<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 MARCH 31, 2000 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)
<TABLE>
<S> <C>
MARYLAND 36-4151656
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO NORTH RIVERSIDE PLAZA 60606
SUITE 2100, CHICAGO, ILLINOIS (Zip Code)
(Address of principal executive offices)
</TABLE>
(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
On May 10, 2000, 248,430,619 of the registrant's Common Shares were outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITY OFFICE PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999
- ------------------------------------------------------------ ----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Investment in real estate................................. $12,973,338 $12,847,389
Developments in process................................... 131,038 229,225
Land available for development............................ 106,026 125,926
Accumulated depreciation.................................. (712,977) (630,387)
----------- -----------
Investment in real estate, net of accumulated
depreciation........................................... 12,497,425 12,572,153
Cash and cash equivalents................................. 16,376 2,338
Tenant and other receivables (net of allowance for
doubtful accounts of $1,048 and $1,244, respectively)... 42,602 54,497
Deferred rent receivable.................................. 151,020 138,697
Escrow deposits and restricted cash....................... 68,258 19,754
Investment in unconsolidated joint ventures............... 875,459 865,863
Deferred financing costs (net of accumulated amortization
of $17,107 and $14,863, respectively)................... 56,829 55,196
Deferred leasing costs (net of accumulated amortization of
$26,784 and $22,461, respectively)...................... 107,261 97,743
Prepaid expenses and other assets (net of discount on note
receivable of $62,393 and $62,393, respectively)........ 274,603 239,817
----------- -----------
Total Assets........................................ $14,089,833 $14,046,058
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Mortgage debt (including a net premium of $11,204 and
$10,574, respectively).................................. $ 1,576,367 $ 1,743,871
Unsecured notes (including a net (discount)/premium of
$(583) and $47, respectively)........................... 4,154,417 3,655,047
Lines of credit........................................... 232,000 453,000
Accounts payable and accrued expenses..................... 246,989 318,003
Dividend/distribution payable............................. 121,478 5,446
Other liabilities......................................... 156,101 161,164
----------- -----------
Total Liabilities................................... 6,487,352 6,336,531
----------- -----------
Commitments and contingencies
Minority Interests:
Operating Partnership................................... 818,628 844,427
Partially owned properties.............................. 40,006 39,027
----------- -----------
Total Minority Interests............................ 858,634 883,454
----------- -----------
Shareholders' Equity:
Preferred Shares, 100,000,000 authorized:
8.98% Series A Cumulative Redeemable Preferred Shares,
liquidation preference $25.00 per share, 7,994,000 and
8,000,000 issued and outstanding, respectively......... 199,850 200,000
5.25% Series B Convertible, Cumulative Redeemable
Preferred Shares, liquidation preference $50.00 per
share, 6,000,000 issued and outstanding................ 300,000 300,000
8.625% Series C Cumulative Redeemable Preferred Shares,
liquidation preference $25.00 per share, 4,562,900 and
4,600,000 issued and outstanding, respectively......... 114,073 115,000
Common Shares, $0.01 par value; 750,000,000 shares
authorized, 248,329,132 and 251,582,434 issued and
outstanding, respectively............................... 2,483 2,516
Additional paid in capital................................ 6,173,292 6,269,259
Dividends in excess of accumulated earnings............... (84,329) (71,640)
Accumulated other comprehensive income.................... 38,478 10,938
----------- -----------
Total Shareholders' Equity.......................... 6,743,847 6,826,073
----------- -----------
Total Liabilities and Shareholders' Equity.......... $14,089,833 $14,046,058
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 3
EQUITY OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999
- ------------------------------------------------------- ------------ ------------
<S> <C> <C>
REVENUES:
Rental............................................... $ 358,366 $ 369,139
Tenant reimbursements................................ 62,983 68,159
Parking.............................................. 26,731 27,459
Other................................................ 12,856 5,474
Fee income........................................... 2,235 1,862
Interest/dividends................................... 5,704 3,041
------------ ------------
Total revenues.............................. 468,875 475,134
------------ ------------
EXPENSES:
Interest:
Expense incurred.................................. 100,532 104,480
Amortization of deferred financing costs.......... 1,377 746
Depreciation......................................... 83,889 82,912
Amortization......................................... 4,386 2,901
Real estate taxes.................................... 57,910 61,801
Insurance............................................ 2,740 2,322
Repairs and maintenance.............................. 47,899 51,384
Property operating................................... 46,788 48,208
Ground rent.......................................... 2,024 1,846
General and administrative........................... 19,651 18,250
------------ ------------
Total expenses.............................. 367,196 374,850
------------ ------------
Income before allocation to minority interests, income
from investment in unconsolidated joint ventures, net
gain on sales of real estate and extraordinary
items................................................ 101,679 100,284
Minority Interests:
Operating Partnership................................ (12,416) (8,670)
Partially owned properties........................... (553) (545)
Income from investment in unconsolidated joint
ventures............................................. 11,374 1,835
Net gain on sales of real estate....................... 3,862 --
------------ ------------
Income before extraordinary items...................... 103,946 92,904
Extraordinary items.................................... (611) (3,183)
------------ ------------
Net income............................................. 103,335 89,721
Put option settlement.................................. (1,030) --
Preferred distributions, net........................... (10,697) (10,881)
------------ ------------
Net income available for Common Shares................. $ 91,608 $ 78,840
============ ============
Net income available per weighted average Common Share
outstanding -- Basic................................. $ 0.37 $ 0.30
============ ============
Weighted average Common Shares outstanding -- Basic.... 247,695,287 259,965,816
============ ============
Net income available per weighted average Common Share
outstanding -- Diluted............................... $ 0.37 $ 0.30
============ ============
Weighted average Common Shares outstanding --Diluted... 283,568,648 291,433,553
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
EQUITY OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- ------------------------------------------------------------ ----------- ----------
<S> <C> <C>
Net income.................................................. $103,335 $89,721
Other comprehensive income:
Unrealized holding gains arising during the period........ 27,540 --
-------- -------
Comprehensive income........................................ $130,875 $89,721
======== =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
EQUITY OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- ------------------------------------------------------------ ------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income before put option settlement and preferred
distributions, net..................................... $ 103,335 $ 89,721
Adjustments to reconcile net income before put option
settlement and preferred distributions, net, to net
cash provided by operating activities:
Depreciation and amortization.......................... 89,652 86,559
Amortization of premiums/discounts on unsecured notes
and terminated interest rate protection agreements.... 936 893
Amortization of deferred revenue included in other
income................................................ (1,036) --
Compensation related to restricted shares issued to
employees............................................. 1,555 1,314
Income from unconsolidated joint ventures.............. (11,374) (1,835)
Net gain on sales of real estate....................... (3,862) --
Extraordinary items.................................... 611 3,183
Provision for doubtful accounts........................ 58 291
Allocation to minority interests....................... 12,969 9,215
Changes in assets and liabilities:
Decrease (increase) in rents receivable.............. 11,837 (10,507)
(Increase) in deferred rent receivables.............. (12,323) (16,540)
(Increase) in prepaid expenses and other assets...... (6,798) (3,489)
(Decrease) in accounts payable and accrued
expenses............................................ (71,014) (69,619)
Increase in due to affiliates........................ -- 260
(Decrease) increase in other liabilities............. (5,057) 13,466
----------- ---------
Net cash provided by operating activities......... 109,489 102,912
----------- ---------
INVESTING ACTIVITIES:
Property acquisitions..................................... -- (101,704)
Payments of disposition costs for sales of real estate.... (358) --
Payments for capital and tenant improvements.............. (50,025) (45,142)
Distributions from unconsolidated joint ventures.......... 6,804 3,977
Investments in unconsolidated joint ventures.............. (5,026) (11,015)
Payments of lease acquisition costs....................... (14,440) (10,369)
(Increase) decrease in escrow deposits and restricted
cash................................................... (2,884) 10,320
----------- ---------
Net cash (used for) investing activities.......... (65,929) (153,933)
----------- ---------
</TABLE>
5
<PAGE> 6
EQUITY OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- ------------------------------------------------------------ ------------- -----------
<S> <C> <C>
FINANCING ACTIVITIES:
Repurchase of Common Shares............................... (119,633) --
Proceeds from exercise of share options................... 1,510 355
Redemption of Units for cash.............................. (3,780) --
Dividends/distributions to shareholders and unitholders... (2,154) (1,599)
Payment of preferred distributions........................ (10,884) (11,100)
Repurchase of preferred shares, including transaction
costs.................................................. (890) --
Payment of offering costs................................. -- (417)
Distributions to minority interest in partially owned
properties............................................. -- (143)
Proceeds from mortgage debt............................... -- 233
Proceeds from unsecured notes............................. 499,320 996,675
Proceeds from lines of credit............................. 1,075,100 163,000
Principal payments on mortgage debt....................... (168,134) (262,335)
Principal payments on lines of credit..................... (1,296,100) (851,000)
Payments of loan costs.................................... (3,877) (7,762)
----------- ---------
Net cash (used for) provided by financing
activities...................................... (29,522) 25,907
----------- ---------
Net increase (decrease) in cash and cash equivalents...... 14,038 (25,114)
Cash and cash equivalents at the beginning of the
period................................................. 2,338 67,080
----------- ---------
Cash and cash equivalents at the end of the period........ $ 16,376 $ 41,966
=========== =========
SUPPLEMENTAL INFORMATION:
Interest paid during the period, including capitalized
interest of $5,143 and $3,125, respectively............ $ 132,470 $ 114,733
=========== =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Escrow deposits used for property acquisitions............ $ -- $ 120,798
=========== =========
Escrow deposits provided by property dispositions......... $ (45,620) $ --
=========== =========
</TABLE>
See accompanying notes.
