolidation and, therefore, are not considered outstanding
during this period.
14. PRO FORMA STATEMENT OF OPERATIONS
The pro forma data presented below is included to illustrate the effect on
the Company's operations as a result of the transactions described below.
The pro forma consolidated statement of operations for the three and nine
months ended September 30, 1997 is presented as if the following transactions
occurred on January 1, 1997: (1) the acquisition of 30 Office Properties and six
Parking Facilities acquired between January 1, 1997 and October 17, 1997 and the
disposition of two Office Properties; (2) the Private Debt Offering which
occurred on September 3, 1997; (3) the Consolidation and the Offering and the
decrease in interest expense resulting from the use of the net proceeds for the
repayment of mortgage debt; and (4) the decrease in interest expense resulting
from draws from the $1.5 billion Credit Facility (see Note 17 (7)) used to
refinance existing debt.
The pro forma consolidated statement of operations for the nine months
ended September 30, 1996 is presented as if the following transactions occurred
on January 1, 1996: (1) the acquisition of 40 Office Properties and 13 Parking
Facilities acquired between January 1, 1996 and October 17, 1997 and the
disposition of two Office Properties; (2) the Private Debt Offering which
occurred on September 3, 1997; (3) the Consolidation and the Offering and the
decrease in interest expense resulting from the use of the net proceeds for the
repayment of mortgage debt; and (4) the decrease in interest expense resulting
from draws from the $1.5 billion credit facility (see Note 17 (7)) used to
refinance existing debt.
14
<PAGE> 15
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited pro forma consolidated statement of operations
have been prepared by management of the Company and do not purport to be
indicative of the results which would actually have been obtained had the
transactions described above been completed on the dates indicated or which may
be obtained in the future. The pro forma consolidated statement of operations
should be read in conjunction with the accompanying notes to the financial
statements contained herein.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE NINE MONTHS ENDED
------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
------------- ------------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Rental........................................... $ 168,869 $ 496,087 $ 461,627
Tenant reimbursements............................ 35,657 99,239 89,791
Parking.......................................... 15,303 40,167 37,032
Other............................................ 1,893 9,989 11,787
Fees from noncombined affiliate.................. 1,401 3,841 3,126
Interest......................................... 1,399 10,589 6,445
------------ ------------ ------------
Total revenues...................... 224,522 659,912 609,808
------------ ------------ ------------
Expenses:
Property operating............................... 85,606 247,789 242,575
Interest......................................... 42,997 126,311 125,544
Depreciation..................................... 34,219 102,658 102,658
Amortization..................................... 3,326 8,272 7,533
General and administrative....................... 8,930 24,856 18,078
------------ ------------ ------------
Total expenses...................... 175,078 509,886 496,388
------------ ------------ ------------
Income before allocation to minority interests,
income from investment in unconsolidated joint
ventures, gain on sale of real estate and
extraordinary items.............................. 49,444 150,026 113,420
Minority interests:
Operating Partnership............................ (3,733) (13,971) (11,950)
Partially owned properties....................... (326) (1,233) (2,208)
Income from investment in unconsolidated joint
ventures......................................... 1,297 4,431 3,528
Gain on sale of real estate........................ -- -- 5,262
------------ ------------ ------------
Income before extraordinary items.................. 46,682 139,253 108,052
Extraordinary items................................ (12,929) (12,929) --
------------ ------------ ------------
Net income....................................... $ 33,753 $ 126,324 $ 108,052
============ ============ ============
Net income per Common Share:
Income before extraordinary items................ $ .29 $ .86 $ .67
Extraordinary items.............................. (.08) (.08) --
------------ ------------ ------------
Net income per Common Share........................ $ .21 $ .78 $ .67
============ ============ ============
Number of Common Shares outstanding................ 161,484,488 161,484,488 161,484,488
============ ============ ============
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
The Company has become a party to various legal actions resulting from the
operating activities transferred to the Operating Partnership in connection with
the Consolidation. These actions
15
<PAGE> 16
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
are incidental to the transferred business and management does not believe that
these actions will have a material adverse effect on the Company.
ZML-Chicago Parking Limited Partnership ("ZCP") and ZML-North Loop/Theatre
District Parking Limited Partnership ("NLT"), were named as defendants in an
action (the "Action") brought by an investor (the "Plaintiff") in an
unaffiliated entity owning an interest in NLT. The Action was brought in the
Circuit Court of Cook County, Illinois, Chancery Division, on August 15, 1995.
NLT is the owner of two Parking Facilities, North Loop Transportation Center and
Theatre District Self Park ("Theatre District Garage"). The Plaintiff demands
rescission of certain transactions related to the acquisition by NLT of the
Theatre District Garage. The case was settled on October 1, 1997 and
accordingly, was dismissed with prejudice pursuant to an order of even date. ZCP
and NLT are fully indemnified by certain of the other co-defendants and will not
be contributing any funds to the settlement.
Except as described above, management of the Company does not believe there
is any litigation threatened against the Company other than routine litigation
arising out of the ordinary course of business, some of which is expected to be
covered by liability insurance, and none of which is expected to have a material
adverse effect on the consolidated financial statements of the Company.
16. MERGER
On September 15, 1997, the Company entered into a definitive agreement and
plan of merger with Beacon Properties Corporation ("Beacon") whereby Beacon's
portfolio of 126 buildings containing 20.7 million square feet will be
integrated into that of the Company. The merger was unanimously approved by the
Company's Board of Trustees and Beacon's Board of Directors. The merger plan
calls for the Company to issue 1.4063 Common Shares of the Company for each
share of Beacon common stock which is anticipated to result in the issuance of
approximately 84.0 million new Common Shares, approximately $200 million in
preferred shares, 9.8 million Units and to assume outstanding liabilities of
approximately $1.0 billion. The merger, which will be accounted for under the
purchase method of accounting, is expected to be completed in December, 1997
with a total purchase price of approximately $4.3 billion and is subject to the
approval of the shareholders of both companies and other conditions. There can
be no assurance that this transaction will be consummated as described above.
17. SUBSEQUENT EVENTS
(1) In October, 1997, the Company purchased the following office properties
from an unaffiliated party:
- Destec Tower, a 25-story, 574,216 square-foot office tower in Houston,
Texas;
- Brookhollow Central I, II and III, a 800,688 square foot office
complex in suburban Houston, Texas;
- 8080 Central, a 17-story, 283,707 square foot office building near
Dallas, Texas; and
- 1700 Market, a 32-story, 825,547 square foot office building in
Philadelphia, Pennsylvania.
The purchase price of approximately $289 million was comprised of $211.9
million in cash, $6.0 million of liabilities assumed and $71.1 million in Units
issued at a price of $24.50 per Unit. In October 1997, affiliates of the seller
of the foregoing properties purchased approximately $73.95 million in restricted
Common Shares for $24.50 per share.
16
<PAGE> 17
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(2) On October 6, 1997, the Company purchased from an unaffiliated party
550 South Hope Street, a 566,434 square foot, 27-story office building located
in Los Angeles, California. The purchase price of approximately $99.5 million
was paid in cash.
(3) On October 7, 1997, the Company purchased from unaffiliated parties
interests in the following office buildings located in suburban Philadelphia,
Pennsylvania:
- Four Falls Corporate Center, consisting of 254,355 square feet;
- Oak Hill Plaza, consisting of 164,360 square feet;
- Walnut Hill Plaza, consisting of 149,716 square feet;
- Two Valley Square, consisting of 70,622 square feet;
- Four Valley Square, consisting of 49,757 square feet;
- Five Valley Square, consisting of 18,564 square feet;
- One Devon Square, consisting of 77,267 square feet;
- Two Devon Square, consisting of 63,226 square feet;
- Three Devon Square, consisting of 6,000 square feet;
The purchase price of approximately $127.5 million was comprised of $14.39
million in Units at a price of $28.775 per Unit, cash of approximately $98.41
million and $14.7 million of debt assumed by the Company.
