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 June 30, 1999
( ) 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 x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At August 13, 1999, 15,135,827 of the Registrant's Common Shares of Beneficial
Interest were outstanding.
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<PAGE>
PRIME GROUP REALTY TRUST
FORM 10-Q
Index
Page
PART I: FINANCIAL INFORMATION ----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998.............................................. 3
Consolidated Statements of Income for the Three Months
Ended June 30, 1999 and 1998................................... 4
Consolidated Statements of Income for the Six Months
Ended June 30, 1999 and 1998................................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998................................... 6
Notes to Consolidated Financial Statements....................... 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................... 23
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................ 23
Item 2. Changes in Securities and Use of Proceeds........................ 23
Item 3. Defaults Upon Senior Securities.................................. 24
Item 4. Submission of Matters to a Vote of Security Holders.............. 24
Item 5. Other Information................................................ 24
Item 6. Exhibits and Reports on Form 8-K................................. 25
Signatures................................................................ 26
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<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIME GROUP REALTY TRUST
Consolidated Balance Sheets
(000's omitted, except share data)
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Real estate, at cost:
Land........................................ $ 162,665 $ 139,505
Building and improvements................... 839,295 655,154
Tenant improvements......................... 58,070 48,372
------------ ------------
1,060,030 843,031
Accumulated depreciation.................... (38,918) (24,756)
------------ ------------
1,021,112 818,275
Property under development.................. 75,408 51,376
------------ ------------
1,096,520 869,651
Mortgage note receivable...................... 72,753 63,270
Cash and cash equivalents..................... 17,858 46,500
Tenant receivables, net....................... 11,317 7,288
Restricted cash escrows....................... 32,354 53,820
Deferred rent receivable...................... 40,270 39,062
Deferred costs, net........................... 35,056 32,891
Loans receivable from services company........ 5,728 7,055
Other......................................... 44,326 44,977
------------ ------------
Total assets.................................. $ 1,356,182 $ 1,164,514
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage notes payable........................ $ 675,471 $ 518,718
Credit facilities............................. 20,637 --
Bonds payable................................. 74,450 74,450
Accrued interest payable...................... 3,378 2,440
Accrued real estate taxes..................... 41,214 29,657
Accounts payable and accrued expenses......... 25,906 26,068
Liabilities for leases assumed................ 3,841 4,792
Dividends payable............................. 8,104 8,080
Other......................................... 3,750 4,523
------------ ------------
Total liabilities 856,751 668,728
Minority interests:
Operating Partnership....................... 148,618 144,781
Other....................................... 1,000 1,000
Series A - Cumulative Convertible Redeemable
Preferred Shares, 2,000,000 shares
designated, issued and outstanding at
June 30, 1999.............................. 39,630 --
Shareholders' equity:
Preferred Shares, $0.01 par value;
30,000,000 shares authorized:
Series B - Cumulative Redeemable
Preferred Shares, 4,000,000 shares
designated, issued and outstanding at
June 30, 1999 and December 31, 1998...... 40 40
Series A - Cumulative Convertible
Preferred Shares, 2,000,000 shares
designated, issued and outstanding at
December 31, 1998........................ -- 20
Common Shares, $0.01 par value; 100,000,000
shares authorized; 15,135,727 and
15,110,794 shares issued and outstanding
at June 30, 1999 and December 31, 1998,
respectively.............................. 151 151
Additional paid-in capital................. 320,386 360,017
Distributions in excess of earnings........ (10,394) (10,223)
------------ ------------
Total shareholders' equity.................... 310,183 350,005
------------ ------------
Total liabilities and shareholders' equity.... $ 1,356,182 $ 1,164,514
============ ============
<FN>
See notes to consolidated financial statements.
