<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-13589
PRIME GROUP REALTY TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 36-4173047
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
(312) 917-1300
(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 No x
---- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At December 19, 1997, 12,980,000 of the Registrant's Common Shares of Beneficial
Interest were outstanding.
<PAGE>
Prime Group Realty Trust
Form 10-Q
Index
-----
Part I: Financial Information
Item 1. Financial Statements
Balance sheet of Prime Group Realty Trust as of
September 30, 1997
Notes to Balance Sheet of Prime Group Realty Trust
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II: Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS.
Prime Group Realty Trust
Balance Sheet
September 30, 1997
(in thousands, except share amounts)
ASSETS
Cash $ 1
Deferred offering costs 3,572
--------
Total assets $ 3,573
--------
--------
LIABILITIES AND SHAREHOLDER'S EQUITY
Due to affiliate $ 3,572
--------
Total liabilities 3,572
Shareholder's equity:
Common shares of beneficial interest, $0.01
par value per share, 100 shares authorized,
issued and outstanding -
Additional paid-in capital 1
--------
Total shareholder's equity 1
--------
Total liabilities and shareholder's equity $ 3,573
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--------
See notes to balance sheet.
<PAGE>
Prime Group Realty Trust
Notes to Balance Sheet
1. FORMATION OF THE COMPANY
Prime Group Realty Trust (the "Company"), was formed in Maryland on July 21,
1997 to succeed and expand the office and industrial real estate business of The
Prime Group, Inc. ("PGI") consisting of a portfolio of eight office, fourteen
industrial properties, a parking garage facility and the real estate ownership,
acquisition, development, leasing and management businesses historically
conducted by PGI. On November 17, 1997, the Company completed its initial
public offering (the "Offering") of 12.38 million common shares of beneficial
interest and the private placement of 2.0 million cumulative convertible
preferred shares of beneficial interest (the "Private Placement"). The
Company's assets will be owned and controlled by, and all of its operations will
be conducted through, Prime Group Realty, L.P. (the "Operating Partnership") and
other subsidiaries. The accompanying balance sheet should be read in
conjunction with the Company's prospectus dated November 11, 1997 as filed with
the Securities and Exchange Commission on November 13, 1997 (the "Prospectus").
2. INCOME TAXES
Commencing with the year ending December 31, 1997, it is the intent of the
Company to qualify as a real estate investment trust (REIT) under the Internal
Revenue Code of 1986, as amended. As a REIT, the Company generally will not be
subject to federal income tax to the extent that it distributes at least 95% of
its REIT taxable income to its shareholders. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT in any taxable year, the Company will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate tax rates.
3. DEFERRED OFFERING COSTS
In connection with the Offering, affiliates of the Company incurred legal,
accounting and related costs which were reimbursed by the Company upon the
consummation of the Offering. These costs were deducted from the gross proceeds
of the Offering.
4. USE OF ESTIMATES
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the balance sheet and accompanying notes. Actual
results could differ from these estimates.
<PAGE>
Prime Group Realty Trust
Notes to Balance Sheet (continued)
5. UNAUDITED INTERIM FINANCIAL STATEMENT
The balance sheet of the Company as of September 30, 1997 is unaudited. In
the opinion of management, the balance sheet reflects all adjustments necessary
for a fair presentation in accordance with generally accepted accounting
principles.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128") effective for financial statements for both interim and annual
periods ending after December 15, 1997. FAS 128 established standards for
computing and presenting earnings per share and supersedes APB Opinion No. 15,
"Earnings Per Share." FAS 128 replaces primary earnings per share with basic
earnings per share and requires dual presentation of basic and diluted earnings
per share on the face of the income statement. The Company will adopt the
standard in the fourth quarter of 1997 and does not expect the adoption of
FAS 128 to have a material impact on its earnings per share.
In February 1997, the FASB issued Statement of Accounting Standards No. 129,
"Disclosure of Information About Capital Structure" ("FAS 129") effective for
financial statements for periods ending after December 15, 1997. FAS 129
requires additional disclosures regarding the Company's capital structure. The
Company will adopt the standard in the fourth quarter of 1997 and does not
expect the adoption of FAS 129 to have a material impact on the presentation of
its capital structure.
7. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying unaudited Pro Forma Condensed Consolidated Statements of
Operations of the Company are presented as if, at January 1, 1996, (i) the
Company had sold 12.38 million shares of its common shares of beneficial
interest at $20.00 per share and contributed the net proceeds to the Operating
Partnership, (ii) the Company had sold 2.0 million shares of its cumulative
convertible preferred shares of beneficial interest at $20.00 per share and
contributed the net proceeds to the Operating Partnership, (iii) PGI and other
individuals (collectively, the "Contributors") had contributed certain of their
respective properties and operations, as described in the Prospectus, (the
"Contribution Properties") to the Operating Partnership, (iv) the Operating
Partnership had issued 4.57 million units for $85.0 million to a partnership
owned 60% by PGI and 40% by certain affiliates of Blackstone Real Estate
Advisors, L.P., ("Primestone") (v) the Operating Partnership acquired various
office and industrial properties (the "Acquisition Properties"), (vi) the
Operating Partnership acquired Continental Office, Ltd. and Continental Offices,
Ltd. Realty
<PAGE>
Prime Group Realty Trust
Notes to Balance Sheet (continued)
7. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
("Continental Management Business"), construction/property management
companies, from a third party, and (vii) the Operating Partnership repaid debt
on certain of the Contribution Properties, as described in the Prospectus. The
unaudited pro forma Condensed Consolidated Statements of Operations should be
read in conjunction with unaudited Pro Forma condensed consolidated financial
statements and all of the historical financial statements contained in the
Prospectus. In management's opinion, all adjustments necessary to reflect the
effects of the Offering and the Private Placement have been made.
The unaudited Pro Forma Condensed Consolidated Statements of Operations of
the Company are not necessarily indicative of what the actual results of
operations would have been assuming the Offering and the Private Placement had
occurred at the dates indicated above, nor do they purport to represent the
future results of operations of the Company.
7. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
Consolidated Statements of Operations
(in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
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<S> <C> <C> <C>
REVENUE:
Rental $ 14,622 $ 42,648 $ 38,522
Tenant reimbursements 5,195 15,653 14,187
Other 5 373 1,709
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Total revenue 19,822 58,674 54,418
EXPENSES:
Property operations 3,012 8,728 8,649
Real estate taxes 3,413 11,212 10,775
Depreciation and amortization 4,244 13,059 12,638
Interest 2,437 7,146 6,940
Financing fees 294 934 1,038
General and administrative 1,611 4,578 4,152
Provision for environmental remediation - 3,205 -
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Total expenses 15,011 48,862 44,192
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INCOME FROM OPERATIONS BEFORE
SHARE OF INCOME OF INVESTMENT
SUBSIDIARIES, PREFERRED SHARE 4,811 9,812 10,226
DIVIDEND AND MINORITY INTEREST
SHARE OF INCOME OF INVESTMENT SUBSIDIARIES (107) 115 86
-------------------------------------------
INCOME BEFORE PREFERRED SHARE
DIVIDEND AND MINORITY INTEREST 4,704 9,927 10,312
PREFERRED SHARE DIVIDENDS (700) (2,100) (2,100)
-------------------------------------------
INCOME BEFORE MINORITY INTEREST 4,004 7,827 8,212
MINORITY INTEREST (1,788) (3,496) (3,667)
-------------------------------------------
NET INCOME $ 2,216 $ 4,331 $ 4,545
-------------------------------------------
-------------------------------------------
AVERAGE NUMBER OF COMMON SHARES
OF BENEFICIAL INTEREST OUTSTANDING 12,380 12,380 12,380
-------------------------------------------
-------------------------------------------
NET INCOME PER COMMON SHARE OF
BENEFICIAL INTEREST $ 0.18 $ 0.35 $ 0.37
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-------------------------------------------
</TABLE>
<PAGE>
Prime Group Realty Trust
Notes to Balance Sheet (continued)
8. SUBSEQUENT EVENTS
On November 11, 1997, the Company's common shares of beneficial interest
commenced trading on the New York Stock Exchange.
On November 17, 1997, the Company completed the Offering and Private
Placement transactions and contributed the net proceeds to the Operating
Partnership.
On December 15, 1997, the Company sold 600,000 common shares of beneficial
interest pursuant to the underwriters' over allotment option and received net
proceeds therefrom of approximately $11.25 million.
On December 15, 1997, the Company acquired the first mortgage note
encumbering the office property known as Continental Towers, which consists of
three Class A, 12-story office towers that contain 916,000 square feet of
rentable space (approximately 98% leased), located in Rolling Meadows, Illinois.
The first mortgage note, which has a current face value of $163.0 million and an
interest rate of 12.5% (6.5% pay rate and an additional 6.0% accrual rate), was
purchased for $108.0 million from an institutional lender with borrowings from
the Company's $235.0 million line of credit with various financial institutions
("Credit Facility"). An affiliate of the Company will assume management and
leasing responsibility for the property pursuant to a 15-year management,
redevelopment and leasing contract that provides the Company with operating
control of the property.