In addition, the Company's Board of Trustees approved the purchase of an
interest in the following two properties from a party affiliated with the seller
of the above properties:
- One Valley Square, consisting of 70,289 square feet; and
- Three Valley Square, consisting of 84,605 square feet.
The purchase price of the interests in these properties is approximately
$17.2 million of which approximately $4 million will be paid in Units to be
issued at a price of $28.775 per Unit and the remainder will be comprised of a
combination of cash and the assumption of debt. This transaction is contingent
upon certain terms and conditions as set forth in the purchase agreement. There
can be no assurance that this transaction will be consummated as described
above.
The Company shall have the option of purchasing the remaining interest in
all 11 properties, exerciseable for a designated period commencing three (3)
years after the respective closing dates on the initial purchases, for
additional consideration in the amount of approximately $2.1 million, all
payable in Units valued at $28.775 per Unit. If this option is exercised, total
consideration paid and to be paid for sole ownership of all 11 properties will
be approximately $142.47 million.
(4) On October 7, 1997, the Company purchased from an unaffiliated party 10
and 30 South Wacker Drive, two 40-story office towers totaling 2,033,377 net
rentable square feet, in downtown Chicago, Illinois. The purchase price of
approximately $462 million was paid in cash.
(5) On October 17, 1997, the Company purchased from an unaffiliated party
One Lafayette Center, a 314,634 square-foot 10-story office building, located in
Washington, D.C. The purchase price of approximately $82.5 million was comprised
of $24.4 million in Units issued at a net price of $32.975 per Unit, the
assumption of approximately $5.3 million of liabilities and approximately $52.8
million of cash.
(6) In October, 1997, the Company's Board of Trustees approved the purchase
of the following properties from an unaffiliated party for approximately $92
million:
- 1600 Duke, a 68,770 square foot office building, located in
Alexandria, Virginia;
- Fair Oaks Plaza, a 177,917 square foot office building, located in
Fairfax, Virginia; and
- Lakeside Square, a 392,537 square foot office building, located in
Dallas, Texas.
17
<PAGE> 18
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
This transaction is contingent upon certain terms and conditions as set
forth in the purchase agreement. There can be no assurance that this transaction
will be consummated as described above.
(7) In October, 1997, the Company obtained a $1.5 billion unsecured credit
facility (the "Facility"). The Facility is available for the acquisition of
properties and general corporate purposes. The Facility carries an interest rate
equal to LIBOR plus 100 basis points and may be increased or decreased upon the
receipt of an investment grade unsecured debt rating. The Facility matures on
July 1, 1998, and may be extended to October 1, 1998. The Company paid an
underwriting fee on the Facility at closing of approximately $4,875,000. In
addition, an unused commitment fee is payable quarterly in arrears based upon
the unused amount of the Facility as follows: .15% per annum if the unused
amount is between 0 to 33%; .20% per annum if the unused amount is more than 33%
but less than 66%; and .25% per annum if the unused amount is greater than 66%.
As of November 14, 1997, the outstanding balance on the Facility was
approximately $1,044,450,000.
(8) On October 20, 1997, the Company completed a private placement of
Common Shares with an unaffiliated party receiving approximately $200 million at
$30 per share.
(9) In November, 1997, the Company's Board of Trustees approved the
purchase of LaSalle Plaza, a 588,908 square foot office building, located in
Minneapolis, Minnesota, for approximately $97.4 million. This transaction is
contingent upon certain terms and conditions as set forth in the purchase
agreement. There can be no assurance that this transaction will be consummated
as described above.
(10) In November, 1997, the Company's Board of Trustees approved the
purchase of the Stanwix Parking Facility, a parking facility consisting of
approximately 712 spaces, located in Pittsburgh, Pennsylvania for approximately
$17.3 million. This transaction is contingent upon the satisfactory completion
of the Company's due diligence and certain other terms and conditions. There can
be no assurance that this transaction will be consummated as described above.
(11) The table below summarized the issuance of Common Shares and Units at
the offering through November 14, 1997:
<TABLE>
<CAPTION>
TRANSACTION DATE COMMON SHARES UNITS
----------- ------- ------------- ----------
<S> <C> <C> <C>
Outstanding upon completion of the Offering(A)............ 7/11/97 152,180,770 11,877,647
Units issued to seller of Properties (Note 8)............. 9/3/97 -- 1,692,546
Restricted Share Awards to Officers....................... 9/22/97 119,000 --
Shares issued as Trustee compensation..................... 9/30/97 2,424 --
----------- ----------
Outstanding as of September 30, 1997...................... 9/30/97 152,302,194 13,570,193
Common Shares and Units issued to seller of Properties
(Note 17 (1))........................................... 10/7/97 3,018,367 2,900,000
Units issued to seller of Properties (Note 17 (3))........ 10/7/97 -- 499,977
Units issued to seller of Properties (Note 17 (5))........ 10/17/97 -- 741,159
Private placement (Note 17 (8))........................... 10/20/97 6,666,667 --
----------- ----------
Outstanding as of November 14, 1997....................... 161,987,228 17,711,329
=========== ==========
</TABLE>
- ---------------
(A) Includes 502,740 common shares held by the Operating Partnership which are
deemed not to be outstanding for accounting purposes and are eliminated in
consolidation.
18
<PAGE> 19
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis of the consolidated and combined
financial condition and results of operations should be read in conjunction with
the Consolidated Financial Statements of the Company and the Combined Financial
Statements of Equity Office Predecessors, and Notes thereto contained herein.
All references to the activities of the Company prior to July 11, 1997 contained
in this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" refer to the activities of the Equity Office Predecessors.
Statements contained in this "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" which are not historical facts may be
forward-looking statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these forward
looking statements which speak only as of the date hereof.
GENERAL
The following discussion is based primarily on the Consolidated Financial
Statements of the Company and the Combined Financial Statements of Equity Office
Predecessors, as of September 30, 1997 and December 31, 1996 and for the three
and nine month periods ended September 30, 1997 and 1996.
The Company receives income primarily from rental revenue from Office
Properties (including reimbursements from tenants for certain operating costs),
parking revenue from Office Properties and stand-alone Parking Facilities and,
to a lesser extent, from fees from noncombined affiliates for the management of
properties not owned by the Company (the "Managed Properties").
As of September 30, 1997, the Company owned or had an interest in 93 Office
Properties totaling approximately 33.4 million square feet, and 16 stand alone
Parking Facilities with approximately 16,037 spaces (the "Total Portfolio"). Of
the Total Portfolio, 71 of these Office Properties totaling approximately 22.6
million square feet and three Parking Facilities were acquired prior to January
1, 1996; 11 Office Properties totaling approximately 6.1 million square feet and
seven Parking Facilities were acquired in 1996; and 11 Office Properties
totaling approximately 4.7 million square feet and six Parking Facilities,
including an interest in four Parking Facilities, were acquired during the nine
months ended September 30, 1997. As a result of this rapid growth in the size of
the Total Portfolio, the financial data presented shows large increases in
revenues and expenses from year to year. For the foregoing reasons, the Company
does not believe its period to period financial data is comparable. Therefore,
the analysis below shows changes resulting from Properties that were held during
the entire period for the periods being compared (the "Core Portfolio") and the
changes in the Total Portfolio. The Core Portfolio for the comparison between
the nine months ended September 30, 1997 and 1996 consists of 71 Office
Properties and three Parking Facilities acquired prior to January 1, 1996. The
Core Portfolio for the comparison between the three months ended September 30,
1997 and 1996 consists of 73 Office Properties and three Parking Facilities
acquired prior to July 1, 1996. The Core Portfolio for these comparisons
excludes Barton Oaks Plaza II, a 118,529 square foot Office Property which was
sold in January 1997, 8383 Wilshire, a 417,463 square foot Office Property,
which was sold in May 1997, and 28 State Street, a 570,040 square foot Office
Property, which was undergoing major redevelopment for the periods discussed.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THREE MONTHS ENDED
SEPTEMBER 30, 1996.