6
<PAGE> 7
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DEFINITION OF TERMS. Capitalized terms used but not defined herein are as
defined in the Company's Annual Report on Form 10-K for the year ended December
31, 1999 (the "Form 10-K").
The consolidated financial statements of the Company 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, 1999 audited consolidated and combined financial statements of
Equity Office Properties Trust and should be read in conjunction with the
financial statements and notes thereto included in the Form 10-K and present
interim disclosures as required by the SEC.
NOTE 1 -- BUSINESS AND FORMATION OF THE COMPANY
As used herein, "Company" means Equity Office Properties Trust, a Maryland
real estate investment trust, together with its subsidiaries including the
Operating Partnership. 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, and to complete the
Consolidation. The Company completed its IPO on July 11, 1997. 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 elected to be taxed as a REIT for federal income
tax purposes and generally will not be subject to federal income tax if it
distributes 100% of its taxable income and complies with a number of
organizational and operational requirements. As of March 31, 2000, the Company
owned or had an interest in 294 office properties (the "Office Properties")
containing approximately 77.0 million rentable square feet of office space and
owned 20 stand-alone parking facilities (the "Parking Facilities" and, together
with the Office Properties, the "Properties") containing approximately 20,506
parking spaces. The weighted average occupancy of the Office Properties at March
31, 2000 was approximately 93.9%. The Office Properties are located in 80
submarkets in 34 markets in 23 states and the District of Columbia. The Office
Properties, by rentable square feet, are located approximately 51% in CBDs and
49% in suburban markets.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's assets, which include investments in joint ventures, are
primarily owned by, and its operations are substantially conducted through, the
Operating Partnership. The Company is the managing general partner of the
Operating Partnership. Due to the Company's ability as managing general partner
to control the Operating Partnership and various other property holding entities
and other subsidiaries, each such entity has been consolidated with the Company
for financial reporting purposes.
Use of Estimates
The preparation of the consolidated financial statements of the Company in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Unaudited Interim Statements
The consolidated financial statements of the Company as of and for the
three months ended March 31, 2000 and 1999 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.
7
<PAGE> 8
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Reclassifications
Certain reclassifications have been made to the previously reported 1999
statements in order to provide comparability with the 2000 statements reported
herein. These reclassifications have not changed the 1999 results or
shareholders' equity.
NOTE 3 -- DISPOSITIONS
During 2000, the Company disposed of the following office properties:
<TABLE>
<CAPTION>
RENTABLE GAIN/(LOSS)
DATE SOLD PROPERTY LOCATION SQUARE FEET SALES PRICE ON SALE
- --------- -------- -------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Sarasota,
2/10/00 Sarasota City Center FL 247,891 $27,700 $4,098
3/10/00 Media Center Burbank, CA -- 20,000 (316)
(development site)
Adjustment to the gain on
properties sold in 1999 -- -- 80
------- ------- ------
Total 247,891 $47,700 $3,862
======= ======= ======
</TABLE>
Included in Investments in Real Estate are eleven Parking Facilities which
were held for sale by the Company as of March 31, 2000. The eleven Parking
Facilities are expected to be sold in May 2000, to an unaffiliated party. The
carrying amount of the eleven Parking Facilities is approximately $154.0 million
which is lower than the anticipated sales price less estimated costs to sell.
The net income generated from these Parking Facilities for the three months
ended March 31, 2000, was approximately $2.8 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.
8
<PAGE> 9
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 4 -- INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company has several investments in unconsolidated joint ventures
consisting of Office Properties, Parking Facilities, a management company and a
company that provides fully-furnished office space to tenants. Combined
summarized financial information of the unconsolidated joint ventures is as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2000 1999
---------------------- ---------- ------------
<S> <C> <C>
Balance Sheets:
Real estate, net.......................................... $1,728,751 $1,719,417
Other assets.............................................. 109,474 106,211
---------- ----------
Total Assets...................................... $1,838,225 $1,825,628
========== ==========
Mortgage debt............................................. $ 577,882 $ 559,344
Other liabilities......................................... 43,937 58,793
Partners' and shareholders' equity........................ 1,216,406 1,207,491
---------- ----------
Total Liabilities and Partners' and Shareholders'
Equity.......................................... $1,838,225 $1,825,628
========== ==========
Company's share of equity................................... $ 707,162 $ 696,502
Net excess of cost of investments over/under the net book
value of underlying net assets, net of accumulated
depreciation of $12,714 and $11,679, respectively......... 168,297 169,361
---------- ----------
Carrying value of investments in unconsolidated joint
ventures.................................................. $ 875,459 $ 865,863
========== ==========
Company's share of unconsolidated mortgage debt............. $ 279,900 $ 264,751
========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
(DOLLARS IN THOUSANDS) 2000 1999
---------------------- --------- ---------
<S> <C> <C>
Statements of Operations:
Revenues.................................................. $71,270 $25,383
------- -------
Expenses:
Interest expense....................................... 10,741 4,447
Depreciation and amortization.......................... 12,072 4,103
Operating expenses..................................... 27,978 10,607
------- -------
Total expenses.................................... 50,791 19,157
------- -------
Net income................................................ $20,479 $ 6,226
======= =======
Company's share of net income............................... $11,374 $ 1,835
======= =======
Company's share of interest expense......................... $ 5,114 $ 2,201
======= =======
Company's share of depreciation and amortization (real
estate related)........................................... $ 7,259 $ 3,483
======= =======
</TABLE>
9
<PAGE> 10
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 5 -- MORTGAGE DEBT
The Company repaid the mortgage debt encumbering the following Properties:
<TABLE>
<CAPTION>
PAYOFF DATE PROPERTY PAYOFF AMOUNT
- ----------- -------- ----------------------
(Dollars in thousands)
<S> <C> <C>
2/15/00 Civic Opera House $ 30,551
3/23/00 161 N. Clark(a) 131,360
--------
$161,911
========
</TABLE>
(a) An extraordinary loss of approximately $0.6 million was incurred due to the
write-off of the unamortized mark-to-market adjustment in connection with
the repayment.
NOTE 6 -- UNSECURED NOTES
On March 21, 2000, the Company issued $500 million of unsecured notes due
March 15, 2006 (the "$500 million Notes") in an offering to institutional
investors (the "$500 million Notes Offering"). The net proceeds after discount,
offering expenses and a terminated treasury lock agreement were approximately
$493.5 million and were used to repay amounts outstanding on the $1.0 Billion
Credit Facility. The $500 million Notes bear interest at a stated rate of 8.375%
per annum and have an effective annual rate of 8.6%.
NOTE 7 -- LINES OF CREDIT
On January 17, 2000, the Company obtained an unsecured borrowing facility
from the Chase Manhattan Bank ("Chase Term Loan") for short-term borrowings not
to exceed $300 million in the aggregate. Upon request of the Company, and at the
lender's option, the lender may offer to lend funds at mutually agreed upon
interest rates and terms, as determined by current market conditions. As of
March 31, 2000, the Company owed $100 million under this facility at a weighted
average rate of 6.3%. The note was repaid on April 10, 2000.
NOTE 8 -- SHAREHOLDERS' EQUITY
Common Shares
The following table presents the changes in the Company's issued and
outstanding Common Shares since January 1, 2000 (excluding Units of 33,163,406
and 34,203,912 outstanding at March 31, 2000 and December 31, 1999,
respectively, which are convertible into Common Shares on a one-for-one basis,
or the cash equivalent thereof, subject to certain restrictions):
<TABLE>
<S> <C>
OUTSTANDING AT JANUARY 1, 2000.............................. 251,582,434
Issued through exercise of options.......................... 71,198
Issued through redemption of Units.......................... 889,300
Repurchase of Common Shares(1).............................. (4,742,500)
Restricted Shares issued/cancelled, net..................... 528,700
-----------
OUTSTANDING AT MARCH 31, 2000............................... 248,329,132
===========
</TABLE>
- ---------------
(1) As part of the share repurchase plan, 4,742,500 Common Shares were
repurchased in January and February 2000 at an average share price of
$25.27 for approximately $119.8 million in the aggregate, including
commissions of approximately $.2 million, and were retired. The share
repurchase plan was suspended in February 2000 in anticipation of the
Cornerstone Merger (See Note 11).