On December 16, 1997, the Company acquired the first mortgage note
encumbering the office property known as 180 North LaSalle Street, which is a
39-story building that contains 729,000 square feet of rentable space,
including 15,000 square feet of retail space, is currently approximately 83%
leased and is located in Chicago, Illinois. The first mortgage note, which
has a current face value of $63.0 million and an interest rate of 8.25%, was
purchased from a third party for approximately $51.2 million in cash from the
Credit Facility and $5.0 million in common units of the Operating
Partnership. In addition, the Company purchased an option, exercisable until
July 30, 2000, to buy the existing $85.0 million second mortgage on the
property for 220,000 common units of the Operating Partnership (subject to
certain adjustments) and has an option to purchase the equity ownership of
the property beginning after February 15, 2004. The Company will also provide
property management and leasing services for the property pursuant to a
10-year management and leasing contract.
<PAGE>
Prime Group Realty Trust
Notes to Balance Sheet (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report on Form 10-Q contains historical information and forward-
looking statements. Statements looking forward in time are included in this
Form 10-Q pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. They involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
be materially different from any future performance suggested herein. In the
context of forward-looking information provided in this Form 10-Q and in other
reports, please refer to the discussion of risk factors detailed in, as well as
the other information contained in, the Company's filings with the Securities
and Exchange Commission during the past 12 months.
OVERVIEW
The Company was formed to succeed to and expand the office and industrial real
estate business of PGI.
Upon completion of the Offering and Private Placement, the Company, through its
subsidiaries, owned 16 office properties , 44 industrial properties, one parking
facility and one retail center and had one industrial property under
construction (collectively, the "Properties") with approximately 2.4 million net
rentable square feet of office space and 5.7 million net rentable square feet of
industrial space. Subsequent to the Offering, the Company acquired two first
mortgage notes encumbering two office properties (the "Mortgage Notes
Receivable"). These properties contain approximately 1.7 million rentable square
feet.
The Company currently plans to invest primarily in the acquisition, development
and redevelopment of office and industrial properties located principally in the
Chicago Metropolitan Area.
The Company intends to access multiple sources of capital to fund future
acquisition and development activities. These capital sources may include
undistributed cash flow, borrowings under certain acquisition facilities,
proceeds from the issuance of long-term, tax-exempt bonds and other debt or
equity securities and other bank and/or institutional borrowings. There can be
no assurance that any such financing will be obtained.
<PAGE>
Prime Group Realty Trust
Notes to Balance Sheet (continued)
RESULTS OF OPERATIONS
COMPARISON OF THE PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996
Prior to November 17, 1997 (the Company's Offering date), the Company had no
operations. Included in the Company's Pro Forma Condensed Consolidated
Statements of Operations are the historical operations of the Prime Properties
and the Contribution and Acquisition Properties, as defined in the Prospectus,
adjusted for the effects of the Offering and Private Placement transactions.
The Company reported pro forma revenues of approximately $58.7 million,
representing an increase of $4.3 million, or 7.9% from the $54.4 million from
the same period in 1996. Of the total pro forma revenue reported by the Company
for the nine months ended September 30, 1997, $37.2 million relates to the
Prime Properties representing an increase of $3.4 million or 10.6% from the
$33.8 million for the same period in 1996. The Prime Properties' rental revenue
increased $3.5 million, or 16.1%, to $25.2 million in 1997 from $21.7 million in
1996. This increase is primarily due to higher net rent per leased square foot.
The Prime Properties' other revenue decreased $1.3 million to $0.4 million in
1997 from $1.7 million in 1996. This relates to an Industrial Property which
sold a parcel of land for a gain of $0.6 million in 1996. No similar sales
occurred in 1997.
Total pro forma expenses increased $4.7 million, or 10.6%, to $48.9 million for
the nine months ended September 30, 1997 compared to $44.2 million for the nine
months ended September 30, 1996. In 1997, real estate tax expenses increased
$0.4 million, or 4.1%, to $11.2 million from $10.8 million in 1996 primarily due
to higher property assessments in 1997. Depreciation and amortization increased
$0.5 million, or 4.0% to $13.1 million in 1997 from $12.6 million in 1996. This
was primarily due to increased depreciation of tenant improvement costs
reflecting higher occupancy levels. In 1997, general and administrative
expenses increased $0.4 million, or 10.2%, to $4.6 million from $4.2 million in
1996 primarily due to the write-off of uncollected tenant receivables related to
one tenant which has subsequently vacated its space, and the establishment of a
general reserve for doubtful accounts. In 1997, certain industrial Properties
recorded a provision for environmental remediation costs of $3.2 million, which
represents the probable costs to be incurred for the clean-up of environmental
contamination at the Properties. PGI has contractually agreed to indemnify the
Company from any environmental liabilities it may incur and has pledged $1.0
million and approximately 485,000 partnership units in an operating partnership
that can be converted to common shares of a publicly traded real estate
investment trust to cover these costs.