The table below presents selected operating information for the Total
Portfolio and for the Core Portfolio which consists of the 73 Office Properties
and three Parking Facilities acquired prior to July 1, 1996. The Core Portfolio
excludes Barton Oaks Plaza II, which was sold in January 1997, and 8383
Wilshire, which was sold
19
<PAGE> 20
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
in May 1997, and 28 State Street which has recently undergone a major
redevelopment and was vacant prior to May 1997.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
------------------------------------------- -------------------------------------------
INCREASE/ INCREASE/
1997 1996 (DECREASE) % CHANGE 1997 1996 (DECREASE) % CHANGE
-------- -------- ---------- -------- -------- -------- ---------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues............... $181,095 $122,883 $58,212 47.4% $128,128 $114,870 $13,258 11.5%
Interest income................. 1,390 2,348 (958) (40.8%) n/a n/a n/a n/a
Fees from noncombined
affiliates.................... 1,401 886 515 58.3% n/a n/a n/a n/a
-------- -------- ------- ------- -------- -------- ------- -------
Total revenues................ 183,886 126,117 57,769 45.8% 128,128 114,870 13,258 11.5%
-------- -------- ------- ------- -------- -------- ------- -------
Interest expense................ 29,973 33,540 (3,567) (10.6%) 23,413 30,568 (7,155) (23.4%)
Depreciation and amortization... 29,786 25,661 4,125 16.1% 19,418 23,182 (3,764) (16.2%)
Property Operating Expenses..... 70,061 50,893 19,168 37.7% 51,926 47,991 3,935 8.2%
General and administrative...... 8,330 5,008 3,322 66.3% n/a n/a n/a n/a
-------- -------- ------- ------- -------- -------- ------- -------
Total expenses................ 138,150 115,102 23,048 20.0% 94,757 101,741 (6,984) (6.9%)
-------- -------- ------- ------- -------- -------- ------- -------
Income before allocation to
minority interests, income
from investment in
unconsolidated joint ventures,
gain on sale of real estate
and extraordinary items....... 45,736 11,015 34,721 315.2% 33,371 13,129 20,242 154.2%
Minority interests.............. (2,899) (468) (2,431) (519.4%) (312) (468) 156 33.3%
Income from unconsolidated joint
ventures...................... 1,383 477 906 189.9% 559 476 83 17.4%
Gain on sale of real estate and
extraordinary items........... (12,930) -- (12,930) -- (12,876) -- (12,876) --
-------- -------- ------- ------- -------- -------- ------- -------
Net Income...................... $ 31,290 $ 11,024 $20,266 183.8% $ 20,742 $ 13,137 $ 7,605 57.9%
======== ======== ======= ======= ======== ======== ======= =======
Property Revenues less Property
Operating Expenses............ $111,034 $ 71,990 $39,044 54.2% $ 76,202 $ 66,879 $ 9,323 13.9%
======== ======== ======= ======= ======== ======== ======= =======
</TABLE>
Property Revenues: The increase in rental revenues, tenant reimbursements,
parking income and other income ("Property Revenues") in the Core Portfolio
resulted from a combination of occupancy and rental rate increases. The weighted
average occupancy of the Core Portfolio increased from approximately 91.1% at
July 1, 1996 to 94.9% as of September 30, 1997. This increase represents
approximately 0.9 million square feet of additional occupancy in the Core
Portfolio between July 1, 1996 and September 30, 1997. Included in Property
Revenues for the Core Portfolio are lease termination fees of $.9 million and
$1.2 million for the three months ended September 30, 1997 and 1996,
respectively (which are included in the other revenue category on the combined
statement of operations). These fees are related to specific tenants who have
paid a fee to terminate their lease obligations before the end of the
contractual term of the lease. Although the Company has historically experienced
similar levels of such termination fees, there is no way of predicting the
timing or amounts of future lease termination fees. The straight-line rent
adjustment which is included in rental revenues for the Core Portfolio for the
three months ended September 30, 1997 and 1996, was approximately $6.0 million
and $4.4 million, respectively. The straight-line rent adjustment which is
included in rental revenues for the Total Portfolio for the three months ended
September 30, 1997 and 1996 was approximately $8.7 million and $5.2 million,
respectively.
Interest Income: Interest income for the Total Portfolio decreased by $.9
million to $1.4 million for the three months ended September 30, 1997, compared
to $2.3 million for the three months ended September 30, 1996. This decrease in
interest income is primarily due to having a lesser amount of cash reserves
invested in short term investments since the closing of the Consolidation and
Offering. Prior to the Consolidation, each of the entities involved in the
Consolidation needed to maintain separate cash reserves which in the aggregate
20
<PAGE> 21
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
were higher than the cash reserves the Company anticipates maintaining going
forward. Due to the availability of borrowings under the $600 million Credit
Facility and other changes in the capital structure of the Company, the Company
anticipates that it will maintain cash reserves of $15 to $25 million (although
the cash balance may at times be more or less in anticipation of pending
acquisitions or other transactions). The lower cash balance will result in lower
interest income in future periods, however, this loss in income should be offset
by savings on the $600 million Credit Facility.
Fees from Noncombined Affiliates: Although fees from noncombined
affiliates increased, they are expected to decrease in future periods as the
Managed Properties are sold. Fee income of approximately $70,900 and $238,900
for the three months ended September 30, 1997 and 1996, respectively, was
related to properties which have been sold.
Interest Expense: Interest expense decreased $3.5 million for the Total
Portfolio to $30.0 million for the three months ended September 30, 1997
compared to $33.5 million for the three months ended September 30, 1996. This
decrease was primarily the result of the repayment of approximately $598.4
million of mortgage debt in July, 1997 (of which $497.6 million was secured by
properties in the Core Portfolio) and the repayment of $80 million on the $475
Million Line partially offset by the $180 million Private Debt Offering.
Interest expense related to the $598.4 million of secured debt repaid was
approximately $1.5 million and $10.9 million for the three months ended
September 30, 1997 and 1996, respectively. Interest expense related to the $475
Million Line, the $180 million Private Debt Offering and the $600 million Credit
Facility for three months ended September 30, 1997 (an equivalent amount was not
outstanding for the prior period) was approximately $.8 million, $1.1 million
and $2.7 million, respectively. Due to these debt repayments, interest expense
is initially expected to decrease in future periods, and then anticipated to
increase as the Company acquires additional properties and incurs additional
financing.
Depreciation and Amortization: The decrease in depreciation in the Core
Portfolio resulted from the recording of the Company's assets and liabilities at
their fair market value in connection with the Consolidation and Offering.
Accordingly, certain of the Company's assets are depreciated over longer lives
than the period over which those assets were previously depreciated by Equity
Office Predecessors. The resulting decrease to depreciation was partially offset
by an increase to depreciation resulting from a step-up recorded to investment
in real estate, also as a result of recording those assets at their fair market
value at the time of the Consolidation and Offering. The decrease in
amortization in the Core Portfolio resulted from the write-off of deferred
financing and leasing costs at the time of the Consolidation and Offering.
