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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20543
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED September 30, 1998
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COMMISSION FILE NO. 000-22741
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CARRAMERICA REALTY, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 52-1976308
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1850 K Street, N.W., Washington, D.C. 20006
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(Address or principal executive office) (Zip code)
Registrant's telephone number, including area code (202) 729-7500
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N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Number of Partnership Units outstanding of each of the registrant's
classes of Partnership Units as of November 16, 1998:
14,362,217
- --------------------------------------------------------------------------------
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 twelve (12) months (or such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
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<PAGE>
Index
<TABLE>
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Page
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<S> <C>
Part I: Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets of CarrAmerica Realty, L.P. and subsidiaries as of
September 30, 1998 (unaudited) and December 31, 1997 .........................................4
Condensed consolidated statements of operations of CarrAmerica Realty, L.P. and subsidiaries
for the three months ended September 30, 1998 and 1997 (unaudited) ...........................5
Condensed consolidated statements of operations of CarrAmerica Realty, L.P. and subsidiaries
for the nine months ended September 30, 1998 and 1997 (unaudited) ............................6
Condensed consolidated statements of cash flows of CarrAmerica Realty, L.P. and subsidiaries
for the nine months ended September 30, 1998 and 1997 (unaudited) ............................7
Notes to condensed consolidated financial statements (unaudited)........................8 to 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................12 to 19
Part II: Other Information
Item 1. Legal Proceedings............................................................................20
Item 2. Changes in Securities........................................................................20
Item 3. Defaults Upon Senior Securities..............................................................20
Item 4. Submission of Matters to a Vote of Security Holders..........................................20
Item 5. Other Information............................................................................20
Item 6. Exhibits and Reports on Form 8-K............................................................
</TABLE>
2
<PAGE>
Part I
Item 1. Financial Information
The information furnished in the accompanying condensed consolidated
balance sheets, consolidated statements of operations and consolidated
statements of cash flows of CarrAmerica Realty, L.P. and subsidiaries (the
"Partnership") reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the aforementioned financial statements for
the interim periods.
The aforementioned financial statements should be read in conjunction
with the notes to such financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations.
3
<PAGE>
<TABLE>
<CAPTION>
CARRAMERICA REALTY, L.P. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of September 30, 1998 and December 31, 1997
- -------------------------------------------------------------------------------------------------------------
(In thousands)
September 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Rental property (note 2):
Land $ 97,248 91,347
Buildings 495,892 465,276
Tenant improvements 22,872 12,496
Furniture, fixtures, and equipment 496 96
--------- ---------
616,508 569,215
Less - accumulated depreciation (27,645) (13,360)
--------- ---------
Total rental property 588,863 555,855
Land held for development 17,046 10,526
Construction in progress 94,096 44,344
Cash and cash equivalents 6,364 3,584
Restricted cash and cash equivalents (note 2) 15,217 1,501
Accounts and notes receivable 10,244 11,757
Accrued straight-line rents 7,445 3,317
Tenant leasing costs, net 7,723 3,439
Prepaid expenses and other assets, net 2,755 2,245
--------- ---------
$ 749,753 636,568
========= =========
Liabilities and Partners' Capital
Liabilities:
Mortgages and notes payable (note 2) $ 263,385 212,304
Note payable to affiliate (note 2) 29,103 29,411
Accounts payable and accrued expenses 18,827 12,608
Due to affiliates 15,191 1,386
Rent received in advance and security deposits 3,621 3,244
--------- ---------
Total liabilities 330,127 258,953
Partners' capital (note 3):
General partner 4,196 3,522
Limited partners 415,430 374,093
--------- ---------
Total partners' capital 419,626 377,615
Commitments and contingencies (note 4)
--------- ---------
$ 749,753 636,568
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CARRAMERICA REALTY, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 1998 and 1997
- -----------------------------------------------------------------------------------------------------------
(Unaudited and in thousands)
1998 1997
---- ----
<S> <C> <C>
Real estate operating revenue:
Rental revenue:
Minimum base rent $ 21,774 13,734
Recoveries from tenants 2,793 2,509
Parking and Other tenant charges 341 237
-------- --------
Total rental revenue 24,908 16,480
Cost reimbursements 873 658
Other income 137 --
-------- --------
Total revenue 25,918 17,138
-------- --------
Real estate operating expenses:
Property operating expenses:
Operating expenses 6,597 5,611
Real estate taxes 2,118 1,815
Interest expense 4,240 1,643
General and administrative 1,375 494
Depreciation and amortization 6,024 3,667
-------- --------
Total operating expenses 20,354 13,230
-------- --------
Real estate operating income 5,564 3,908
-------- --------
Other operating income:
Interest income 272 16
Gain on sale of assets 5,526 --
-------- --------
Total other operating income 5,798 16
-------- --------
Net income $ 11,362 3,924
======== ========
Net income attributable to general partner $ 114 39
======== ========
Net income attributable to limited partners $ 11,248 3,885