10
<PAGE> 11
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Preferred Shares
In January 2000, the Company repurchased 6,000 Series A Cumulative
Redeemable Preferred Shares and 37,100 Series C Cumulative Redeemable Preferred
Shares at an average share price of $20.66 for approximately $.9 million in the
aggregate and were retired. The difference between the share repurchase amount
and the carrying amount of the preferred shares was classified as a preferred
distribution in the statement of operations for the three months ended March 31,
2000.
Ownership of Operating Partnership
The Company's ownership in the Operating Partnership was approximately
88.2% and 88.0% as of March 31, 2000 and December 31, 1999, respectively.
Dividends/Distributions
The following table summarizes the dividends/distributions paid or declared
to Common Share/Unit holders and Preferred shareholders during the three months
ended March 31, 2000:
<TABLE>
<CAPTION>
DIVIDEND/
DISTRIBUTION
AMOUNT DATE PAID RECORD DATE
------------ ----------------- ----------------
<S> <C> <C> <C>
Common Shares/Units......................... $ 0.42 April 14, 2000 March 31, 2000
Series A Preferred Shares................... $ 0.56125 March 15, 2000 March 1, 2000
Series B Preferred Shares................... $ 0.65625 February 15, 2000 February 1, 2000
Series C Preferred Shares................... $0.5390625 March 15, 2000 March 1, 2000
</TABLE>
11
<PAGE> 12
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 9 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per Common Share:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999
--------------------------------------------- ------------ ------------
<S> <C> <C>
NUMERATOR:
Net income available for Common Shares before net gain on
sales of real estate and extraordinary items........... $ 88,357 $ 82,023
Net gain on sales of real estate.......................... 3,862 --
Extraordinary items....................................... (611) (3,183)
------------ ------------
Numerator for basic earnings per share -- net income
available for Common Shares............................ 91,608 78,840
Minority interest in Operating Partnership................ 12,416 8,670
------------ ------------
Numerator for diluted earnings per share -- net income
available for Common Shares and common share
equivalents............................................ $ 104,024 $ 87,510
============ ============
DENOMINATOR:
Denominator for basic earnings per share -- weighted
average Common Shares.................................. 247,695,287 259,965,816
------------ ------------
Effect of dilutive securities:
Redemption of Units to Common Shares................... 33,685,351 28,589,044
Share options, put options and restricted stock........ 2,188,010 2,878,693
------------ ------------
Dilutive potential Common Shares.......................... 35,873,361 31,467,737
------------ ------------
Denominator for diluted earnings per share -- adjusted
weighted average shares and assumed conversions........ 283,568,648 291,433,553
============ ============
BASIC EARNINGS AVAILABLE FOR COMMON SHARES PER WEIGHTED
AVERAGE
COMMON SHARE:
Net income before net gain on sales of real estate and
extraordinary items, net of minority interests......... $ 0.36 $ 0.31
Net gain on sales of real estate, net of minority
interests.............................................. 0.01 --
Extraordinary items, net of minority interests............ -- (0.01)
------------ ------------
Net income................................................ $ 0.37 $ 0.30
============ ============
DILUTED EARNINGS AVAILABLE FOR COMMON SHARES AND COMMON
SHARE EQUIVALENTS PER WEIGHTED AVERAGE COMMON SHARE AND
COMMON SHARE EQUIVALENT:
Net income before net gain on sales of real estate and
extraordinary items.................................... $ 0.36 $ 0.31
Net gain on sales of real estate.......................... 0.01 --
Extraordinary items....................................... -- (0.01)
------------ ------------
Net income................................................ $ 0.37 $ 0.30
============ ============
</TABLE>
12
<PAGE> 13
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following securities were not included in the computation of diluted
earnings per share since they would have an antidilutive effect:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
WEIGHTED AVERAGE ---------------------------
ANTIDILUTIVE SECURITIES EXERCISE PRICE 2000 1999
- ----------------------- ---------------- ------------ ------------
<S> <C> <C> <C>
Share options........................................ $30.030 3,396,317 --
Share options........................................ $30.150 -- 3,435,098
Series B Preferred Shares............................ $35.700 6,000,000 6,000,000
Warrants............................................. $39.375 5,000,000 5,000,000
---------- ----------
Total...... 14,396,317 14,435,098
========== ==========
</TABLE>
NOTE 10 -- SEGMENT INFORMATION
As discussed in Note 1, the Company's primary business is the ownership and
operation of Office Properties. The Company's long-term tenants are in a variety
of businesses and no single tenant, by itself, is material to the Company's
business. Information related to this segment for the three months ended March
31, 2000 and March 31, 1999 is below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 2000
--------------------------------------
CORPORATE
OFFICE AND
(DOLLARS IN THOUSANDS) PROPERTIES OTHER CONSOLIDATED
- -------------------------------------------------------- ----------- --------- ------------
<S> <C> <C> <C>
Property Operating Revenues............................. $ 450,992 $ 9,944 $ 460,936
Property Operating Expenses............................. (152,646) (2,691) (155,337)
----------- -------- -----------
Net operating income.................................. 298,346 7,253 305,599
----------- -------- -----------
Adjustments to arrive at net income:
Other revenues........................................ 2,918 5,021 7,939
Interest expense(1)................................... (27,505) (73,027) (100,532)
Depreciation and amortization......................... (85,457) (4,195) (89,652)
Ground rent........................................... (2,011) (13) (2,024)
General and administrative............................ (112) (19,539) (19,651)
----------- -------- -----------
Total adjustments to arrive at net income............. (112,167) (91,753) (203,920)
----------- -------- -----------
Income before allocation to minority interests, income
from investment in unconsolidated joint ventures, net
gain on sales of real estate and extraordinary
items................................................. 186,179 (84,500) 101,679
Minority interests...................................... (438) (12,531) (12,969)
Income from investment in unconsolidated joint
ventures.............................................. 11,361 13 11,374
Net gain on sales of real estate........................ 3,862 -- 3,862
Extraordinary items..................................... (611) -- (611)
----------- -------- -----------
Net income.............................................. $ 200,353 $(97,018) $ 103,335
=========== ======== ===========
Capital and tenant improvements......................... $ 45,348 $ 4,677 $ 50,025
=========== ======== ===========
Total Assets............................................ $13,447,512 $642,321 $14,089,833
=========== ======== ===========
</TABLE>
13
<PAGE> 14
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1999
---------------------------------------
CORPORATE
OFFICE AND
(DOLLARS IN THOUSANDS) PROPERTIES OTHER CONSOLIDATED
- -------------------------------------------------------- ----------- ---------- ------------
<S> <C> <C> <C>
Property Operating Revenues............................. $ 461,456 $ 8,775 $ 470,231
Property Operating Expenses............................. (161,750) (1,965) (163,715)
----------- ---------- -----------
Net operating income.................................. 299,706 6,810 306,516
----------- ---------- -----------
Adjustments to arrive at net income:
Other revenues........................................ 631 4,272 4,903
Interest expense(1)................................... (37,601) (66,879) (104,480)
Depreciation and amortization......................... (83,786) (2,773) (86,559)
Ground rent........................................... (1,833) (13) (1,846)
General and administrative............................ (160) (18,090) (18,250)
----------- ---------- -----------
Total adjustments to arrive at net income............. (122,749) (83,483) (206,232)
----------- ---------- -----------
Income before allocation to minority interests, income
from investment in unconsolidated joint ventures and
extraordinary items................................... 176,957 (76,673) 100,284
Minority interests...................................... (310) (8,905) (9,215)
Income from investment in unconsolidated joint
ventures.............................................. 1,793 42 1,835
Extraordinary items..................................... (3,183) -- (3,183)
----------- ---------- -----------
Net income.............................................. $ 175,257 $ (85,536) $ 89,721
=========== ========== ===========
</TABLE>
- ---------------
(1) Interest expense for the Office Properties does not include an allocation of
interest expense on corporate unsecured debt.
NOTE 11 -- MERGER
CORNERSTONE MERGER
On February 11, 2000, the Company, the Operating Partnership, Cornerstone
Properties Inc. ("Cornerstone") and Cornerstone Properties Limited Partnership
("Cornerstone Partnership") entered into a merger agreement, where Cornerstone
will merge with and into the Company and Cornerstone Partnership will merge with
and into the Operating Partnership (the "Cornerstone Merger"). The total
purchase price will be approximately $4.6 billion, including the assumption of
approximately $1.9 billion in liabilities, the payment of $1.1 billion in cash
and the issuance of approximately 62.8 million new Common Shares and Units.
Cornerstone common shareholders may elect to receive $18.00 per share in cash or
0.7009 of Company's Common Shares based on a prevailing transaction price of
$25.68125 per Common Share, subject to proration. Cornerstone's convertible
preferred shareholders will receive $18.00 per share in cash, plus any accrued
but unpaid dividends. Cornerstone Partnership unitholders will receive 0.7009
Units of the Company. The Company intends to finance the $1.1 billion cash
portion of the purchase price by obtaining an additional line of credit,
amending the existing line of credit or issuing unsecured notes.