Property Operating Expenses: The increase in real estate taxes and
insurance, repairs and maintenance, and property operating expenses ("Property
Operating Expenses") in the Core Portfolio relates primarily to increases in
real estate taxes due to higher property valuations partially offset by real
estate tax refunds recorded in the three months ended September 30, 1997.
General and Administrative Expenses: General and administrative expenses
increased by approximately $3.3 million to $8.3 million for the three months
ended September 30, 1997, compared to $5.0 million for the three months ended
September 30, 1996. General and administrative expenses as a percentage of total
revenues was approximately 4.5% and 4.0% for the three months ended September
30, 1997 and 1996, respectively. The primary reasons for the increase in general
and administrative expenses are the significant increase in the size of the
Company's portfolio and increased expenses associated with becoming a public
company. While general and administrative expenses will continue to increase as
the size of the Company's portfolio increases, it is anticipated that general
and administrative expenses as a percentage of total revenue will initially
remain stable (or increase slightly), as the full costs of running a public
company are reflected in operations, and then decrease over time as the Company
realizes increased economies of scale.
21
<PAGE> 22
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
The table below presents selected operating information for the Total
Portfolio and for the Core Portfolio which consists of the 71 Office Properties
and three Parking Facilities acquired prior to January 1, 1996. The Core
Portfolio excludes Barton Oaks Plaza II, which was sold in January 1997, 8383
Wilshire, which was sold in May 1997 and 28 State Street which has recently
undergone a major redevelopment and was vacant prior to May 1997.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
------------------------------------------ ------------------------------------------
INCREASE/ % INCREASE/ %
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) CHANGE
-------- -------- ---------- ------- -------- -------- ---------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Revenues.................. $489,307 $343,660 $145,647 42.4% $340,295 $317,520 $22,775 7.2%
Interest income.................... 10,524 6,451 4,073 63.1% n/a n/a n/a n/a
Fees from noncombined affiliates... 3,841 3,126 715 22.9% n/a n/a n/a n/a
-------- -------- -------- ------- -------- -------- ------- -------
Total revenues................... 503,672 353,237 150,435 42.6% 340,295 317,520 22,775 7.2%
-------- -------- -------- ------- -------- -------- ------- -------
Interest expense................... 106,274 87,551 18,723 21.4% 79,195 81,988 (2,793) (3.4%)
Depreciation and amortization...... 90,195 69,193 21,002... 30.4% 64,287 62,807 1,480 2.4%
Property Operating Expenses........ 190,170 141,823 48,347 34.1% 132,629 130,536 2,093 1.6%
General and administrative......... 23,056 16,278 6,778 41.6% n/a n/a n/a n/a
-------- -------- -------- ------- -------- -------- ------- -------
Total expenses................... 409,695 314,845 94,850 30.1% 276,111 275,331 780 0.3%
-------- -------- -------- ------- -------- -------- ------- -------
Income before allocation to
minority interests, income from
investment in unconsolidated
joint ventures, gain on sale of
real estate and extraordinary
items............................ 93,977 38,392 55,585 144.8% 64,184 42,189 21,995 52.1%
Minority interests................. (3,778) (2,166) (1,612) (74.4%) (1,191) (2,166) 975 45.0%
Income from unconsolidated joint
ventures......................... 3,408 1,554 1,854 119.3% 1,796 1,686 110 6.5%
Gain on sale of real estate and
extraordinary items.............. (694) 5,262 (5,956) (113.2%) (12,876) -- (12,876) --
-------- -------- -------- ------- -------- -------- ------- -------
Net Income......................... $ 92,913 $ 43,042 $ 49,871 115.9% $ 51,913 $ 41,709 $10,204 24.5%
======== ======== ======== ======= ======== ======== ======= =======
Property Revenues less Property
Operating Expenses............... $299,137 $201,837 $ 97,300 48.2% $207,666 $186,984 $20,682 11.1%
======== ======== ======== ======= ======== ======== ======= =======
</TABLE>
Property Revenues: The increase in Property Revenues in the Core Portfolio
resulted from a combination of occupancy and rental rate increases. The weighted
average occupancy of the Core Portfolio increased from approximately 88.5% at
January 1, 1996 to 94.8% as of September 30, 1997. This increase represents
approximately 1.4 million square feet of additional occupancy in the Core
Portfolio between January 1, 1996 and September 30, 1997. Included in Property
Revenues for the Core Portfolio are lease termination fees of $3.4 million and
$4.5 million for the nine months ended September 30, 1997 and 1996, respectively
(which are included in the other revenue category on the combined statement of
operations). These fees are related to specific tenants who have paid a fee to
terminate their lease obligations before the end of the contractual term of the
lease. Although the Company has historically experienced similar levels of such
termination fees, there is no way of predicting the timing or amounts of future
lease termination fees. The straight-line rent adjustment which is included in
rental revenues for the Core Portfolio for the nine months ended September 30,
1997 and 1996, was approximately $9.9 million and $9.9 million, respectively.
The straight-line rent adjustment which is included in rental revenues for the
Total Portfolio for the nine months ended September 30, 1997 and 1996, was
approximately $16.4 million and $13.1 million, respectively.
Interest Income: Interest income for the Total Portfolio increased by $4.1
million to $10.5 million for the nine months ended September 30, 1997, compared
to $6.5 million for the nine months ended
22
<PAGE> 23
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
September 30, 1996. This increase in interest income is due primarily to having
a larger amount of cash invested in short term investments pending the purchase
of new acquisitions. Prior to the Consolidation, each of the entities involved
in the Consolidation needed to maintain separate cash reserves which in the
aggregate were higher than cash reserves the Company anticipates maintaining
going forward. Due to the availability of borrowings under the $600 million
Credit Facility and other changes in the capital structure of the Company, the
Company anticipates that it will maintain cash reserves of $15 to $25 million
(although the cash balance may at times be more or less in anticipation of
pending acquisitions or other transactions). The lower cash balance will result
in lower interest income in future periods, however, this loss in income should
be offset by savings on the $600 million Credit Facility.
Fees from Noncombined Affiliates: Although fees from noncombined
affiliates increased, they are expected to decrease in future periods as the
Managed Properties are sold. Fee income of approximately $380,800 and $834,300
for the nine months ended September 30, 1997 and 1996, respectively, related to
Properties which have been sold.
Interest Expense: Interest expense increased $18.7 million for the Total
Portfolio to $106.3 million for the nine months ended September 30, 1997
compared to $87.6 million for the nine months ended September 30, 1996. This
increase was primarily the result of the $180 million Private Debt Offering, net
proceeds of $164 million from the $475 Million Line and the $600 Million Credit
Facility (exclusive of the $80 million repaid after the closing of the
Offering), and increased debt obtained to finance acquisitions. At or shortly
after the closing of the Offering, the Company repaid approximately $598.4
million of mortgage debt (of which $497.6 million was secured by Properties in
the Core Portfolio) and repaid $80 million on the $475 Million Line, partially
offsetting the increase in interest expense. Interest expense related to the
$598.4 million of secured debt repaid was approximately $25.2 million and $31.1
million for the nine months ended September 30, 1997 and 1996, respectively.
Interest expense related to the $475 Million Line, the $180 million Private Debt
Offering and the $600 million Credit Facility for the nine months ended
September 30, 1997 (an equivalent amount was not outstanding for the prior
period) was approximately $5.2 million, $1.1 million and $2.7 million,
respectively. Due to these debt repayments, interest expense is initially
expected to decrease in future periods, and then anticipated to increase as the
Company acquires additional properties and incurs additional financing.