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CARRAMERICA REALTY, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 1998 and 1997
- -----------------------------------------------------------------------------------------------------------
(Unaudited and in thousands)
1998 1997
---- ----
<S> <C> <C>
Real estate operating revenue:
Rental revenue:
Minimum base rent $ 63,616 32,554
Recoveries from tenants 9,533 5,465
Parking and Other tenant charges 1,122 801
-------- --------
Total rental revenue 74,271 38,820
Cost reimbursements 2,284 1,337
Other income 137 --
-------- --------
Total revenue 76,692 40,157
-------- --------
Real estate operating expenses:
Property operating expenses:
Operating expenses 18,096 13,422
Real estate taxes 6,857 3,989
Interest expense 11,992 3,989
General and administrative 3,642 1,625
Depreciation and amortization 16,751 8,784
-------- --------
Total operating expenses 57,338 31,809
-------- --------
Real estate operating income 19,354 8,348
-------- --------
Other operating income:
Interest income 746 71
Gain on sale of assets 5,033 --
-------- --------
Total other operating income 5,779 71
-------- --------
Net income $ 25,133 8,419
======== ========
Net income attributable to general partner $ 251 84
======== ========
Net income attributable to limited partners $ 24,882 8,335
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
CARRAMERICA REALTY, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------------
(Unaudited and in thousands)
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 25,133 8,419
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 16,751 8,784
Loss on write off of assets 449 148
Decrease (increase) in accounts and notes receivable 1,513 (3,106)
Increase in accrued straight-line rents (4,128) (1,690)
Additions to tenant leasing costs (1,935) (2,302)
Increase in prepaid expenses and other assets (423) (763)
Increase in accounts payable and accrued expenses 6,219 6,532
Increase (decrease) in due to affiliates 13,805 (1,802)
Increase in rent received in advance and security deposits 377 1,518
--------- ---------
Total adjustments 32,628 7,319
--------- ---------
Net cash provided by operating activities 57,761 15,738
--------- ---------
Cash flows from investing activities:
Additions to rental property (14,720) (4,848)
Acquisitions of rental property (17,390) (94,297)
Additions to land held for development (21,638) (16,716)
Additions to construction in process (82,475) (39,321)
Proceeds from sale of rental property 27,315 --
Increase in restricted cash and cash equivalents (13,716) (167)
--------- ---------
Net cash used by investing activities (122,624) (155,349)
--------- ---------
Cash flows from financing activities:
Capital contributions 18,583 113,738
Capital distributions (1,705) (709)
Net borrowings on unsecured line of credit 67,500 28,000
Repayments on notes and mortgages payable (16,728) (1,040)
Additions to deferred financing costs (7) --
--------- ---------
Net cash provided by financing activities 67,643 139,989
--------- ---------
Increase in cash and cash equivalents 2,780 378
Unrestricted cash and cash equivalents, beginning of the period 3,584 2,478
--------- ---------
Unrestricted cash and cash equivalents, end of the period $ 6,364 2,856
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest of $3,098 for the nine
months ended September 30, 1998 and $2,044 for the nine
months ended September 30, 1997 $ 12,354 3,638
========= =========
Supplemental disclosure of noncash investing and financing activities:
During the nine months ended September 30, 1997, the Partnership funded a
portion of the aggregate purchase price of its property acquisitions by
assuming $53.1 million of debt and liabilities and by issuing $17.6 million
of Minority Units in the Partnership.
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
CARRAMERICA REALTY, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
(1) Description of Business and Summary of Significant Accounting Policies
(a) Business
CarrAmerica Realty, L.P., (the "Partnership") is a Delaware
limited partnership formed on March 6, 1996 to own, acquire,
develop, and operate office buildings across the United
States. At September 30, 1998, the Partnership owned 55
operating properties, 17 properties under development and land
expected to support the future development of 1.1 million
square feet of office space. At December 31, 1997, the
Partnership owned 53 operating properties and eight properties
under development. The properties are located in Austin,
Texas, southeast Denver, suburban Dallas, suburban Salt Lake
City, suburban Chicago, suburban Phoenix, suburban Seattle,
downtown Washington, D.C., San Francisco Bay Area and Orange
County/Los Angeles.
The Partnership's general partner is CarrAmerica Realty GP
Holdings, Inc. (the "General Partner"), a wholly owned
subsidiary of CarrAmerica Realty Corporation ("CARC"), a
self-administered and self-managed real estate investment
trust. The General Partner owned a 1% interest in the
Partnership at September 30, 1998 and December 31, 1997. The
Partnership's limited partners are CarrAmerica Realty LP
Holdings, Inc., a wholly owned subsidiary of CARC, which owned
an approximate 87% and 86% interest in the Partnership at
September 30, 1998 and December 31, 1997, respectively, and
various other individuals and entities which collectively
owned an approximately 12% and 13% interest in the Partnership
at September 30, 1998 and December 31, 1997, respectively.
(2) Mortgages and Note Payable
Mortgages payable generally are collateralized by certain rental
properties and generally require monthly principal and/or interest
payments. Following is a summary of the Partnership's mortgages and
notes payable as of the end of each period (in thousands):
September 30, December 31,
1998 1997
------------- ------------
Fixed rate mortgages $ 169,488 186,215
Unsecured credit facility 123,000 55,500
---------- ---------
$ 292,488 241,715
========== =========
On May 24, 1996, the Partnership entered into a $30 million loan
agreement with CARC. The note payable bears interest at 8.5% and
requires monthly principal and interest payments of $242 thousand. The
loan matures on May 31, 2011. The note is secured by certain office
properties and other assets of the Partnership. The outstanding balance
of the note payable to affiliate was $29.1 million and $29.4 million,
at September 30, 1998 and December 31, 1997, respectively.