</FN>
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</TABLE>
<PAGE>
<TABLE>
PRIME GROUP REALTY TRUST
Consolidated Statements of Income
(000's omitted, except share data)
(Unaudited)
<CAPTION>
Three Months Ended
June 30
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUE
Rental........................................ $ 33,716 $ 23,391
Tenant reimbursements......................... 13,484 10,026
Mortgage note interest........................ 1,604 1,507
Other......................................... 4,108 1,999
------------ ------------
Total revenue................................. 52,912 36,923
EXPENSES
Property operations........................... 10,597 6,885
Real estate taxes............................. 9,774 6,874
Depreciation and amortization................. 8,680 6,240
Interest...................................... 11,545 8,061
General and administrative.................... 1,757 1,648
------------ ------------
Total expenses................................ 42,353 29,708
------------ ------------
Income before minority interests, gain on
sale of real estate and extraordinary item... 10,559 7,215
Minority interests............................ (3,083) (2,352)
------------ ------------
Income before gain on sale of real estate
and extraordinary item....................... 7,476 4,863
Gain on sale of real estate, net of
minority interests of $1,778................. 2,579 --
------------ ------------
Income before extraordinary item.............. 10,055 4,338
Extraordinary loss on extinguishment of
debt, net of minority interests of $375...... -- (525)
------------ ------------
Net income.................................... 10,055 4,338
Net income allocated to preferred
shareholders................................. (3,030) (1,341)
------------ ------------
Net income available to common shareholders... $ 7,025 $ 2,997
============ ============
Net income available per weighted-average
common share of beneficial interest -
Basic and diluted............................ $ 0.46 $ 0.19
============ ============
<FN>
See notes to consolidated financial statements.
</FN>
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</TABLE>
<PAGE>
<TABLE>
PRIME GROUP REALTY TRUST
Consolidated Statements of Income
(000's omitted, except share data)
(Unaudited)
<CAPTION>
Six Months Ended
June 30
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUE
Rental........................................ $ 66,332 $ 41,476
Tenant reimbursements......................... 26,385 18,401
Mortgage note interest........................ 3,110 3,014
Other......................................... 6,164 2,783
------------ ------------
Total revenue................................. 101,991 65,674
------------ ------------
EXPENSES
Property operations........................... 21,247 11,941
Real estate taxes............................. 19,149 12,232
Depreciation and amortization................. 16,638 11,575
Interest...................................... 21,923 14,476
Loss on land development option............... 600 --
General and administrative.................... 3,807 3,044
------------ ------------
Total expenses................................ 83,364 53,268
------------ ------------
Income before minority interests, gain on
sale of real estate and extraordinary item... 18,627 12,406
Minority interests............................ (5,139) (4,317)
------------ ------------
Income before gain on sale of real estate
and extraordinary item....................... 13,488 8,089
Gain on sale of real estate, net of minority
interests of $1,778.......................... 2,579 --
------------ ------------
Income before extraordinary item.............. 16,067 8,089
Extraordinary loss on extinguishment of
debt, net of minority interests of $375...... -- (525)
------------ ------------
Net income.................................... 16,067 7,564
Net income allocated to preferred
shareholders................................. (6,030) (2,041)
------------ ------------
Net income available to common shareholders... $ 10,037 $ 5,523
============ ============
Net income available per weighted-average
common share of beneficial interest -
Basic and diluted............................ $ 0.66 $ 0.39
============ ============
<FN>
See notes to consolidated financial statements.