Depreciation and Amortization: Depreciation and amortization for the Core
Portfolio increased as a result of capital and tenant improvements made in 1996
and 1997 and as a result of a step-up that was recorded to investment in real
estate. This step-up was recorded as a result of adjusting the basis of the
Company's assets and liabilities to their fair market values in connection with
the Consolidation and Offering. This increase was partially offset by a decrease
resulting from certain of the Company's assets being depreciated over longer
lives than the periods over which corresponding assets were previously
depreciated by Equity Office Predecessors.
Property Operating Expenses: The increase in Property Operating Expenses
relates primarily to an increase in maintenance expenses, offset in part by a
decrease in real estate taxes, which was caused by real estate tax refunds
related to prior periods recorded in the nine months ended September 30, 1997.
General and Administrative: General and administrative expenses increased
by approximately $6.8 million to $23.1 million for the nine months ended
September 30, 1997, compared to $16.3 million for the nine months ended
September 30, 1996. General and administrative expenses as a percentage of total
revenues was approximately 4.6% and 4.6% for the nine months ended September 30,
1997 and 1996, respectively. While general and administrative expenses will
continue to increase as the size of the Company's portfolio increases, it is
anticipated that general and administrative expenses as a percentage of total
revenues will initially remain
23
<PAGE> 24
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
stable (or increase slightly), as the full costs of running a public company are
reflected in operations, and then decrease over time as the Company realizes
increased economies of scale.
PARKING OPERATIONS
Included in the Total Portfolio numbers above are results of operations
from the stand alone Parking Facilities, the summarized information for which is
presented below.
Comparison of three months ended September 30, 1997 to three months ended
September 30, 1996.
<TABLE>
<CAPTION>
TOTAL PARKING PORTFOLIO CORE PARKING PORTFOLIO
-------------------------------------- ---------------------------------------
INCREASE/ % INCREASE/
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) % CHANGE
------- ------ ---------- ------ ------ ------ ---------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Revenues................ $ 6,311 $2,465 $3,846 156.0% $2,515 $2,465 $ 50 2.0%
Interest income.................. 35 42 (7) (16.7%) -- -- -- --
------- ------ ------ ------ ------ ------ ----- ------
Total revenues................. 6,346 2,507 3,839 153.1% 2,515 2,465 50 2.0%
------- ------ ------ ------ ------ ------ ----- ------
Interest expense................. 475 411 64 15.8% 700 411 289 70.3%
Depreciation and amortization.... 1,068 333 735 220.7% 482 333 149 44.7%
Property Operating Expenses...... 1,071 692 379 54.8% 426 692 (266) (38.4%)
------- ------ ------ ------ ------ ------ ----- ------
Total expenses................. 2,614 1,436 1,178 82.0% 1,608 1,436 172 12.0%
------- ------ ------ ------ ------ ------ ----- ------
Income before allocation to
minority interests, income from
investment in unconsolidated
joint ventures................. 3,732 1,071 2,661 248.5% 907 1,029 (122) (11.9%)
Minority interests............... (79) (43) (36) 83.7% (79) (43) (36) (83.7%)
Income from unconsolidated joint
ventures....................... 825 -- 825 -- -- -- -- --
------- ------ ------ ------ ------ ------ ----- ------
Net Income....................... $ 4,478 $1,028 $3,450 335.6% $ 828 $ 986 $(158) (16.0%)
======= ====== ====== ====== ====== ====== ===== ======
Property Revenues less Property
Operating Expenses............. $ 5,240 $1,773 $3,467 195.5% $2,089 $1,773 $ 316 17.8%
======= ====== ====== ====== ====== ====== ===== ======
</TABLE>
Comparison of nine months ended September 30, 1997 to nine months ended
September 30, 1996.
<TABLE>
<CAPTION>
TOTAL PARKING PORTFOLIO CORE PARKING PORTFOLIO
--------------------------------------- ---------------------------------------
INCREASE/ % INCREASE/
1997 1996 (DECREASE) CHANGE 1997 1996 (DECREASE) % CHANGE
------- ------- ---------- ------ ------ ------ ---------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Revenues............... $16,282 $ 7,402 $8,880 120.0% $7,515 $7,402 $ 113 1.5%
Interest income................. 149 95 54 56.9% -- -- -- --
------- ------- ------ ------ ------ ------ ----- ------
Total revenues.................. 16,431 7,497 8,934 119.2% 7,515 7,402 113 1.5%
------- ------- ------ ------ ------ ------ ----- ------
Interest expense................ 2,566 1,237 1,329 107.4% 1,995 1,237 758 61.3%
Depreciation and amortization... 2,703 1,000 1,703 170.3% 1,181 1,000 181 18.1%
Property Operating Expenses..... 3,458 2,319 1,139 49.1% 1,869 2,319 (450) (19.4%)
------- ------- ------ ------ ------ ------ ----- ------
Total expenses.................. 8,727 4,556 4,171 91.6% 5,045 4,556 489 10.7%
------- ------- ------ ------ ------ ------ ----- ------
Income before allocation to
minority interests, income
from investment in
unconsolidated joint
ventures...................... 7,704 2,941 4,763 162.0% 2,470 2,846 (376) (13.2%)
Minority interests.............. (200) (249) 49 19.7% (200) (249) 49 19.7%
Income from unconsolidated joint
ventures...................... 1,611 -- 1,611 -- -- -- -- --
------- ------- ------ ------ ------ ------ ----- ------
Net Income...................... $ 9,115 $ 2,692 $6,423 238.6% $2,270 $2,597 $(327) (12.6%)
======= ======= ====== ====== ====== ====== ===== ======
Property Revenues less Property
Operating Expenses............ $12,824 $ 5,083 $7,741 152.3% $5,646 $5,083 $ 563 11.1%
======= ======= ====== ====== ====== ====== ===== ======
</TABLE>
24
<PAGE> 25
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISPOSITIONS OF PROPERTY
The Company sold two Office Properties in 1997: Barton Oaks Plaza II, a
118,529 square-foot Office Property, in January, 1997 and 8383 Wilshire, a
417,463 square-foot Office Property, in May, 1997. In January, 1996, the Company
sold the condominium portion, comprised of a 210 room hotel at Three Lakeway, a
mixed-use property. Below is a summary of the operations of these Office
Properties for the three and nine month periods ended September 30, 1997 and
1996.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -----------------
1997 1996 1997 1996
---- ------ ------- ------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Property Revenues....................................... $ 42 $2,540 $ 3,227 $7,460
---- ------ ------- ------
Interest expense........................................ -- 149 36 808
Depreciation and amortization........................... -- 563 451 1,678
Property Operating Expenses............................. 91 1,007 1,501 3,447
---- ------ ------- ------
Total expenses........................................ 91 1,719 1,988 5,933
Income/(loss) before allocation to minority interests,
and gain on sale of real estate and extraordinary
items................................................. (49) 821 1,239 1,527
Minority interests...................................... -- -- (164) --
Gain on sale of real estate and extraordinary items..... -- -- 12,235 5,262
---- ------ ------- ------
Net (Loss) Income....................................... ($49) $ 821 $13,310 $6,789
==== ====== ======= ======
Property Revenues less Property Operating Expenses...... ($49) $1,533 $ 1,726 $4,013
==== ====== ======= ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity: Net cash provided from operations represents the primary source
of liquidity to fund distributions, debt service, recurring capital costs and
non-revenue enhancing tenant improvements. Historically, the Company made annual
distributions equal to approximately 100% of taxable income. Cash generated in
excess of taxable income (resulting primarily from non-cash items such as
depreciation and amortization) was retained for working capital and to fund
capital improvements and non-revenue enhancing tenant improvements. The Company
intends to make regular quarterly distributions to holders of Common Shares and
Units. The Company has established its initial distribution at an annual rate of
$1.20 per Common Share based upon its estimate of annualized cash flow.