8
<PAGE>
CARRAMERICA REALTY, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
The Partnership is party to a $450.0 million unsecured revolving credit
facility payable to Morgan Guaranty Trust Company of New York, as agent
for a group of banks ("Morgan"). This note is available to CARC, the
Partnership and Carr Realty, L.P., a partnership in which CARC is the
majority partner. The line of credit contains a number of financial and
other covenants, including, but not limited to, covenants relating to
ratios of annual EBITDA (Earnings Before Interest, Taxes, Depreciation
and Amortization) to interest expense, annual EBITDA to debt service,
and total debt to tangible fair market value of CARC's consolidated
assets and restrictions on the ability of CARC to make dividend
distributions in excess of 90% of funds from operations. Availability
under the line of credit is also limited to a specified percentage of
the Partnership's unencumbered properties. CARC and the Partnership are
jointly and severally liable for all obligations under the line of
credit. As of September 30, 1998, availability under the line of credit
was $450.0 million, of which approximately $448.0 million had been
drawn under this facility.
As of September 30, 1998, the scheduled maturity of mortgages and notes
payable and the note payable to affiliate are as follows (in
thousands):
1998............................. $ 20,731
1999............................. 17,381
2000............................. 15,503
2001............................. 154,734 (1)
2002............................. 8,796
Thereafter....................... 75,343 (2)
--------
$292,488
========
(1) Includes $123.0 million outstanding as of September 30,
1998 under the Company's $450.0 million unsecured line of
credit.
(2) Includes approximately $26.9 million outstanding on the
Partnership's loan agreement with CARC.
Based on the borrowing rates available to the Partnership for mortgages
and notes payable with similar terms and average maturities, the
estimated fair value, as determined by management, of the Partnership's
mortgages and notes payable approximates the carrying amount.
Restricted cash and cash equivalents consist of an escrow deposit
required as collateral for a letter of credit and proceeds from the
sale of a building held in escrow for the purchase of replacement
property.
(3) Partners' Capital Contributions, Distributions, and Participation
Percentages
The Second Amended and Restated Agreement of Limited Partnership of the
Partnership, as amended, (the "Partnership Agreement") details the
rights of ownership in the Partnership. Ownership in the Partnership is
expressed in partnership units ("Units"). Units currently are
designated as Class A, B,C,D or E Units. Class D Units have first
preference, Class A and Class E Units together have second preference
and Class B Units have third preference as to the allocation of
Available Cash, as defined in the Partnership Agreement. Class C Units
do not share in the allocation of Available Cash. Upon the third
anniversary of the date of issuance of Class C Units, they may be
converted to Class A Units based on a conversion factor described in
the Partnership Agreement. Class E Units have a special allocation of
Partnership losses.
9
<PAGE>
CARRAMERICA REALTY, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
Upon the first anniversary of the date of issuance (or two years from
the date of issuance, in the case of Class D Units), each holder of
Class A Units, Class D Units or Class E Units may, subject to certain
limitations, require that the Partnership redeem his or her Units. Upon
redemption, such holder will receive, at the option of the Partnership,
with respect to each Unit tendered, either (i) cash in an amount equal
to the market value of one share of CARC common stock (subject to
certain anti-dilution adjustments) or (ii) one share of CARC common
stock. In lieu of the Partnership redeeming Class A, Class D or Class E
Units for cash, CARC has the right to assume directly and satisfy the
redemption right of a Unit holder. Holders of Class B Units and Class C
Units are not entitled to exercise this redemption right.
The following Units were outstanding:
September 30, December 31,
1998 1997
------------- ------------
Class A Units 950,111 950,111
Class B Units 12,584,630 11,916,673
Class C Units 539,593 539,593
Class D Units 271,363 271,363
Class E Units 16,520 16,520
------------ -----------
14,362,217 13,694,260
============ ===========
(4) Commitments and Contingencies
At September 30, 1998, the Partnership is contingently liable on
letters of credit amounting to approximately $1.4 million for various
completion escrows.
In June 1997 and February 1998, the Partnership unconditionally
guaranteed unsecured notes sold by CARC to institutional investors. The
aggregate principal amount of the unsecured notes is $475.0 million of
long-term debt, in the form of $150 million aggregate principal amount
of 7.20% unsecured notes due 2004, $100 million aggregate principal
amount of 6.625% unsecured notes due 2005, $125 million aggregate
principal amount of 7.375% unsecured notes due 2007 and $100 million
aggregate principal amount of 6.875% unsecured notes due 2008.
(5) Acquisition and Development Activities
From January 1, 1998 to September 30, 1998 the Partnership acquired one
operating property totaling approximately 160,000 square feet and land
that will support the future development of approximately 1,639,000
square feet. The operating property and land were acquired through the
payment of $57.3 million in cash. In addition, in the nine months ended
September 30, 1998, the Partnership has placed into service two
operating properties previously under development containing
approximately 193,000 square feet. As of September 30, 1998, the
Partnership had 17 properties under development and land expected to
support the future development of approximately 1,137,000 square feet.