The Cornerstone Merger is expected to be completed in the second quarter of
2000 and is subject to the approval of the shareholders of the Company and the
shareholders of Cornerstone and other customary conditions. Cornerstone is a
fully integrated REIT and currently owns 82 office properties in the U.S.
totaling approximately 18.0 million square feet, and has an additional $855
million of projects under development. If the Cornerstone Merger is completed
the Company will own approximately 376 office properties consisting of
approximately 95.0 million square feet.
14
<PAGE> 15
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
The Company maintains its cash and cash equivalents at financial
institutions. The combined account balances at each institution typically exceed
FDIC insurance coverage and, as a result, there is a concentration of credit
risk related to amounts on deposit in excess of FDIC insurance coverage.
Management of the Company believes that the risk is not significant.
Environmental
The Company, as an owner of real estate, is subject to various
environmental laws of federal and local governments. Compliance by the Company
with existing laws has not had a material adverse effect on the Company's
financial condition and results of operations, and management does not believe
it will have such an impact in the future. However, the Company cannot predict
the impact of new or changed laws or regulations on its current Properties or on
properties that it may acquire in the future.
Litigation
The Company has become a party to various legal actions resulting from the
operational activities transferred to the Operating Partnership in connection
with the Consolidation and the Beacon Merger. These actions are incidental to
the transferred business and management does not believe that these actions will
have a material adverse effect on the Company.
Neither the Company nor any of the Properties is presently subject to any
material litigation nor, to the Company's knowledge, is any litigation
threatened against the Company or any of the Properties, other than actions
which the Company does not believe to be material, or routine actions for
negligence and other claims and administrative proceedings arising in the
ordinary course of business, some of which are expected to be covered by
liability insurance and all of which collectively are not expected to have a
material adverse effect on the liquidity, business, results of operations or
financial condition of the Company.
Commitments
In July 1998, the Company entered into an agreement to purchase the World
Trade Center project in Seattle, Washington. The property consists of
approximately 186,787 square feet of office space and is 100% preleased to a
single tenant. The Company is expected to acquire the property in the third
quarter of 2000 for approximately $39.0 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.
In accordance with the agreement governing the Company's investment in
WRALP, the Company agreed to make available to WRALP up to $20.0 million in
additional financing or credit support for future development. As of March 31,
2000, no amounts have been funded pursuant to this agreement. However, the
Company has guaranteed WRALP's line of credit which has an outstanding balance
of approximately $17.4 million as of March 31, 2000.
Contingencies
On August 13, 2000, (or August 13, 2001 at the option of the WR Holders)
the WR Holders can require the Company to purchase all or a portion of the
remaining 1,717,844 Common Shares issued to them at a price equal to $31.50 per
Common Share. Prior to such date, if the WR Holders sell all or a portion of
their Common Shares to a third party for a price less than $29.10625, then the
Company is obligated to pay to the
15
<PAGE> 16
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
WR Holders for each Common Share sold at such lower price an amount equal to the
difference between $29.10625 and such lower price, not to exceed $3.00 per
Common Share. Any amounts paid by the Company as a result of such sales will be
recorded as a reduction in shareholders' equity. For put options exercised on
August 13, 2000, any amounts paid up to $29.10625 per Common Share would be
reflected as a reduction in shareholders' equity and the portion of any amounts
paid in excess of $29.10625 per Common Share (not to exceed $2.39375 per Common
Share up to an aggregate of approximately $4.1 million) will be reflected as a
preferred distribution. The $4.1 million portion of the total potential payment
is being amortized by the Company on a straight-line basis over the period
between August 13, 1999 and August 13, 2000. The Company will not incur any loss
on this transaction if the put option is not exercised.
In connection with the acquisition of Worldwide Plaza on October 1, 1998,
the Company issued a transferable put option on the 6,861,166 Units which is
exercisable only on the third anniversary of closing with an estimated fair
value of approximately $27.4 million. This option entitles its holder to
additional Common Shares, the number of which shall be determined using a
formula based on the extent, if any, that the Common Shares are then trading at
less than $29.05 per share.
NOTE 13 -- SUBSEQUENT EVENTS
1. In April 2000, the Board of Trustees of the Company declared a second
quarter distribution for the Series B Preferred Shares of $0.65625 per share.
The distribution will be paid on May 15, 2000 to holders of record as of May 1,
2000.
2. On April 10, 2000 the Company purchased the remaining 30% interest in
Metropoint II, a 150,181 square foot office building in Denver, Colorado, from
an unaffiliated party for approximately $8.3 million.
3. In May 2000, the $1.0 Billion Credit Facility was amended. Upon closing
of the Cornerstone Merger the facility will be converted to a term loan to
mature on May 29, 2001. If the Cornerstone Merger does not close, the existing
facility will terminate. In addition, a new $1.0 billion credit facility was
agreed upon maturing on May 12, 2003, with an option to extend the maturity date
for one additional year for an extension fee of .25% of the facility amount. The
interest rate base and facility fees remain the same as the existing facility.
Upon closing of the Cornerstone Merger the new facility will supersede the
existing facility.
4. The Company is in negotiations with Capital Trust to amend the terms of
the 50,000 shares of 8.25% Preferred Securities that the Company owns. The
amended terms are as follows and are subject to final documentation:
- 60% of the Company's investment, or approximately $30 million of the
preferred securities the Company owns will be amended as follows:
- The coupon rate of 8.25% will remain fixed for two more years.
Thereafter, the rate will increase to the greater of:
a. 10%, increasing by 75 basis points per annum commencing October 1,
2004, or
b. a rate equal to Capital Trust's then dividend per common share
divided by $7.00.
- The conversion price will decrease from $11.70 to $7.00 per share.
16
<PAGE> 17
EQUITY OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
- The common share equivalent will be fixed at 4,285,714 shares.
- The call date will be extended one year to September 30, 2004.
- 40% of the Company's investment, or approximately $20 million of the
preferred securities the Company owns will be amended as follows:
- The coupon rate of 8.25% will increase to 13.0% and remain fixed until
October 1, 2004 when it will increase by 75 basis points per annum.
- The conversion feature is eliminated.
- The preferred securities may be called at any time.
- The co-investment right will be terminated.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion and analysis of the consolidated financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto contained
herein. Terms employed herein as defined terms, but without definition, shall
have the meaning set forth in the financial statements. Statements contained in
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations" including without limitation, the "Developments" and "Market Risks"
disclosures, which are not historical facts may be forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company intends such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in Section 21E of the Exchange Act. Such statements are subject to certain risks
and uncertainties which could cause actual results to differ materially from
those projected or anticipated. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of March 31,
2000. Among the factors about which the Company has made assumptions are the
following:
- Future economic conditions which may impact upon the demand for office
space and tenant ability to pay rent, either at current or increased
levels.
- Prevailing interest rates.
- The extent of any inflation on operating expenses.
- The Company's ability to reduce various expenses as a percentage of
revenues.
- The Company's continuing ability to pay amounts due to its noteholders
and preferred shareholders prior to any distribution to holders of its
Common Shares.
- The cost to complete and lease-up pending developments.
- The Company's continued access to adequate credit facilities on
acceptable terms, including any amounts required for the Cornerstone
Merger.
- The demand from the Company's customers for office-related services.
During the three months ended March 31, 2000, the Company completed the
following key transactions:
- Entered into a merger agreement with Cornerstone Properties, Inc. (see
Cornerstone Merger section in this MD&A for additional information).
- Sold an office property and a development parcel for approximately $47.7
million.
- Issued $500 million of unsecured notes due 2006 with an effective
interest rate of 8.6% per annum.
- Obtained an unsecured credit facility for short-term borrowings not to
exceed $300 million in the aggregate.
18
<PAGE> 19
RESULTS OF OPERATIONS
GENERAL
The following discussion is based primarily on the Consolidated Financial
Statements of the Company as of March 31, 2000 and December 31, 1999 and for the
three months ended March 31, 2000 and 1999.
The Company receives income primarily from rental revenue from the Office
Properties (including reimbursements from tenants for certain operating costs)
and from parking revenue from Office Properties and Parking Facilities.
Below is a summary of the Company's acquisition and disposition activity
since January 1, 1999. The buildings and total square feet shown include
Properties the Company owns in joint ventures with other partners and reflects
the total square footage of the Properties. Excluding the joint venture
partner's share of the square feet of these Properties, the Company effectively
owned approximately 72.9 million square feet of office space as of March 31,
2000.