The Company intends to fund recurring capital costs and non-revenue
enhancing tenant improvements from cash from operations and draws under its $600
million Credit Facility. The Company has no contractual obligations for material
capital costs, other than in connection with customary tenant improvements in
the ordinary course of business. The Company also expects that the $600 million
Credit Facility will provide for temporary working capital, unanticipated cash
needs, and funding of acquisitions.
The anticipated size of the Company's distributions will not allow the
Company, using only cash from operations, to retire all of its debt as it comes
due and, therefore, the Company will be required to repay maturing debt with
funds from debt and/or equity financing.
Mortgage Financing: The table below summarizes the mortgage debt, unsecured
notes and credit facility indebtedness outstanding at September 30, 1997 and
December 31, 1996, excluding the discount on mortgage
25
<PAGE> 26
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
debt (net of accumulated amortization of approximately $1.3 million) of
approximately $19 million recorded in connection with the Offering and
Consolidation.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Debt Summary:
Balance ($'s in thousands)
Fixed Rate................................................ $1,308,125 $1,304,075
Variable Rate............................................. 427,368 660,817
---------- ----------
Total............................................. $1,735,493 $1,964,892
========== ==========
Percentage of Total Debt:
Fixed Rate................................................ 75.4% 66.4%
Variable Rate............................................. 24.6% 33.6%
---------- ----------
Total............................................. 100.0% 100.0%
========== ==========
Weighted Average Interest Rate at End of Period:
Fixed Rate................................................ 7.56% 7.89%
Variable Rate............................................. 6.86% 7.33%
---------- ----------
Total............................................. 7.39% 7.70%
========== ==========
</TABLE>
The variable rate debt shown above bore interest at the 30 day LIBOR-based
floating interest rate. The 30-day LIBOR at September 30, 1997 was approximately
5.66% resulting in a weighted average spread over LIBOR at September 30, 1997 of
1.2%.
During the quarter ended September 30, 1997, the Company used the net
proceeds of the Offering of approximately $564.5 million and approximately $33.9
million of available cash reserves to repay $253.1 million of fixed rate debt
and $345.3 million of variable rate debt. An additional $12.9 million was
incurred for prepayment penalties. The Company used the $180 million of proceeds
received from the Private Debt Offering to repay a portion of the $600 million
Credit Facility. The balance on the $600 million Credit Facility at September
30, 1997 was approximately $211.1 million. The total debt outstanding as of
September 30, 1997, excluding the discount on mortgage debt (net of accumulated
amortization of approximately $1.3 million) of approximately $19 million
recorded in connection with the Offering and Consolidation, will mature as
follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
1997............................................. $ 3,319
1998............................................. 45,218
1999............................................. 168,085
2000............................................. 357,605
2001............................................. 192,074
2002............................................. 60,333
Thereafter....................................... 908,859
----------
Total.................................. $1,735,493
==========
</TABLE>
The instruments encumbering the Properties contain customary restrictions
and requirements such as transferability restrictions, payment of taxes on the
Property, maintenance of the Property in good condition, maintenance of
insurance on the Property, prohibition on liens, and obtaining lender consent to
leases with material tenants.
26
<PAGE> 27
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Lines of Credit: ZML Fund IV entered into an acquisition/term loan facility
in September, 1996 which was amended in April 1997 (the "$475 million Line"). On
July 15, 1997, the Company obtained a $600 million Credit Facility which is used
for acquisitions and general corporate purposes. Amounts were drawn on the $600
million Credit Facility to repay the outstanding balance on the $475 million
Line which was terminated when the $600 million Credit Facility was obtained.
The $600 million Credit Facility matures on July 15, 2000. The Company paid a
commitment fee on the $600 million Credit Facility at closing of approximately
$645,000. In addition, until the Company receives a long term debt rating of
BBB- or Baa3 or higher by two rating agencies, an unused commitment fee is
payable quarterly in arrears based upon the unused amount of the $600 million
Credit Facility as follows: .15% per annum if the unused amount is between 0 to
33%; .20% per annum if the unused amount is more than 33% but less than 66%;
.25% per annum if the unused amount is more than 66%. The $600 million Credit
Facility carries an interest rate equal to LIBOR plus 110 basis points. Once the
Company receives the rating as described above, a competitive bid option will
become available for up to $250 million of the facility amount, the interest
rate spread will be reduced on a sliding scale based upon the Company's senior
unsecured debt rating and the unused commitment fee will be replaced by a
facility fee of .20% per annum. The Company is negotiating an amendment to the
$600 million Credit Facility to reduce the interest rate to LIBOR plus 100 basis
points. There can be no assurance that the amendment will be consummated. As of
November 14, 1997 the outstanding balance on the $600 million Credit Facility
has been repaid with proceeds received from the $180 million Private Debt
Offering and the $1.5 billion Facility.
Term Loan Facility: In October 1997 the Company obtained a $1.5 billion
unsecured credit facility (the "Facility"). The Facility is available for the
acquisition of properties and general corporate purposes. The Facility carries
an interest rate equal to LIBOR plus 100 basis points and may be increased or
decreased upon receipt of an investment grade unsecured debt rating. The
Facility matures on July 1, 1998, and may be extended to October 1, 1998. The
Company paid an underwriting fee on the Facility at closing of approximately
$4,875,000. In addition, an unused commitment fee is payable quarterly in
arrears based upon the unused amount of the Facility as follows: .15% per annum
if unused amount is between 0 to 33%; .20% per annum if unused amount is more
than 33% but less than 66%; .25% per annum if unused amount is greater than 66%.
In October, 1997, the Company used approximately $236 million of proceeds from
the Facility to repay the majority of the variable rate property mortgage
indebtedness outstanding as of September 30, 1997. The Company repaid $150
million on the Facility with proceeds from the $200 million private placement of
Common Shares in October, 1997. Under the terms of the facility agreement, any
amounts repaid cannot be drawn. In addition, amounts were drawn from the
Facility for property acquisitions and general corporate purposes. As of
November 14, 1997, the outstanding balance on the $1.5 billion Credit Facility
was approximately $1.044 billion. The amount available to draw under the
Facility is approximately $306 million as of November 14, 1997.
Unsecured Notes: In September, 1997, the Company completed the $180
million Private Debt Offering with an unaffiliated party. The terms of the $180
million Private Debt Offering consist of four tranches with maturities from
seven to ten years which were priced at an interest rate spread over the
corresponding U.S. Treasury rate. The Company used the proceeds of the $180
million Private Debt Offering to repay a portion of the $600 million Credit
Facility. In addition, the Company terminated $150 million of the $700 million
of hedge agreements at a cost of approximately $3.9 million for the $180 million
Private Debt Offering. This
27
<PAGE> 28
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
amount will be amortized to interest expense over the respective terms of each
tranche. A summary of the terms of the $180 million Private Debt Offering are as
follows:
<TABLE>
<CAPTION>
STATED EFFECTIVE
TRANCHE AMOUNT RATE RATE(A)
- ----------------------------------------------- ------------ ------ ---------
<S> <C> <C> <C>
7 Year Senior Notes due 2004.................. $ 30,000,000 7.24% 7.24%
8 Year Senior Notes due 2005.................. 50,000,000 7.36% 7.67%
9 Year Senior Notes due 2006.................. 50,000,000 7.44% 7.73%
10 Year Senior Notes due 2007.................. 50,000,000 7.42% 7.69%
------------
$180,000,000
============
</TABLE>
(A) Includes the cost of the terminated interest rate protection agreements.
It is currently anticipated that the Company will issue Preferred Shares
and/or senior unsecured notes (the "Expected Offering") in early 1998 subject to
market conditions. Proceeds from the Expected Offering will be used to repay a
portion of the Facility. There can be no assurance that the Expected Offering
will be consummated.