Costs incurred as of September 30, 1998 for properties under
construction were $94.1 million.
All acquisitions have been accounted for as purchases. Operations of
acquired properties have been included in the accompanying financial
statements from their respective dates of acquisition.
10
<PAGE>
CARRAMERICA REALTY, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
(6) Gain on Sale of Assets
Through September 30, 1998, the Partnership has disposed of one asset
that was inconsistent with its long-term strategic return objectives.
The proceeds of the sale were redeployed into other office properties
utilizing a tax deferred exchange. The Partnership realized a gain
totaling $5.0 million on this disposition.
(7) Subsequent Events
From October 1 to November 14, 1998, the Company acquired two office
properties. The Company paid $36.2 million in cash to purchase the
properties. These acquisitions added to the Company's holdings as
follows:
# of Square
Region Buildings Feet
------ --------- ----
Pacific Region 1 105,000
Mountain Region 1 133,000
---------- ---------
Total 2 238,000
========== =========
In October 1998, CarrAmerica sold an aggregate principal amount of $150
million of its long-term debt in the form of 6.625% unsecured notes due
in 2000. The Partnership is a guarantor of these notes.
11
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is based primarily on the Condensed
Consolidated Financial Statements of CarrAmerica Realty, L.P. and its
subsidiaries (the Partnership) as of September 30, 1998 and December 31, 1997,
and for the three and nine months ended September 30, 1998 and 1997. This
information should be read in conjunction with the accompanying condensed
consolidated financial statements and notes thereto. These financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect a fair presentation of the results for the interim periods, and all such
adjustments are of a normal, recurring nature. The comparability of these
periods is significantly impacted by acquisitions and dispositions made during
1998 and 1997. As of September 30, 1997, the Partnership owned 46 properties.
Between October 1, 1997 and September 30, 1998, the Partnership acquired 15
properties, placed into service two properties, and disposed of seven
properties.
Results of Operations - Three Months Ended September 30, 1998 and 1997
Real Estate Operating Revenue. As of September 30, 1998, the
Partnership owned 55 operating properties, 54 of which, containing approximately
4.8 million square feet, were in service for the full three months ended
September 30, 1998, as compared to 46 properties, 44 of which, containing
approximately 3.8 million square feet, were in service for the full three months
ended September 30, 1997. As a result, total real estate operating revenue
increased $8.8 million, or 51.2%, to $25.9 million for the three months ended
September 30, 1998 as compared to $17.1 million for the three months ended
September 30, 1997. The increase in revenue was primarily attributable to a $8.4
million and a $.4 million increase in rental revenue and cost reimbursement and
other income, respectively. The Partnership experienced net growth in its rental
revenue as a result of its acquisitions since the third quarter of 1997 which
contributed approximately $7.4 million of additional rental revenue in the three
month period ended September 30, 1998. Rental revenue from properties that were
fully operating throughout both periods increased $1.0 million. Cost
reimbursement and other income increased by $.4 million, for the three months
ended September 30, 1998 as compared to the three months ended September 30,
1997, primarily as a result of an increase in reimbursements from an affiliate
related to certain services the Partnership personnel provide to the affiliate.
Real Estate Operating Expenses. Total real estate operating expenses
increased $7.2 million for the three months ended September 30, 1998, or 53.8%,
to $20.4 million as compared to $13.2 million for the three months ended
September 30, 1997. The net increase in operating expenses was attributable to a
$1.3 million increase in property operating expenses, a $2.6 million increase in
interest expense, a $.9 million increase in general and administrative expenses,
and a $2.4 million increase in depreciation and amortization. The increase in
operating expenses was primarily attributable to additional expenses associated
with new acquisitions since the third quarter of 1997. The increase in the
Partnership's interest expense is primarily related to borrowings for
acquisitions. The increase in general and administrative expenses is
predominately a result of the addition of staff to implement the Partnership's
business strategy and inflation. The increase in depreciation and amortization
is predominately a result of additional depreciation and amortization of the
Partnership's real estate acquisitions.
Other Operating Income. Other operating income increased $5.8 million
for the three months ended September 30, 1998 as compared to the same period in
1997, primarily due to a gain recognized on the disposition of 189,000 square
feet of office space.
Net Income. Net income of $11.4 million was earned for the three months
ended September 30, 1998 as compared to $3.9 million during the three months
ended September 30, 1997. The comparability of net income between the two
periods is impacted by the acquisitions the Partnership made and the other
changes described above.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership
- --------------------------------------------------------------------------------
Results of Operations - Nine Months Ended September 30, 1998 and 1997
Real Estate Operating Revenue. As of September 30, 1998, the
Partnership owned 55 operating properties, 53 of which, containing approximately
4.7 million square feet, were in service for the full nine months ended
September 30, 1998, as compared to 46 properties, 25 of which, containing
approximately 2.3 million square feet, were in service for the full nine months
ended September 30, 1997. As a result, total real estate operating revenue
increased $36.5 million, or 91.0%, to $76.7 million for the nine months ended
September 30, 1998 as compared to $40.2 million for the nine months ended
September 30, 1997. The increase in revenue was primarily attributable to a
$35.4 million and a $1.1 million increase in rental revenue and cost
reimbursement and other income, respectively. The Partnership experienced net
growth in its rental revenue as a result of its acquisitions since the third
quarter of 1997 which contributed approximately $33.6 million of additional
rental revenue in the nine month period ended September 30, 1998. Rental revenue
from properties that were fully operating throughout both periods increased $1.8
million. Cost reimbursement and other income increased by $1.1 million, for the
nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997, primarily as a result of reimbursements from an affiliate
related to certain services the Partnership personnel provide to the affiliate.