<TABLE>
<CAPTION>
OFFICE PROPERTIES PARKING FACILITIES
----------------------------- ------------------
BUILDINGS TOTAL SQUARE FEET GARAGES SPACES
--------- ----------------- -------- -------
<S> <C> <C> <C> <C>
Properties owned as of:
January 1, 1999.................................... 284 75,100,727 19 18,059
Acquisitions..................................... 10 1,947,639 1 2,575
Developments placed in service................... 4 610,810 1 589
Dispositions..................................... (4) (668,796) -- --
Building remeasurements.......................... -- 25,230 -- 42
Reclassifications(1)............................. -- -- (1) (759)
--- ---------- -- ------
December 31, 1999.................................. 294 77,015,610 20 20,506
Developments placed in service................... 1 180,000 -- --
Dispositions..................................... (1) (247,891) -- --
Building remeasurements.......................... -- 20,100 -- --
--- ---------- -- ------
March 31, 2000 ("Total Portfolio")................. 294 76,967,819 20 20,506
=== ========== == ======
</TABLE>
- ---------------
(1) The 601 Tchoupitoulas garage was previously considered a stand-alone garage
and included in the number of parking facilities owned by the Company.
Effective with the second quarter of 1999, this garage is no longer
considered a stand-alone parking facility.
As a result of the acquisition and disposition of properties, the financial
data presented shows changes in revenues and expenses from period-to-period.
Therefore the Company does not believe its period to period financial data are
comparable. The following analysis 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.
As reflected in the tables below, property revenues include rental
revenues, reimbursements from tenants for certain expenses, parking revenue and
other property operating revenues. Property operating expenses include real
estate taxes, insurance, repairs and maintenance and other property operating
expenses.
19
<PAGE> 20
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 TO MARCH 31, 1999
The table below represents selected operating information for the Total
Portfolio and for the Core Portfolio consisting of 266 Office Properties and 18
Parking Facilities acquired or placed in service prior to January 1, 1999.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
----------------------------------------- -----------------------------------------
INCREASE/ % INCREASE/ %
(DOLLARS IN THOUSANDS) 2000 1999 (DECREASE) CHANGE 2000 1999 (DECREASE) CHANGE
- ---------------------------------- -------- -------- ---------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues................. $460,936 $470,231 $(9,295) (2.0)% $444,554 $418,919 $25,635 6.1%
Fee income........................ 2,235 1,862 373 20.0 -- -- -- --
Interest/dividend income.......... 5,704 3,041 2,663 87.6 428 569 (141) (24.8)
-------- -------- ------- ----- -------- -------- ------- ------
Total revenues............ 468,875 475,134 (6,259) (1.3) 444,982 419,488 25,494 6.1
-------- -------- ------- ----- -------- -------- ------- ------
Interest expense.................. 100,532 104,480 (3,948) (3.8) 30,541 37,398 (6,857) (18.3)
Depreciation and amortization..... 89,652 86,559 3,093 3.6 84,818 77,013 7,805 10.1
Property operating expenses....... 155,337 163,715 (8,378) (5.1) 150,344 143,717 6,627 4.6
Ground rent....................... 2,024 1,846 178 9.6 2,024 1,846 178 9.6
General and administrative........ 19,651 18,250 1,401 7.7 (19) 136 (155) (114.0)
-------- -------- ------- ----- -------- -------- ------- ------
Total expenses............ 367,196 374,850 (7,654) (2.0) 267,708 260,110 7,598 2.9
-------- -------- ------- ----- -------- -------- ------- ------
Income before allocation to
minority interests, income from
investment in unconsolidated
joint ventures, net gain on
sales of real estate and
extraordinary items............. 101,679 100,284 1,395 1.4 177,274 159,378 17,896 11.2
Minority interests................ (12,969) (9,215) (3,754) 40.7 (553) (540) (13) 2.4
Income from investment in
unconsolidated joint ventures... 11,374 1,835 9,539 519.8 2,564 2,202 362 16.4
Net gain on sales of real
estate.......................... 3,862 -- 3,862 -- -- -- -- --
Extraordinary items............... (611) (3,183) 2,572 (80.8) (611) (2,392) 1,781 (74.5)
-------- -------- ------- ----- -------- -------- ------- ------
Net income........................ $103,335 $ 89,721 $13,614 15.2% $178,674 $158,648 $20,026 12.6%
======== ======== ======= ===== ======== ======== ======= ======
Property revenues less property
operating expenses before
depreciation and amortization,
general and administrative,
ground rent and interest
expense......................... $305,599 $306,516 $ (917) (0.3)% $294,210 $275,202 $19,008 6.9%
======== ======== ======= ===== ======== ======== ======= ======
Straight-line rent adjustment..... $ 12,707 $ 16,540 $(3,833) (23.2)% $ 12,320 $ 15,831 $(3,511) (22.2)%
======== ======== ======= ===== ======== ======== ======= ======
Lease termination fees............ $ 7,228 $ 2,130 $ 5,098 239.3% $ 7,228 $ 1,205 $ 6,023 499.8%
======== ======== ======= ===== ======== ======== ======= ======
</TABLE>
Property Revenues
The increase in property revenues in the Core Portfolio resulted from an
increase in rental rates partially offset by a decrease in occupancy. The
weighted average occupancy of the Core Portfolio decreased from 95.3% at January
1, 1999 to 94.2% at March 31, 2000. This decrease represents approximately 0.7
million square feet in the Core Portfolio between January 1, 1999 and March 31,
2000. Included in Property Revenues are lease termination fees. These fees
relate to specific tenants who have paid a fee to terminate their lease
obligations before the end of the contractual term of their lease. Although the
Company has received these fees in the past, a prediction of the timing or
amounts of future fees cannot be made.
Interest Expense
Total Portfolio interest expense decreased from the prior period as a
result of having a lower average outstanding debt balance as compared to the
prior period partially offset by an increase in the weighted average interest
rate. In addition, the following statistics for each period for the Total
Portfolio are as follows:
- Total debt to total assets decreased to 42.3% from 42.4%.
- Interest coverage ratio increased to 3.0 from 2.8 times.
20
<PAGE> 21
- Weighted average interest rate increased to 7.3% from 7.0%.
Core Portfolio interest expense decreased from the prior period due to the
paydown of mortgage debt on certain Properties. Interest expense on the
unsecured notes and the lines of credit is not reflected in the Core Portfolio.
Depreciation and Amortization
Total Portfolio depreciation and amortization expense increased from the
prior period as a result of Properties acquired and capital and tenant
improvements made during the periods. Core portfolio depreciation and
amortization expense increased as a result of capital and tenant improvements.
Property Operating Expenses
Core Portfolio property operating expenses increased mainly as a result of
real estate taxes and other operating expenses. Real estate taxes increased
approximately $3.7 million due to higher property tax assessments and other
operating expenses increased $2.9 million primarily due to higher insurance
costs, higher utility expenses and a one-time charge related to a change in the
employee benefit program.
General and Administrative Expenses
General and administrative expenses increased due to an increase in the
number of employees at the corporate office as a result of the establishment of
new revenue-producing business groups such as Access and the hiring of
additional personnel in other corporate groups, primarily the information
technology group. Although general and administrative expenses are expected to
increase along with any increase in the size of the Company's portfolio, it is
also anticipated that the Company will realize economies of scale with future
growth, should it occur.
Income from Investment in Unconsolidated Joint Ventures
Income from investment in unconsolidated joint ventures increased for the
Total Portfolio due to the partial sale of twelve Office Properties in December
1999. The Company retained an equity interest in the twelve Office Properties
and accounts for its remaining interest under the equity method of accounting.
Prior to the sale, the Company consolidated the results of operations of such
Office Properties.