Interest Rate Protection Agreements: In order to limit the market risk
associated with variable rate debt, the Company entered into several interest
rate protection agreements. These agreements effectively convert floating rate
debt to a fixed rate basis, as well as hedge anticipated financing transactions.
Net amounts paid or received under these agreements are recognized as an
adjustment to interest expense when such amounts are incurred or earned.
Settlement amounts paid or received under these agreements are deferred and
amortized over the term of the related financing transaction on the
straight-line method which approximates the effective yield method. A summary of
the various interest rate hedge agreements is as follows: (1) On June 4, 1997,
the Company entered into interest rate protection agreements for $700 million of
indebtedness. As a result of this arrangement, the Company has essentially
"locked into" U.S. Treasury rates in effect as of June 4, 1997, for $700 million
in indebtedness. In August, 1997, the Company terminated $150 million of the
$700 million of hedge agreements at a cost of $3.9 million. The terminated
agreements pertained to the $180 million Private Debt Offering. The portion of
the $180 million Private Debt Offering protected by these agreements consisted
of three tranches with maturities of eight, nine and ten years, respectively.
The cost of the terminated hedge agreements will be amortized to interest
expense over the respective terms of each tranche. (2) On October 6, 1997, the
Company entered into an additional $450 million of interest rate protection
agreements based on the U.S. Treasury rates in effect as of that date. The
Company intends to terminate these agreements and the remaining $550 million
hedge agreements described above at such time as it incurs fixed rate
indebtedness. Upon the occurrence of such termination, the Company will either
owe money or be entitled to receive money depending on whether U.S. Treasury
rates have increased (resulting in a payment to the Company) or decreased
(resulting in a payment obligation of the Company) subsequent to the date of the
hedge. The counterparties to these arrangements are major U.S. financial
institutions. (3) Equity Office Predecessors entered into an interest rate swap
agreement in October, 1995 which effectively fixed the interest rate on a $93.6
million mortgage loan at 6.94% through the maturity of the loan on June 30,
2000.
The $600 million Credit Facility, the $180 million Private Debt Offering,
the Facility and any notes issued in the Expected Offering are expected to
contain certain customary restrictions and requirements such as total debt to
assets ratios, secured debt to total assets ratios, debt service coverage
ratios, minimum ratios of unencumbered assets to unsecured debt, and other
limitations.
28
<PAGE> 29
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ISSUANCE OF COMMON SHARES AND UNITS SUBSEQUENT TO THE OFFERING:
During the period July 11, 1997 through November 14, 1997, 5,833,682 Units
and 3,018,367 Common Shares were issued to the sellers of certain Properties
acquired during this period. An additional 121,424 Common Shares were issued as
restricted share awards to officers and to trustees as compensation. Also, the
Company completed the private placement of Common Shares with an unaffiliated
party, issuing 6,666,667 Common Shares at $30 per share. A portion of these
funds were used to repay a portion of the $1.5 billion Credit Facility.
CASH FLOWS
Nine Months ended September 30, 1997 and 1996
For discussion purposes, the cash flows for the nine months ended September
30, 1997 combine the cash flows of the Equity Office Predecessors for the period
January 1, 1997 to July 10, 1997 and the cash flows of the Company for the
period July 11, 1997 to September 30, 1997. The cash flows for the nine months
ended September 30, 1996 represent solely the cash flows of Equity Office
Predecessors. Consequently, the comparison of the periods provides only limited
information regarding the cash flows of the Company.
Cash and cash equivalents decreased by approximately $277.8 million, to
approximately $132.6 million at September 30, 1997, compared to $410.4 million
at December 31, 1996. This decrease was the result of $155.6 million of cash
generated by operations, $404.4 million generated from financing activities
reduced by $656.7 million invested in new acquisitions, capital and tenant
improvements, and payment of leasing commissions. Net cash provided by operating
activities increased by $65.9 million from $89.7 million to $155.6 million
primarily due to the additional cash flow generated by the increase in the
number of Properties owned. Net cash used for investing activities increased by
$67.4 million from $589.3 million to $656.7 million mainly due to an increase in
the amount of real estate assets purchased during the nine months ended
September 30, 1997 compared to the nine months ended September 30, 1996. Net
cash provided by financing activities decreased by $125.9 million from $530.3
million to $404.4 million due to an increase in principal payments on mortgage
notes (including the repayments of debt with proceeds received from the
Offering) and the $600 million Credit Facility, and a decrease in proceeds from
mortgage notes offset in part by a decrease in capital distributions and an
increase in proceeds from the $600 million Credit Facility and unsecured notes.
CAPITAL IMPROVEMENTS
The Company has a history of acquiring and repositioning undercapitalized
and poorly managed properties, many of which have required significant capital
improvements due to deferred maintenance and/or required substantial renovation
to enable them to compete effectively. A number of the Company's properties also
have had significant amounts of shell space requiring build out at the time of
acquisition. The Company takes these capital improvements and revenue enhancing
tenant improvements into consideration at the time of acquisition in determining
the amount of equity and debt financing required to purchase the Property and
fund the improvements. Therefore, capital improvements up to the first five
years after acquisition of these Properties are treated separately from typical
recurring capital expenditures, non-revenue enhancing tenant improvements and
leasing commissions required once these Properties have reached stabilized
occupancy, and deferred maintenance and renovations planned at the time of
acquisition have been completed. Capital improvements (including tenant
improvements and leasing commissions for shell space) for the nine months ended
September 30, 1997, was approximately $57 million or $1.71 per square foot.
These amounts include approximately $27.8 million for the nine months ended
September 30, 1997, for the redevelopment of the 28 State Street Building.
29
<PAGE> 30
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company considers capital expenditures to be recurring expenditures
relating to the on-going maintenance of the Office Properties. The table below
summarizes capital expenditures for the nine months ended September 30, 1997.
The capital expenditures set forth below are not necessarily indicative of
future capital expenditures.
<TABLE>
<CAPTION>
1997
(THROUGH
SEPTEMBER 30)
-------------
<S> <C>
Number of Office Properties............................ 93
Rentable Square Feet (in millions)..................... 33.4
Annual Capital Expenditures per square foot............ $ .07
</TABLE>
TENANT IMPROVEMENTS AND LEASING COMMISSION COSTS
The Company distinguishes its tenant improvements and leasing commissions
between those that are revenue enhancing (which are required for space which is
vacant at the time of acquisition or that has been vacant for nine months or
more) and non-revenue enhancing (which are required to maintain the revenue
being generated from currently leased space). The table below summarizes the
revenue enhancing and non-revenue enhancing tenant improvements and leasing
commissions for the nine months ended September 30, 1997. The tenant improvement
and leasing commission costs set forth below are presented on an aggregate basis
and do not reflect significant regional variations and, in any event, are not
necessarily indicative of future tenant improvement and leasing commission
costs:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Number of Office Properties................................. 93
Rentable square feet (in millions) (as of September 30,
1997)..................................................... 33.4
Revenue enhancing tenant improvements and leasing
commissions:
Amounts (in thousands).................................... $ 6,930
Per square foot improved.................................. $ 15.90(1)
Per total square foot..................................... $ .28(1)(2)
Non-revenue enhancing tenant improvements and leasing
commissions:
Renewal space
Amounts (in thousands).................................... $ 7,553
Per square foot improved............................... $ 6.02(1)
Per total square foot.................................. $ .31(1)(2)
Retenanted space
Amounts (in thousands).................................... $10,689
Per square foot improved............................... $ 13.93(1)
Per total square foot.................................. $ .43(1)(2)
-------
Total non-revenue enhancing (in thousands).................. $18,242
Per square foot improved.................................... $ 9.02(1)
Per total square foot....................................... $ .74(1)(2)
</TABLE>
- ---------------
(1) The per square foot calculations as of September 30, 1997 are
calculated taking the total dollars anticipated to be expended on tenant
improvements in process as of September 30, 1997 divided by the total
square-footage being improved or total building square footage, respectively.