Real Estate Operating Expenses. Total real estate operating expenses
increased $25.5 million for the nine months ended September 30, 1998, or 80.3%,
to $57.3 million as compared to $31.8 million for the nine months ended
September 30, 1997. The net increase in operating expenses was attributable to a
$7.5 million increase in property operating expenses, a $8.0 million increase in
interest expense, a $2.0 million increase in general and administrative
expenses, and a $8.0 million increase in depreciation and amortization. The
increase in operating expenses was primarily attributable to additional expenses
associated with new acquisitions since the third quarter of 1997. The increase
in the Partnership's interest expense is primarily related to borrowings for
acquisitions. The increase in general and administrative expenses is
predominately a result of the addition of staff to implement the Partnership's
business strategy and inflation. The increase in depreciation and amortization
is predominately a result of additional depreciation and amortization of the
Partnership's real estate acquisitions.
Other Operating Income. Other operating income increased $5.8 million
for the nine months ended September 30, 1998 as compared to the same period in
1997, primarily due to a gain recognized on the disposition of 189,000 square
feet of office space.
Net Income. Net income of $25.1 million was earned for the nine months
ended September 30, 1998 as compared to $8.4 million during the nine months
ended September 30, 1997. The comparability of net income between the two
periods is impacted by the acquisitions the Partnership made and the other
changes described above.
Cash Flows
Net cash provided by operating activities increased $42.1 million, or
267.0%, to $57.8 million for the nine months ended September 30, 1998 as
compared to $15.7 million for the nine months ended, September 30, 1997,
primarily as a result of the acquisitions made by the Company. Net cash used by
investing activities decreased $32.7 million, to $122.6 million for the nine
months ended September 30, 1998 as compared to $155.3 million for the nine
months ended September 30, 1997, primarily as a result of a reduction in
acquisitions of rental property. Net cash provided by financing activities
decreased $72.4 million to $67.6 million provided for the nine months ended
September 30, 1998 as compared to $140.0 million used for the nine months ended
September 30, 1997, primarily as a result of a reduction in capital
contributions associated with the acquisition of rental properties, net of
borrowings on the unsecured credit facility.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership
- --------------------------------------------------------------------------------
Acquisitions
During the nine months ended September 30, 1998, the Partnership
acquired one operating property totaling approximately 160,000 square feet and
land that will support the future development of approximately 1,639,000 square
feet. The operating property and land are located in suburban Dallas, Austin,
Texas and downtown Washington, D.C. The operating property and land were
acquired through the payment of $57.3 million in cash. In addition, in the nine
months ended on September 30, 1998, the Partnership has placed into service two
operating properties previously under development containing approximately
193,000 square feet.
Liquidity and Capital Resources
The Partnership's total indebtedness at September 30, 1998 was $292.5
million, of which $123.0 million, or 42.1%, had a LIBOR-based floating interest
rate. The Partnership's fixed rate indebtedness had an effective weighted
average interest rate of 8.3% and had a weighted average term to maturity of 6.3
years. The Partnership is jointly and severally liable with CARC on a $450.0
million unsecured revolving line of credit. This line of credit bears interest
at 90 basis points above LIBOR. At September 30, 1998, on this line of credit,
the Partnership had $123.0 million outstanding directly and had a joint and
several guarantee on the remainder of the outstanding balance of $325.0 million.
At September 30, 1998, CARC was able to borrow the full amount under the $450.0
million unsecured revolving line of credit. At September 30, 1998, the total
book value of the Partnership's assets was $779.0 million. The Partnership's
debt as a percentage of total book value of its assets was 37.5%.
The Partnership will require capital to invest in its existing
portfolio of operating assets for major capital projects such as large-scale
renovations, routine capital expenditures and deferred maintenance on certain
properties recently acquired and tenant related capital expenditures, such as
tenant improvements and allowances and leasing commissions. The Partnership's
capital requirements for tenant related capital expenditures are dependent upon
a number of factors, including square feet of expiring leases, tenant retention
ratios and whether the expiring leases are in central business district
properties or suburban properties. As of September 30, 1998, the Partnership had
234,000 square feet under leases expiring on or before December 31, 1998,
representing 4.9% of total leased space. The Partnership expects expenditures
for deferred maintenance on recently acquired properties to decrease in
subsequent years as the emphasis of the Partnership's growth shifts from
acquiring existing office properties to developing new properties. The
Partnership anticipates that this shift from acquiring properties to developing
properties will increase its need for short-term borrowings.
The Partnership will require a substantial amount of capital for
development projects currently underway and planned for the future. As of
September 30, 1998, the Partnership had 17 development projects underway, which
are expected to require a total investment by the Partnership of $271.9 million.
As of September 30, 1998, the Partnership had expended $94.1 million of these
costs.