21
<PAGE> 22
PARKING OPERATIONS
The Total Portfolio and Core Portfolio selected operating information for
the three months ended March 31, 2000 and 1999 presented above includes results
of operations from the Parking Facilities. Summarized information for the
Parking Facilities is presented below.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 TO MARCH 31, 1999
The table below represents selected operating information for the Parking
Facilities for the Total Portfolio and the Core Portfolio consisting of 18
Parking Facilities acquired prior to January 1, 1999.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CORE PORTFOLIO
---------------------------------------- -------------------------------------
INCREASE/ % INCREASE/ %
(DOLLARS IN THOUSANDS) 2000 1999 (DECREASE) CHANGE 2000 1999 (DECREASE) CHANGE
- ----------------------------------- ------- ------ ---------- -------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property revenues.................. $ 9,944 $8,775 $1,169 13.3% $9,485 $8,775 $ 710 8.1%
Interest/dividend income........... 108 3 105 3,500.0 11 3 8 266.7
------- ------ ------ -------- ------ ------ ----- ------
Total revenues............. 10,052 8,778 1,274 14.5 9,496 8,778 718 8.2
------- ------ ------ -------- ------ ------ ----- ------
Interest expense................... 740 928 (188) (20.3) 740 928 (188) (20.3)
Depreciation and amortization...... 1,751 1,383 368 26.6 1,657 1,383 274 19.8
Property operating expenses........ 2,691 1,965 726 36.9 2,493 1,965 528 26.9
Ground rent........................ 13 13 -- -- 13 13 -- --
General and administrative......... 1 (24) 25 (104.2) 1 (24) 25 (104.2)
------- ------ ------ -------- ------ ------ ----- ------
Total expenses............. 5,196 4,265 931 21.8 4,904 4,265 639 15.0
------- ------ ------ -------- ------ ------ ----- ------
Income before allocation to
minority interests and income
from investment in unconsolidated
joint ventures................... 4,856 4,513 343 7.6 4,592 4,513 79 1.8
Minority interests................. (115) (235) 120 (51.1) (115) (235) 120 (51.1)
Income from investment in
unconsolidated joint ventures.... 354 409 (55) (13.4) 354 409 (55) (13.4)
------- ------ ------ -------- ------ ------ ----- ------
Net income......................... $ 5,095 $4,687 $ 408 8.7% $4,831 $4,687 $ 144 3.1%
======= ====== ====== ======== ====== ====== ===== ======
Property revenues less property
operating expenses before
depreciation and amortization,
general and administrative,
ground rent and interest
expense.......................... $ 7,253 $6,810 $ 443 6.5% $6,992 $6,810 $ 182 2.7%
======= ====== ====== ======== ====== ====== ===== ======
</TABLE>
22
<PAGE> 23
PROPERTY DISPOSITIONS
The Company has disposed of the following properties since January 1, 1999:
<TABLE>
<CAPTION>
YEAR PROPERTY
- ---- ----------------------------------------------
<S> <C> <C>
2000............................. Sarasota City Center Media Center
1999............................. Atrium Towers SunTrust Center(1)
5100 Brookline Promenade II(1)
215 Fremont Street Pasadena Towers(1)
One Columbus Preston Commons(1)
10&30 South Wacker(1) Sterling Plaza(1)
Bank One Center(1)
</TABLE>
After the Company sold the above properties, the Company continued as the
property manager for One Columbus as well as the Properties described in Note
(1) below. Below is a summary of the results of operations of these office
properties through their respective disposition dates:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
(DOLLARS IN THOUSANDS) 2000 1999
- ------------------------------------------------------------ -------- ---------
<S> <C> <C>
Property revenues........................................... $ 373 $44,962
Interest income............................................. -- 65
------ -------
Total revenues.................................... 373 45,027
------ -------
Interest expense............................................ -- 2,957
Depreciation and amortization............................... 74 7,291
Property operating expenses................................. 164 17,270
General and administrative.................................. 127 --
------ -------
Total expenses.................................... 365 27,518
------ -------
Income before allocation to minority interests, net gain on
sales of real estate and extraordinary items.............. 8 17,509
Minority interest -- partially owned properties............. -- (6)
Net gain on sales of real estate and extraordinary items.... 3,862 (791)
------ -------
Net income.................................................. $3,870 $16,712
====== =======
Property revenues less property operating expenses before
depreciation and amortization, general and administrative
and interest expense...................................... $ 209 $27,692
====== =======
</TABLE>
- ---------------
(1) These Office Properties were partially sold in December 1999. The above
condensed statements of operations include the results of operations for
these Properties through their disposition date. Since the Company retained
an equity interest in these Office Properties and shares equally in the
control of the operations and major decisions of these Properties, the
Company now accounts for these Properties under the equity method of
accounting. The following table shows the Company's share of the results of
operations excluding the gain on sales of real estate from these Properties
under the equity method as if they were partially sold on January 1, 1999 or
the Properties original acquisition date if the Property was acquired
subsequent to January 1, 1999:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
---------------
(DOLLARS IN THOUSANDS) 2000 1999
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Net income.................................................. $8,678 $7,568
Interest expense............................................ $1,648 $1,162
Depreciation and amortization (real estate related)......... $3,023 $3,506
</TABLE>
23
<PAGE> 24
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. In order to qualify as a REIT for
federal income tax purposes, the Company must distribute at least 95% of its
REIT taxable income (excluding capital gains). Accordingly, the Company
currently intends to continue to make, but has not contractually bound itself to
make, regular quarterly distributions to holders of Common Shares/Units and
preferred shares. Subject to the foregoing, the Company has established annual
distribution rates as follows:
- $1.68 per annum per Common Share/Unit
- 8.98% per annum ($2.245 per share) for each Series A Preferred Share
- 5.25% per annum ($2.625 per share) for each Series B Preferred Share
- 8.625% per annum ($2.15625 per share) for each Series C Preferred Share
The Company intends to continue to fund distributions, debt service,
recurring capital costs and non-revenue enhancing tenant improvements from cash
from operations and borrowings under its credit facilities. The Company also
expects that its unsecured credit facilities will provide for temporary working
capital, the funding of capital improvements and revenue enhancing tenant
improvements, unanticipated cash needs and funding of acquisitions and
development costs.
Since 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, the Company will be required to repay maturing debt with funds from
debt and/or equity financing.
DEBT FINANCING
The table below summarizes the mortgage debt, unsecured notes and lines of
credit indebtedness outstanding at March 31, 2000 and December 31, 1999,
including a net unamortized premium on mortgage debt of $11,204 and $10,574,
respectively, and a net unamortized (discount)/premium on unsecured notes of
$(583) and $47, respectively, recorded in connection with the Consolidation,
debt assumed in connection with certain of the Company's acquisitions and the
issuance of unsecured notes.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2000 1999
- ------------------------------------------------------------ ---------- ------------
<S> <C> <C>
DEBT SUMMARY:
BALANCE
Fixed rate................................................ $5,642,884 $5,272,608
Variable rate............................................. 319,900 579,310
---------- ----------
Total............................................. $5,962,784 $5,851,918
========== ==========
PERCENT OF TOTAL DEBT:
Fixed rate................................................ 94.6% 90.1%
Variable rate............................................. 5.4% 9.9%
---------- ----------
Total............................................. 100.0% 100.0%
========== ==========
EFFECTIVE INTEREST RATE AT END OF PERIOD:
Fixed rate................................................ 7.3% 7.1%
Variable rate............................................. 7.2% 7.4%
---------- ----------
Effective interest rate........................... 7.3% 7.2%
========== ==========
</TABLE>
A majority of the variable rate debt shown above bears interest at an
interest rate based on various spreads over LIBOR.
24
<PAGE> 25
MORTGAGE FINANCING
As of March 31, 2000, the Company's total mortgage debt (excluding the
Company's share of unconsolidated debt of approximately $279.9 million)
consisted of approximately $1.5 billion of fixed rate debt with a weighted
average interest rate of approximately 7.6% and $87.9 million of variable rate
debt based on various spreads over LIBOR or the prime rate. The Company's
mortgage debt at March 31, 2000 will mature as follows:
<TABLE>
<CAPTION>
Dollars in thousands
- -------------------------------------------------------------------------
<S> <C>
2000........................................................ $ 18,812
2001........................................................ 200,194
2002........................................................ 73,151
2003........................................................ 184,454
2004........................................................ 223,933
Thereafter.................................................. 864,619
----------
Subtotal.................................................... 1,565,163
Net premium (net of accumulated amortization of $1.6
million).................................................. 11,204
----------
Total............................................. $1,576,367
==========
</TABLE>
The instruments encumbering the Properties restrict transfer of the
respective Properties subject to the terms of the mortgage, prohibit additional
liens and require payment of real estate taxes on the Properties, maintenance of
the Properties in good condition, maintenance of insurance on the Properties and
obtaining lender consent to material tenant leases.
CREDIT FACILITIES
Lines of Credit
The Company has the ability to draw on two unsecured credit facilities for
various purposes, the $1.0 Billion Credit Facility and the Chase Facility.
- The $1.0 Billion Credit Facility matures on May 29, 2001. The interest
rate is based on the Company's investment-grade rating on its unsecured
debt and is currently LIBOR plus 60 basis points with a facility fee
(based on the aggregate amount of the facility) equal to 20 basis points
per annum. In addition, a competitive bid option, whereby the lenders
participating in the line of credit bid on the interest rate to be
charged, is available for up to $350 million of the facility. As of May
9, 2000 and March 31, 2000, there was approximately $253.0 million and
$132.0 million outstanding on the facility, respectively.
- In May 2000, the $1.0 Billion Credit Facility was amended. Upon closing
of the Cornerstone Merger the facility will be converted to a term loan
to mature on May 29, 2001. If the Cornerstone Merger does not close, the
existing facility will terminate. In addition, a new $1.0 billion credit
facility was agreed upon maturing on May 12, 2003, with an option to
extend the maturity date for one additional year for an extension fee of
.25% of the facility amount. The interest rate base and facility fees
remain the same as the existing facility. Upon closing of the Cornerstone
Merger the new facility will supersede the existing facility.
- In January 2000, the Company obtained an additional unsecured borrowing
facility from the Chase Manhattan Bank (the "Chase Facility") for
short-term borrowings not to exceed $300 million in the aggregate. Upon
request of the Company, and at the lender's option, the lender may offer
to lend funds at mutually agreed upon interest rates and terms, as
determined by current market conditions. As of March 31, 2000, the
Company owed $100 million under this facility at a weighted average rate
of 6.3%. The note was repaid on April 10, 2000.