The actual amounts expended as
30
<PAGE> 31
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
of September 30, 1997 for revenue enhancing and non-revenue enhancing renewal
and released space were $8.7 million, $7.5 million and $21.5 million,
respectively.
(2) The amounts shown have been annualized to reflect a full year of
comparable operation. The actual costs per total square foot as of September 30,
1997 for revenue enhancing and non-revenue enhancing renewal and released space
were $.21, $.23 and $.32, respectively.
INFLATION
Substantially all of the office leases require the tenant to pay, as
additional rent, a portion of any increases in real estate taxes and operating
expenses over a base amount. In addition, many of the office leases provide for
fixed increases in base rent or indexed escalations (based on the Consumer Price
Index or other measures). The Company believes that inflationary increases in
expenses will be offset, in part, by the expense reimbursements and contractual
rent increases described above.
FUNDS FROM OPERATIONS
Management of the Company believes Funds from Operations, as defined by the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), to be an
appropriate measure of performance for an equity REIT. While Funds from
Operations is a relevant and widely used measure of operating performance of
equity REITs, it does not represent cash flow from operations or net income as
defined by generally accepted accounting principles ("GAAP"), and it should not
be considered as an alternative to these indicators in evaluating liquidity or
operating performance of the Company.
31
<PAGE> 32
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table reflects the calculation of the Company's and Equity
Office Predecessors' Funds from Operations for the three and nine month periods
ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
---------------------------------------------
EQUITY OFFICE
PROPERTIES
EQUITY OFFICE TRUST AND
PROPERTIES PREDECESSORS EQUITY OFFICE
TRUST FOR THE COMBINED PREDECESSORS
PERIOD FROM FOR THE FOR THE THREE
JULY 11, 1997 THREE MONTHS MONTHS
TO ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income from investment in unconsolidated
joint ventures, gain on sale of real estate,
extraordinary items and minority interest............. $ 45,874 $ 45,736 $ 11,015
Add back (deduct):
(Income) allocated to minority interests.............. (279) (312) (468)
Income from investment in unconsolidated joint
ventures.............................................. 1,426 1,383 477
Depreciation and amortization (real estate related)... 21,860 26,715 23,451
Amortization of loan discount...................... 1,267 1,267 --
-------- -------- --------
Funds from Operations before effect of adjusting
straight-line rental revenue and expense included in
Funds from Operations to a cash basis(1).............. 70,148 74,789 34,475
-------- -------- --------
Deferred rental revenue............................ (8,659) (8,705) (5,173)
Deferred rental expense............................ 549 549 --
-------- -------- --------
Funds from Operations excluding straight-line rental
revenue and expense adjustments....................... $ 62,038 $ 66,633 $ 29,302
======== ======== ========
Operating Partnership Funds from Operations............. $ 70,148 $ 74,789 n/a
Company's share of Operating Partnership................ 92% 92% n/a
-------- -------- --------
Company's share of Funds from Operations................ $ 64,824 $ 69,141 n/a
======== ======== ========
Weighted average Common Shares outstanding(2)........... 151,691 151,690 n/a
Weighted average Units outstanding...................... 164,147 164,082(3) n/a
Cash Flow Provided By (Used For):
Operating Activities.................................. $ 59,665 -- --
Investing Activities.................................. (85,634) -- --
Financing Activities.................................. 158,593 -- --
</TABLE>
32
<PAGE> 33
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
EQUITY OFFICE
PROPERTIES
TRUST AND EQUITY OFFICE
PREDECESSORS PREDECESSORS
COMBINED FOR FOR THE NINE
THE NINE MONTHS
MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Income before income from investment in unconsolidated joint
ventures, gain on sale of real estate, extraordinary items
and minority interest..................................... $ 93,977 $ 38,392
Add back (deduct):
(Income) allocated to minority interests.................. (1,191) (2,166)
Income from investment in unconsolidated joint ventures... 3,408 1,554
Depreciation and amortization (real estate related)....... 85,709 66,018
Amortization of loan discount............................. 1,267 --
--------- ---------
Funds from Operations before effect of adjusting
straight-line rental revenue and expense included in Funds
from Operations to a cash basis(1)........................ 183,170 103,798
--------- ---------
Deferred rental revenue................................... (16,395) (13,140)
Deferred rental expense................................... 1,647 --
--------- ---------
Funds from Operations excluding straight-line rental revenue
and expense adjustments................................... $ 168,422 $ 90,658
========= =========
Operating Partnership Funds from Operations................. $ 183,170 $ 103,798
Company's share of Operating Partnership.................... n/a n/a
--------- ---------
Company's share of Funds from Operations.................... n/a n/a
========= =========
Weighted average Common Shares outstanding(2)............... n/a n/a
Weighted average Units outstanding.......................... n/a n/a
Cash Flow Provided By (Used For):
Operating Activities...................................... $ 155,625 $ 89,685
Investing Activities...................................... (656,702) (589,340)
Financing Activities...................................... 404,444 530,280
</TABLE>
- ---------------
1) The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT in March 1995 defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along with
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance with
standards established by NAREIT which may not be comparable to Funds from
Operations reported by other REITs that do not define the term in accordance
with the current NAREIT definition or that interpret the current NAREIT
definition differently than the Company. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of
33
<PAGE> 34
EQUITY OFFICE PROPERTIES TRUST AND EQUITY OFFICE PREDECESSORS
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
the Company's liquidity, nor or is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
2) Represents the Common Shares/Units outstanding, assuming all outstanding
Units are redeemed for Common Shares and excluding 502,740 Common Shares held by
the Operating Partnership, which are eliminated in consolidation.
3) Weighted Average Common Shares and Units for Equity Office Properties
Trust and Equity Office Predecessors combined results for the three months ended
September 30, 1997 are calculated as if the Offering had occurred on July 1,
1997.
34
<PAGE> 35
EQUITY OFFICE PROPERTIES TRUST
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion in Note 15 of "Notes to Consolidated and Combined Financial
Statements" is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
a. Exhibits:
(1) Financial Data Schedule
b. Reports of Form 8-K: (1) A report on Form 8-K, dated August 6, 1997
containing Item 5 and Item 7.
(2) A report of Form 8-K, dated September 15, 1997 containing Item 5 and
Item 7.
(3) A report of Form 8-K, dated October 16, 1997 containing Item 2, Item
5 and Item 7.
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUITY OFFICE PROPERTIES TRUST
Date: November 14, 1997 By: /s/ STANLEY M. STEVENS
------------------------------------
Stanley M. Stevens
Executive Vice President, Chief
Legal
Counsel and Secretary
Date: November 14, 1997 By: /s/ RICHARD D. KINCAID
------------------------------------
Richard D. Kincaid
Executive Vice President,
Chief Financial Officer
36
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 175,615
<SECURITIES> 0
<RECEIVABLES> 16,190
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 163,958
<PP&E> 5,022,946
<DEPRECIATION> 22,787
<TOTAL-ASSETS> 5,355,922
<CURRENT-LIABILITIES> 175,712
<BONDS> 1,716,458
0
0
<COMMON> 0
<OTHER-SE> 3,463,752
<TOTAL-LIABILITY-AND-EQUITY> 5,355,922
<SALES> 0
<TOTAL-REVENUES> 519,590
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 307,199
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106,274
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 13,204
<CHANGES> 0
<NET-INCOME> 92,913
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