The Partnership expects to meet these anticipated capital needs through
the use of its unsecured line of credit (as described above), through advances
from CARC, prudent refinancing of certain properties, targeted use of joint
ventures, and from the disposition of certain properties. Currently, the
Partnership has five properties under contract for sale located in Dallas. These
properties are expected to produce net proceeds of approximately $58 million.
Due to the uncertainty in the disposition process, there can be no assurance
that these sales will close or that they will achieve the expected net proceeds.
The Partnership intends to use cash flow from operations, its unsecured
revolving line of credit facility and the proceeds from the disposition of
assets to meet its working capital needs for its existing portfolio of operating
assets. The Partnership anticipates that adequate cash will be available to fund
its operating and administrative expenses, continuing debt service obligations
and the payment of distributions in both the short term and long term. However,
the Partnership's ability to access additional capital necessary to support the
current development program is largely dependent on CARC's ability to access
capital. Current market conditions make CARC's traditional sources of such
capital, the equity and public debt markets, currently unattractive. CARC
believes that the alternative sources which it is currently pursuing, namely
refinancings, joint ventures and asset dispositions, will provide it with the
necessary capital until such time as the equity and public debt markets improve.
However, there can be no assurance that such an improvement will occur in the
near term. If CARC is not able to access capital at attractive rates and the
Partnership is not able to meet its cash requirements through its traditional
means, it may have to rely on working capital advances from CARC at a time when
CARC's cost of capital causes such advances to be made at unattractive rates.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership
- --------------------------------------------------------------------------------
Year 2000 Compliance
The Year 2000 issue results from a programming convention in which
computer programs use two digits rather than four to define the applicable year.
Software and hardware may recognize a date using "00" as the year 1900, rather
than the year 2000. Such an inability of computer programs to recognize a year
that begins with "20" could result in business or building system failures,
miscalculations or errors causing disruptions of operations or other business
problems, including, among other things, a temporary inability to process
transactions, send invoices or engage in other normal business activities.
The Partnership is addressing its Year 2000 issues, through
participation in CARC's Year 2000 initiative. CARC has undertaken a
comprehensive program to address the Year 2000 issue. In the second quarter of
1998, CARC expanded its program and appointed a Year 2000 Steering Committee to
manage centrally its Year 2000 compliance program (known internally as "Project
2000"). The Steering Committee includes representatives of senior level
management representing a wide array of the organization. The Steering Committee
is charged with overseeing CARC's comprehensive action plan designed to address
Year 2000 issues.
CARC's Steering Committee has engaged the independent consulting firm
of Computer Technology Associates, Inc. ("CTA") to serve as the Project Manager
for Project 2000. The project is organized into two areas of concentration: (i)
Property Operations Embedded Systems and (ii) Internal Business Operations
Technology. The Property Operations segment of the program focuses primarily on
equipment and systems present in CARC's operating properties that may contain
embedded microcontroller technology (such as elevators and HVAC systems). The
Internal Business Operations segment focuses primarily on CARC's information
technology, operating systems (such as such as billing, accounting and financial
reporting systems) and certain systems of CARC's major vendors and material
service providers. As described below, Project 2000 involves (i) the assessment
of the Year 2000 problems that may affect CARC, (ii) the development of remedies
to address the problems discovered in the assessment phase, (iii) the testing of
such remedies and (iv) the preparation of contingency plans to deal with the
potential failure of important and critical systems.
Assessment. During the course of its assessment phase, CARC continues
to identify substantially all of the major components of its property and
business operations systems which may be vulnerable to the Year 2000 issue. In
terms of Property Operations, CARC is conducting a comprehensive inventory of
all the buildings' systems and equipment. Systems are ranked (0-3) based upon
each systems' importance to the properties' operations. Those systems classified
as level 2 or 3 (the highest levels of importance) are compared to CTA's
existing embedded systems database to determine the status of Year 2000
compliance if it is not already known by CARC. If relevant information is not
contained in the existing database, the system is then identified for processing
through vendor management coordinated by CTA. Vendor management involves
concentrated communication with the vendor in an attempt to determine the status
of a systems Year 2000 compliance and any available remedies. As of the third
quarter of 1998, inventory of CARC's operating properties was substantially
complete (approximately 98%). Assessment of property operations is scheduled for
completion in the fourth quarter of 1998.
15
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership
- --------------------------------------------------------------------------------
In terms of Internal Business Operations Technology, team leaders have
been selected from each business unit and market office to assist in identifying
software, hardware and external interfaces which may be vulnerable to Year 2000
issues. Inventory of both core business units and all market offices is expected
to be completed by the end of the fourth quarter of 1998. CARC's primary billing
and accounting software is currently undergoing a routine application upgrade
expected to be complete by the end of the fourth quarter of 1998. The vendor of
the software has received the Information Technology Association of America
(ITAA) 2000 Certification and represents that the system is Year 2000 ready, and
CARC expects to test the system during the first quarter of 1999. In addition,
during the third quarter of 1998, CARC continued communicating with other
significant hardware, software and other material services providers, requesting
them to provide CARC with detailed, written information concerning existing or
anticipated Year 2000 compliance of their systems insofar as the systems relate
to such parties' business activities with CARC. CARC expects that it will
complete its distribution of these inquiries by the end of the fourth quarter of
1998.