<PAGE>
Prime Group Realty Trust
Notes to Balance Sheet (continued)
Pro forma net income decreased $0.2 million, or 4.7%, to $4.3 million in 1997
compared to $4.5 million in 1996, primarily due to increase in rental revenues,
offset by the provision for environmental remediation described above.
<PAGE>
Prime Group Realty Trust
Notes to Balance Sheet (continued)
LIQUIDITY AND CAPITAL RESOURCES
On November 17, 1997, the Company completed its Offering of 12,380,000 common
shares of beneficial interest, which provided the Company with net proceeds of
$232.1 million and the Private Placement of 2,000,000 cumulative convertible
preferred shares of beneficial interest, which provided the Company with net
proceeds of $39.6 million. The Company used the net proceeds of the Offering and
the Private Placement to acquire 12,380,000 common units and 2,000,000 preferred
units of the Operating Partnership. Concurrent with the completion of the
Offering and the Private Placement, Primestone purchased approximately 4.57
million common units of the Operating Partnership which provided net proceeds to
the Operating Partnership of $85.0 million.
The Operating Partnership used the funds it received from the sale of these
common and preferred units plus $83.5 million in proceeds from newly issued
mortgage notes ("Mortgage Notes") as follows:
- - $350.8 million (including prepayment fees) was used to repay certain
mortgages and other indebtedness related to certain of the Properties and
held by third-party lenders (the proceeds of the Mortgage Notes were used
to repay certain mortgages);
- - $41.4 million was used to acquire the Acquisition Properties from third
parties and an additional $5.9 million was used for the acquisition of
Continental Management Business;
- - $28.7 million was paid to certain of the Contributors and in connection
with their contribution of their Properties, as described in the
Prospectus;
- - $5.9 million was used to pay on behalf of PGI, or reimburse PGI for, costs
and expenses incurred by PGI in connection with the Offering and Private
Placement, including registration, NASD and NYSE listing fees of
approximately $0.3 million, financial printing and engraving costs of
approximately $1.0 million, legal, accounting, due diligence and related
fees of approximately $3.9 million and certain acquisition costs (including
earnest money deposits) of approximately $0.7 million relating to certain
Contribution Properties;
- - $1.2 million was used to pay transfer taxes related to the contribution of
the Properties by the Contributors
- - $1.7 million was used to acquire the ownership interests and subordinate
debt interests in the property partnerships of the Prime Properties not
held by PGI;
- - $1.7 million was used to pay commitment fees relating to the Credit
Facility and the Mortgage Notes; and
- - $2.9 million in excess proceeds will be used for working capital.
<PAGE>
As previously described, the Company obtained the Credit Facility which bears
interest at rates ranging from Libor plus 1.2% to Libor plus 1.75%, as defined,
and matures November 17, 2000. Simultaneously with the Offering, the Company
used approximately $75 million to provide credit enhancement for its tax-exempt
bonds. Subject to compliance with applicable loan covenants, the remainder of
the line may be used to fund acquisition and development activities. On
December 15 and 16, 1997, the Company borrowed an additional $159.2 million on
the Credit Facility to acquire the Mortgage Notes Receivable.
On December 15, 1995, the Company sold 600,000 common shares of beneficial
interest pursuant to the underwriters' over allotment option and received net
proceeds therefrom of approximately $11.25 million. These funds, together with
the remaining net proceeds from the Offering and the Private Placement,
undistributed funds generated by operations, borrowings under the Credit
Facility and other debt financing, to the extent available, are expected to be
used to fund acquisition and development activities and for working capital and
other general corporate purposes.
<PAGE>
Prime Group Realty Trust
Notes to Balance Sheet (continued)
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings.
No material developments with respect to legal proceedings occurred
during the period covered by this quarterly report.
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:
Exhibit
Number: Description
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*3.1 Original Declaration of Trust of Prime Group Realty Trust
*3.2 Form of Original Bylaws of Prime Group Realty Trust
27.1 Financial Data Schedule
___
* Incorporated herein by reference to the Company's Registration
Statement on Form S-11 (File No. 333-33547).
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 8-K during the quarter ended September
30, 1997.
<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.
PRIME GROUP REALTY TRUST
Registrant
Date: December 24, 1997 /s/ Richard S. Curto
----------------- -----------------------------
Richard S. Curto
President and
Chief Executive Officer
Date: December 24, 1997 /s/ William M. Karnes
----------------- -----------------------------
William M. Karnes
Executive Vice President -
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> SEP-30-1997
<PERIOD-END> SEP-30-1997
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<CURRENT-ASSETS> 3572000<F1>
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0
0
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<FN>
<F1>REPRESENTS DEFERRED OFFERRING COSTS INCURRED BY AN AFFILIATE
<F2>REPRESENTS ADDITIONAL PAID-IN CAPITAL
</FN>
</TABLE>