25
<PAGE> 26
UNSECURED NOTES
The table below summarizes the Company's unsecured notes as of March 31,
2000:
<TABLE>
<CAPTION>
TRANCHE AMOUNT STATED RATE EFFECTIVE RATE(1)
- ------- ----------- ----------- -----------------
(Dollars in
thousands)
<S> <C> <C> <C>
3 Year Notes due 2002.......................... $ 200,000 6.4% 6.6%
4 Year MOPPRS due 2002(2)...................... 250,000 6.4% 6.3%
5 Year Notes due 2003.......................... 300,000 6.4% 6.8%
5 Year Notes due 2004.......................... 300,000 6.5% 6.7%
6 Year Notes due 2004.......................... 250,000 6.5% 6.7%
7 Year Notes due 2004.......................... 30,000 7.2% 7.3%
7 Year Notes due 2005.......................... 400,000 6.6% 7.0%
8 Year Notes due 2005.......................... 50,000 7.4% 7.7%
6 Year Notes due 2006(3)....................... 500,000 8.4% 8.6%
9 Year Notes due 2006.......................... 50,000 7.4% 7.7%
9 Year Notes due 2007.......................... 300,000 6.8% 6.8%
10 Year Notes due 2007......................... 50,000 7.4% 7.7%
10 Year Notes due 2008......................... 300,000 6.8% 7.0%
10 Year Notes due 2009......................... 500,000 6.8% 6.9%
20 Year Notes due 2018......................... 250,000 7.3% 7.6%
30 Year Notes due 2028......................... 225,000 7.3% 7.3%
30 Year Notes due 2029......................... 200,000 7.5% 7.6%
---------- --- ---
Subtotal............................. 4,155,000 7.0% 7.2%
=== ===
Net discount (net of accumulated
amortization of $.1 million)....... (583)
----------
Total................................ $4,154,417
==========
</TABLE>
- ---------------
(1) Includes the cost of terminated interest rate protection agreements,
offering and transaction costs and premiums and discounts on certain
unsecured notes.
(2) The MOPPRS are subject to mandatory redemption in 2002 but do not mature
until 2012.
(3) On March 21, 2000 the Company issued the $500 million Notes due March 15,
2006. The net proceeds after discount, offering expenses and a terminated
treasury lock agreement were approximately $493.5 million and were used to
repay amounts outstanding on the $1.0 Billion Credit Facility.
The Company previously filed a shelf registration statement, which was
declared effective on July 22, 1998, relating to the issuance from time to time
of up to $2.0 billion of unsecured debt securities and warrants exercisable for
debt securities in amounts, at initial prices and on terms to be determined at
the time of offering. The Company issued $1.7 billion of unsecured notes under
this registration statement.
Restrictions and Covenants
Agreements or instruments relating to the unsecured notes and lines of
credit contain certain restrictions and requirements regarding total
debt-to-assets ratios, secured debt-to-total assets ratios, debt service
coverage ratios, minimum ratio of unencumbered assets to unsecured debt and
other limitations.
26
<PAGE> 27
EQUITY SECURITIES
A summary of the activity of the Company's Common Shares and Units during
2000 is as follows:
<TABLE>
<CAPTION>
COMMON SHARES UNITS TOTAL
------------- ---------- -----------
<S> <C> <C> <C>
Balance at January 1, 2000........................... 251,582,434 34,203,912 285,786,346
Units redeemed for Common Shares................... 889,300 (889,300) --
Additional Units issued for Palo Alto acquisition
in 1999......................................... -- 1,713 1,713
Units converted to cash............................ -- (152,919) (152,919)
Repurchases(a)..................................... (4,742,500) -- (4,742,500)
Restricted Shares issued/cancelled, net............ 528,700 -- 528,700
Share options exercised............................ 71,198 -- 71,198
----------- ---------- -----------
Balance at March 31, 2000............................ 248,329,132 33,163,406 281,492,538
=========== ========== ===========
</TABLE>
- ---------------
(a) As part of the share repurchase plan, 4,742,500 Common Shares were
repurchased in January and February 2000 at an average share price of
$25.27 for approximately $119.8 million in the aggregate, including
commissions of approximately $.2 million, and were retired. The share
repurchase plan was suspended in February 2000 in anticipation of the
Cornerstone Merger.
INVESTMENTS IN SECURITIES
The Company owns equity interests in several companies that provide
communication and other services to tenants. The equity interests are in the
form of common stock and vested and unvested warrants to acquire common stock.
Below is a summary of these investments as of March 31, 2000:
<TABLE>
<CAPTION>
SQUARE FEET
ASSIGNED SHARES VESTED MARKET CAPITAL
COMPANY (IN MILLIONS) RECEIVED(C) WARRANTS(C) VALUE/BALANCE INVESTMENT
- ------- ------------- ----------- ----------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allied Riser Corporation.......... 76 624,393 1,411,596 $69,779 $2,000
Broadband Office.................. 55 2,391,180 -- 1,300 --
Captivate(a)...................... 14 -- 360,000 1,200 --
OnSite(b)......................... 22 -- -- -- --
--------- --------- ------- ------
Total................... 3,015,573 1,771,596 $72,279 $2,000
========= ========= ======= ======
</TABLE>
- ---------------
(a) The amounts in the table reflect the Company's agreement with Captivate as
of March 31, 2000. In April 2000, the Company entered into a new agreement
with Captivate whereby the Company would allow Captivate access to
approximately 60 million square feet of office space in return for
approximately 2.1 million common stock warrants. In addition, the Company
invested approximate $8.0 million for approximately 1.9 million Series C
and D preferred shares of Captivate.
(b) The Company entered into an agreement with OnSite Access, Inc. ("OnSite"),
a facilities based provider of broadband data, video and voice
communications services, delivered over fiber optic networks designed,
constructed and owned by OnSite in large- and medium-sized office
buildings. OnSite will provide its services to tenants in certain Office
Properties. In return for allowing OnSite access to the Office Properties,
OnSite will grant the Company warrants to acquire common shares of OnSite
for $2.36 per share. Although OnSite in not currently a public Company, it
has filed a registration statement with the SEC to register the issuance of
its common shares and its expected to become a reporting company under the
Securities Exchange Act of 1934.
(c) Shares received and vested warrants include amounts allocable to joint
venture partners.
27
<PAGE> 28
CORNERSTONE MERGER
On February 11, 2000, the Company, the Operating Partnership, Cornerstone
Properties Inc. ("Cornerstone") and Cornerstone Properties Limited Partnership
("Cornerstone Partnership") entered into a merger agreement, where Cornerstone
will merge with and into the Company and Cornerstone Partnership will merge with
and into the Operating Partnership (the "Cornerstone Merger"). The total
purchase price will be approximately $4.6 billion, including the assumption of
approximately $1.9 billion in liabilities, the payment of $1.1 billion in cash
and the issuance of approximately 62.8 million new Common Shares and Units.
Cornerstone common shareholders may elect to receive $18.00 per share in cash or
0.7009 of Company's Common Shares based on a prevailing transaction price of
$25.68125 per Common Share, subject to proration. Cornerstone's convertible
preferred shareholders will receive $18.00 per share in cash, plus any accrued
but unpaid dividends. Cornerstone Partnership unitholders will receive 0.7009
Units of the Company. The Company intends to finance the $1.1 billion cash
portion of the purchase price by obtaining an additional line of credit,
amending the existing line of credit or issuing unsecured notes.
The Cornerstone Merger is expected to be completed in the second quarter of
2000 and is subject to the approval of the shareholders of the Company and the
shareholders of Cornerstone and other customary conditions. Cornerstone is a
fully integrated REIT and currently owns 82 office properties in the U.S.
totaling approximately 18.0 million square feet, and has an additional $855
million of projects under development. If the Cornerstone Merger is completed
the Company will own approximately 376 office properties consisting of
approximately 95.0 million square feet.
MARKET RISK
Since December 31, 1999, there have been no material changes in the
information regarding market risk that was provided in the Company's Form 10-K
for the year ended December 31, 1999, except as provided below:
The Company has several investments in marketable securities. If the market
price of these securities increases or decreases by 10%, the Company's
investment in the securities would increase or decrease by approximately $10.2
million. The change in market price would also be reflected as a corresponding
adjustment to accumulated other comprehensive income. There will be no impact on
earnings or cash flows of the Company from market price fluctuations unless the
Company disposes of its investments.
These amounts were determined by considering the impact of hypothetical
equity prices on the Company's financial statements. These analyses do not
consider the effect of the reduced level of overall economic activity that could
exist in such an environment. Further, in the event of a change of such
magnitude, management would likely take actions to further mitigate its exposure
to the change. However, due to the uncertainty of the specific actions that
would be taken and their possible effects, these analyses assume no changes in
the Company's financial structure.
CAPITAL IMPROVEMENTS
The Company considers capital improvements and revenue enhancing tenant
improvements when a property is acquired in determining the amount of equity and
debt financing required to purchase the property and fund the improvements.