Remediation and Testing Phase. Based upon the results of its assessment
efforts, CARC will undertake remediation and testing activities. CARC intends to
complete this phase by the end of the third quarter of 1999. The activities
conducted during the remediation and testing phase are intended to provide
assurance from both the Property Operation and the Internal Business
perspectives that critical and important applications, systems and equipment
will be substantially Year 2000 compliant on a timely basis. In this phase, CARC
will first evaluate applications, systems and equipment. If a potential Year
2000 problem is identified, CARC will take steps to attempt to remediate the
problem and, where applicable, test to confirm that the remediating changes are
effective and have not adversely affected the functionality of that application.
After the various applications, system components and equipment have undergone
remediation and testing phases, CARC, where applicable, will conduct integrated
testing for the purpose of demonstrating functional integrated systems
operations.
Contingency Plans. CARC intends to develop contingency plans to handle
its most reasonably likely worst case Year 2000 scenarios, which it is in the
process of identifying. CARC intends to complete its determination of worst case
scenarios after it has received and analyzed responses to substantially all of
the inquiries it has made of third parties. CARC expects to complete contingency
plans by the end of the third quarter of 1999.
Costs Related to the Year 2000 Issue. To date, CARC, has incurred
approximately $.3 million in costs for its Year 2000 program. CARC currently
estimates that it will incur additional costs, which are not expected to exceed
approximately $4.3 million, to complete its Year 2000 compliance work. Of such
additional costs, approximately $1.5 million are expected to be incurred during
1998 and approximately $2.8 million are expected to be during 1999. CARC has not
yet determined the portion of these expenditures that will be allocated to the
Partnership.
Risks Related to the Year 2000 Issue. Although the Partnership's Year
2000 efforts are intended to minimize the adverse effects of the Year 2000 issue
on the Partnership's business and operations, the actual effects of the Year
2000 issue and the success or failure of the Partnership's efforts described
above cannot be known until the year 2000. Failure by the Partnership and its
major vendors, other material service providers and material clients to address
adequately their respective Year 2000 issues in a timely manner (insofar as such
issues relate to the Partnership's business) could have a material adverse
effect on the Partnership's business, results of operations and financial
condition.
16
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership
- --------------------------------------------------------------------------------
Building and Lease Information
The 55 properties contain a total of approximately 4.9 million rentable
square feet. Eleven properties are located in suburban Dallas (representing
23.2% of the portfolio's net rentable square feet), ten properties are located
in southeast Denver (representing 20.4%), ten properties are located in suburban
Austin (representing 15.0%), eight properties are located in suburban Salt Lake
City (representing 9.4%), five properties are located in the Orange County/Los
Angeles area (representing 8.4%), four properties are located in suburban
Phoenix (representing 10.9%), three properties are located in suburban Chicago
(representing 6.5%), three properties are located in the San Francisco Bay Area
(representing 4.3%) and one property is located in suburban Seattle
(representing 1.9%). Each of the properties is wholly owned by the Partnership.
The properties range in size from approximately 70,000 square feet to
approximately 187,000 square feet. The Partnership acquired or placed in service
each of the properties at various times between May 1996 and September 30, 1998.
All of the properties are managed by CarrAmerica Realty Services, Inc., a wholly
owned subsidiary of CARC. In addition, as of September 30, 1998, the Partnership
owns 17 properties under development that will contain approximately 1.8 million
square feet and land that is expected to support the future development of up to
1.1 million square feet of office space.
17
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership
- --------------------------------------------------------------------------------
Building And Lease Information
The following table sets forth certain information about each operating property
owned by the Partnership as of September 30, 1998:
<TABLE>
<CAPTION>
Partnership's Net
Effective Rentable
Property Area Percent # of
Property Ownership (square feet)(1) Leased(2) Buildings
- -------- --------- ---------------- --------- ---------
<S> <C> <C> <C> <C>
Consolidated Properties
Southern California,
Orange County/Los Angeles:
South Coast Executive Center 100.0% 161,310 92.9% 2
2600 W. Olive 100.0 145,474 95.7 1
Bay Technology Center 100.0 107,481 100.0 2
Northern California,
San Francisco Bay Area:
San Mateo I 100.0 70,000 100.0 1
San Mateo II and III 100.0 141,404 97.2 2
Suburban Seattle:
Canyon Park Commons 100.0 95,290 100.0 1
Austin, Texas:
Great Hills Plaza 100.0 135,333 100.0 1
Balcones Center 100.0 75,761 77.6 1
Park North 100.0 132,744 93.4 2
City View Centre 100.0 136,183 100.0 3
Tower of the Hills 100.0 166,099 98.1 2
Riata 4 100.0 91,538 93.6 1
Suburban Chicago:
Bannockburn I & II 100.0 209,860 100.0 2
Bannockburn IV 100.0 108,469 100.0 1
Suburban Dallas:
Greyhound 100.0 92,890 100.0 1
Search Plaza 100.0 152,790 95.5 1
Quorum North 100.0 115,845 88.2 1
Quorum Place 100.0 179,303 93.9 1
Cedar Maple Plaza 100.0 113,011 96.1 3
Tollhill East & West 100.0 241,337 93.0 2
Two Mission Park 100.0 77,731 90.8 1
5000 Quorum 100.0 160,122 87.5 1
Southeast Denver:
Harlequin Plaza 100.0 329,070 100.0 2
Quebec Court I & II 100.0 287,294 100.0 2
Greenwood Center 100.0 75,866 97.2 1
Quebec Center 100.0 106,849 90.2 3
Panorama Corporate Center I 100.0 100,881 100.0 1
Panorama II 100.0 100,916 96.7 1
Suburban Phoenix:
US West 100.0 532,506 100.0 4
Suburban Salt Lake City:
Sorenson Research Park 100.0 285,144 98.8 5
Wasatch Corporate Center 100.0 178,098 100.0 3
--------- ----- --
TOTAL CONSOLIDATED PROPERTIES: 4,906,599 55
========= ==
WEIGHTED AVERAGE 96.8%
=====
</TABLE>
- ----------
(1) Includes office and retail space but excludes storage space.
(2) Includes space for leases that have been executed and have commenced as of
September 30, 1998.
18
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership
- --------------------------------------------------------------------------------
The following table sets out a schedule of the lease expirations for
leases in place at those Properties owned as of September 30, 1998:
Net Rentable Percent of Leased
Area Subject to Square Footage
Expiring Leases Represented by
Year of Lease Expiration (square feet) (1) Expiring Leases
------------------------ ----------------- ---------------
1998....................... 234,000 4.9%
1999....................... 572,000 12.0
2000....................... 496,000 10.4
2001....................... 809,000 17.0
2002....................... 612,000 12.9
2003....................... 573,000 12.1
2004....................... 417,000 8.8
2005....................... 2,000 .1
2006....................... 180,000 3.8
2007 and thereafter........ 856,000 18.0
- ------------
(1) Excludes 156,000 square feet of vacant space.
19
<PAGE>
Part II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
10.1 Fourth Amended and Restated Revolving Credit
Agreement dated as of August 27, 1998 by and among
CarrAmerica Realty Corporation, Carr Realty, L.P.,
CarrAmerica Realty, L.P., Morgan Guaranty Trust
Company of New York, J.P. Morgan Securities Inc.,
Commerzbank Aktiengesellschaft, New York Branch,
NationsBank, N.A., PNC Bank, National Association,
Bank of America National Trust and Savings
Association, Societe Generale, a French Banking
Corporation, acting through its Southwest Agency,
and the other banks listed therein (incorporated by
reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q for the quarter ended September 30,
1998 filed by CarrAmerica Realty Corporation).
10.2 Indenture, dated as of October 1, 1998, by and
among CarrAmerica Realty Corporation, as primary
obligor, CarrAmerica Realty, L.P., as guarantor,
and Bankers Trust Company, as trustee (incorporated
by reference to Exhibit 4.1 to the Form 8-K filed
by CarrAmerica Realty Corporation on October 2,
1998).
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARRAMERICA REALTY, L.P.
a Delaware Limited Partnership
By: CarrAmerica Realty GP Holdings, Inc.,
its general partner
/s/ Thomas A. Carr
- ------------------------------------------------
Thomas A. Carr, President
/s/ Brian K. Fields
- ----------------------------------------------------------------------
Brian K. Fields, Chief Financial Officer, Treasurer and Vice President
Date: November 16, 1998
21
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
10.1 Fourth Amended and Restated Revolving Credit Agreement dated as
of August 27, 1998 by and among CarrAmerica Realty Corporation,
Carr Realty, L.P., CarrAmerica Realty, L.P., Morgan Guaranty
Trust Company of New York, J.P. Morgan Securities Inc.,
Commerzbank Aktiengesellschaft, New York Branch, NationsBank,
N.A., PNC Bank, National Association, Bank of America National
Trust and Savings Association, Societe Generale, a French
Banking Corporation, acting through its Southwest Agency, and
the other banks listed therein (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 filed by CarrAmerica Realty
Corporation).
10.2 Indenture, dated as of October 1, 1998, by and among CarrAmerica
Realty Corporation, as primary obligor, CarrAmerica Realty,
L.P., as guarantor, and Bankers Trust Company, as trustee
(incorporated by reference to Exhibit 4.1 to the Form 8-K filed
by CarrAmerica Realty Corporation on October 2, 1998).
27 Financial Data Schedule
22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CARRAMERICA REALTY, L.P. BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND FROM
CARRAMERICA REALTY, L.P. STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998.
</LEGEND>
<CIK> 0001040554
<NAME> CarrAmerica Realty, L.P.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 21,581
<SECURITIES> 0
<RECEIVABLES> 10,244
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 616,508
<DEPRECIATION> 27,645
<TOTAL-ASSETS> 749,753
<CURRENT-LIABILITIES> 0
<BONDS> 292,488
0
0
<COMMON> 0
<OTHER-SE> 419,626
<TOTAL-LIABILITY-AND-EQUITY> 749,753
<SALES> 0
<TOTAL-REVENUES> 76,692
<CGS> 0
<TOTAL-COSTS> 57,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 25,133
<INCOME-TAX> 0
<INCOME-CONTINUING> 25,133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,133
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>
Notes & accounts receivable are presented net of allowance for doubtful accounts
as the allowance is immaterial.
</FN>
</TABLE>