Therefore, capital improvements made in the year of acquisition and the
following two years, 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 three months ended March 31, 2000 were
approximately $8.7 million or $0.11 per square foot. These amounts exclude
capital and tenant improvements of approximately $18.5 million for developments.
28
<PAGE> 29
The Company considers capital expenditures to be recurring expenditures
relating to the ongoing maintenance of the Office Properties. The table below
summarizes capital expenditures for the three months ended March 31, 2000. The
capital expenditures set forth below are not necessarily indicative of future
capital expenditures.
<TABLE>
<S> <C>
Number of Office Properties................................. 294
Rentable square feet (in millions).......................... 77.0
Capital expenditures per square foot........................ $0.01
</TABLE>
TENANT IMPROVEMENTS AND LEASING COMMISSION COSTS
The Company distinguishes its tenant improvements and leasing commissions
between those that are revenue enhancing (i.e., 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 (i.e. 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 three months ended March 31, 2000. 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 improvements and leasing commission costs:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
(DOLLARS IN THOUSANDS) MARCH 31, 2000(1)
- ------------------------------------------------------------ --------------------------
<S> <C>
Number of Office Properties................................. 294
Rentable square feet (in millions).......................... 77.0
Revenue enhancing tenant improvements and leasing
commissions:
Amounts (in thousands).................................... $29,330
Per square foot improved.................................. $ 43.75
Per total square foot (annualized)........................ $ 1.52
Non-revenue enhancing tenant improvements and leasing
commissions:
Renewal space:
Amounts (in thousands).................................... $10,893
Per square foot improved.................................. $ 5.74
Per total square foot (annualized)........................ $ 0.57
Retenanted space:
Amounts (in thousands).................................... $18,786
Per square foot improved.................................. $ 14.06
Per total square foot (annualized)........................ $ 0.98
-------
Total non-revenue enhancing (in thousands).................. $29,679
Per square foot improved.................................... $ 9.18
Per total square foot (annualized).......................... $ 1.55
</TABLE>
- ---------------
(1) The per square foot calculations as of March 31, 2000 are calculated taking
the total dollars anticipated to be incurred on tenant improvements for
tenants taking occupancy during the three months ended March 31, 2000,
divided by the total square footage being improved or total building square
footage. The actual amounts incurred as of March 31, 2000 for revenue
enhancing, non-revenue enhancing renewal and retenanted space are summarized
below:
<TABLE>
<CAPTION>
(Dollars in millions)
- -------------------------------------------------------------------
<S> <C>
Revenue enhancing........................................... $ 9.2
Non-revenue enhancing renewal............................... $ 5.2
Non-revenue enhancing retenanted............................ $17.1
</TABLE>
29
<PAGE> 30
DEVELOPMENTS
The Company currently owns several Properties in various stages of
development or pre-development. The Company funds these developments with
proceeds from working capital and the line of credit. Specifically identifiable
direct and indirect acquisition, development and construction costs are
capitalized including, where applicable, salaries and related costs, real estate
taxes, interest and certain pre-construction costs essential to the development
of a property. The Properties under development as of March 31, 2000 are as
follows:
<TABLE>
<CAPTION>
TOTAL
ESTIMATED PLACE IN PERCENT ESTIMATED
PROPERTY LOCATION SERVICE DATE(A) LEASED SQUARE FEET COSTS INCURRED COSTS(A)
-------- ----------------- ------------------ ------- ----------- -------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
WHOLLY-OWNED
Riverside Center Newton, MA 2Q/2000 93% 494,710 $ 83,974 $112,000
150 California San Francisco, CA 2Q/2000 83% 201,554 48,300 66,000
--- --------- -------- --------
90% 696,264 132,274 178,000
TAKE-OUT PROJECT
World Trade Center(b) Seattle, WA 3Q/2000 100% 186,787 164 39,000
JOINT VENTURE
Three Bellevue Center(c) Bellevue, WA 2Q/2000 79% 471,635 45,600 72,000
--- --------- -------- --------
Grand Total/Weighted Average 88% 1,354,686 $178,038 $289,000
=== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET RECONCILIATION: COST INCURRED
- ----------------------------- -------------
<S> <C>
Wholly-Owned Developments................................... $132,274
Take Out Project............................................ 164
Leasing Commissions(d)...................................... (1,400)
--------
Developments in process........................... $131,038
========
UNFUNDED DEVELOPMENT COSTS:
Total Estimated Costs....................................... $289,000
Less: Costs Incurred........................................ (178,038)
Less: Costs to be Funded by Development Loan................ (24,900)
--------
Unfunded Development Costs........................ $ 86,062
========
</TABLE>
- ---------------
(a) The Estimated Place in Service Date represents the date the certificate of
occupancy has been or is anticipated to be obtained. Subsequent to
obtaining the certificate of occupancy, the property will undergo a
lease-up period. The Total Estimated Costs include amounts attributable to
tenanting the Property.
(b) The Company is expected to acquire the property upon full occupancy in
August 2000. This transaction is contingent upon certain terms and
conditions as set forth in its purchase agreement. There can be no
assurance that this transaction will be consummated as described above.
(c) The Costs Incurred and Total Estimated Costs reflect the Company's 80%
interest in this project including the Company's pro-rata share of a
development loan. The total cost of the project including the joint
venture partner's share is approximately $90 million of which
approximately $60 million will be funded by the development loan. The
Company's share of the development loan outstanding as of March 31, 2000
is approximately $23.1 million.
(d) Deferred leasing costs are classified separately on the Company's balance
sheet.
In addition to the properties described above, the Company owns various
land parcels available for development. However, no significant development
activity is taking place on these sites at this time.
30
<PAGE> 31
INFLATION
Substantially all of the office leases require the tenant to pay, as
additional rent, a portion of any increases in real estate taxes (except, in the
case of certain California leases, which limit the ability of the landlord to
pass through to the tenants the effect of increased real estate taxes
attributable to a sale of real property interests) 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.
The following table reflects the calculation of the Company's Funds from
Operations for the three months ended March 31, 2000 and 1999 on an historical
basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
(DOLLARS IN THOUSANDS) 2000 1999
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Income before allocation to minority interests, income from
investment
in unconsolidated joint ventures, net gain on sales of
real estate and extraordinary items....................... $101,679 $100,284
Add back (deduct):
(Income) allocated to minority interests for partially
owned
properties............................................. (553) (545)
Income from investment in unconsolidated joint ventures... 11,374 1,835
Depreciation and amortization (real estate related)....... 94,786 89,088
Put option settlement..................................... (1,030) --
Preferred distributions................................... (10,697) (10,881)
-------- --------
Funds from Operations(1).................................... 195,559 179,781
Less deferred rental revenue.............................. (12,707) (16,540)
Plus deferred rental expense.............................. 501 653
-------- --------
Adjusted Funds from Operations.............................. $183,353 $163,894
======== ========
Cash Flow Provided By (Used For):
Operating Activities...................................... $109,489 $102,912
Investing Activities...................................... (65,929) (153,933)
Financing Activities...................................... (29,522) 25,907
Ratio of earnings to combined fixed charges and preferred
share distributions....................................... 1.8 1.7
</TABLE>
- ---------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("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. In November 1999, NAREIT issued a National Policy Bulletin
effective January 1, 2000 clarifying the definition of FFO to include all
operating results, both recurring and non-recurring, except those defined as
extraordinary under GAAP. In accordance with this NAREIT Bulletin, the
Company will no longer adjust for the amortization of
31
<PAGE> 32
discounts and premiums on mortgages when calculating FFO. Accordingly, the
Company restated the prior period data for comparative purposes. 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, nor does it
represent cash available to pay distributions 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
the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
32
<PAGE> 33
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about quantitative and qualitative disclosures about market
risk is incorporated herein by reference from Item 2 Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Market Risk
section.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit: (27) Financial Data Schedule
(b) Report on Form 8-K:
(1) A report on Form 8-K, dated February 11, 2000 containing Item 5
and Item 7.
33
<PAGE> 34
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: May 15, 2000 By: /s/ STANLEY M. STEVENS
-------------------------------------
Stanley M. Stevens
Executive Vice President,
Chief Legal Counsel and Secretary
Date: May 15, 2000 By: /s/ RICHARD D. KINCAID
-------------------------------------
Richard D. Kincaid
Executive Vice President,
Chief Financial Officer
34
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 16,376
<SECURITIES> 0
<RECEIVABLES> 193,622
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,382,410
<PP&E> 13,210,402
<DEPRECIATION> (712,977)
<TOTAL-ASSETS> 14,089,833
<CURRENT-LIABILITIES> 524,568
<BONDS> 5,962,784
0
613,923
<COMMON> 2,483
<OTHER-SE> 6,986,075
<TOTAL-LIABILITY-AND-EQUITY> 14,089,833
<SALES> 0
<TOTAL-REVENUES> 468,875
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 276,124
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<EXTRAORDINARY> (611)
<CHANGES> 0
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<EPS-DILUTED> 0.37
</TABLE>