</FN>
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</TABLE>
<PAGE>
<TABLE>
PRIME GROUP REALTY TRUST
Consolidated Statements of Cash Flows
(000's omitted, except share data)
(Unaudited)
<CAPTION>
Six Months Ended
June 30
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 16,067 $ 7,564
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of costs for leases assumed
(included in rental revenue).............. 491 591
Interest income and development fees added
to mortgage note receivable principal..... (1,788) --
Depreciation and amortization.............. 16,638 11,575
Gain on sale of real estate................ (4,357) --
Net gain on treasury lock terminations..... (615) --
Loss on land development option............ 600 --
Equity in loss (earnings) of
unconsolidated affiliate.................. 390 (2)
Minority interests......................... 6,917 4,317
Extraordinary item, net.................... -- 525
Changes in operating assets and liabilities:
Increase in tenant receivables.......... (4,029) (2,288)
Increase in deferred rent receivable.... (1,208) (741)
Decrease (increase) in other assets..... 3,596 (18,044)
Increase in accrued interest payable.... 938 458
Increase in accrued real estate taxes... 11,557 7,505
(Decrease) increase in accounts payable
and accrued expenses.................. (6,213) 1,246
Decrease in liabilities for leases
assumed............................... (598) (380)
(Decrease) increase in other
liabilities........................... (773) 4,890
------------ ------------
Net cash provided by operating activities..... 37,613 17,216
INVESTING ACTIVITIES
Expenditures for real estate and equipment.... (176,801) (257,119)
Proceeds from sale of real estate............. 13,191 --
Leasing costs................................. (2,364) (1,789)
Additional advances on mortgage note
receivable................................... (7,695) (25)
Decrease (increase) in restricted cash escrows 13,466 (7,309)
Option deposits............................... (10,000) --
Repayments (loans) from services company...... 1,327 (1,094)
------------ ------------
Net cash used in investing activities......... (168,876) (267,336)
FINANCING ACTIVITIES
Financing costs............................... (2,878) (4,161)
Deposits returned on treasury lock agreements. 15,256 --
Proceeds from mortgage notes payable.......... 96,000 341,856
Net proceeds from credit facilities........... 20,637 --
Repayment of mortgage notes payable........... (2,839) (212,268)
Repayment of mortgage note payable - affiliate -- (3,984)
Contributions from minority interest - other.. -- 1,000
Distributions to minority interests
- Operating Partnership...................... (6,971) (5,176)
Proceeds from the sale of Series B
- preferred shares........................... -- 95,318
Series A - preferred shares transaction fee... (400) --
Proceeds from the sale of common shares....... -- 47,194
Dividends paid to Series B - preferred
shareholders................................. (4,500) --
Dividends paid to Series A - preferred
shareholders................................. (1,480) (1,045)
Dividends paid to common shareholders......... (10,204) (7,416)
------------ ------------
Net cash provided by financing activities..... 102,621 251,318
------------ ------------
Net (decrease) increase in cash and cash
equivalents.................................. (28,642) 1,198
Cash and cash equivalents at beginning of
period....................................... 46,500 11,969
------------ ------------
Cash and cash equivalents at end of period.... $ 17,858 $ 13,167
============ ============
<FN>
See notes to consolidated financial statements.
</FN>
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</TABLE>
<PAGE>
PRIME GROUP REALTY TRUST
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated and combined financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Prime Group Realty
Trust's annual report on Form 10-K for the year ended December 31, 1998 as filed
with the Securities and Exchange Commission on March 31, 1999 ("Form 10-K").
Certain prior period amounts have been reclassified to conform with the current
financial statement presentation.
2. FORMATION OF THE COMPANY
Prime Group Realty Trust (the "Company") was organized in Maryland on July 21,
1997 to continue the business of The Prime Group, Inc. and certain of its
affiliates. The Company intends to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended, for Federal income
tax purposes.
The Company is the managing general partner of the Operating Partnership and
owns all of the preferred units and 58.9% and 59.4% of the common units of the
Operating Partnership issued at June 30, 1999 and December 31, 1998,
respectively. Each common unit entitles the Company to receive distributions
from the Operating Partnership. Distributions declared or paid to holders of
common shares and preferred shares are based upon such distributions the Company
receives with respect to its common units and preferred units.
3. INCOME TAXES
Commencing with the period ended December 31, 1997, the Company elected to be
taxed as a 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.
4. USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles 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 revenue and expenses during the reporting
period. Actual results could differ from these estimates.
5. RECENT DEVELOPMENTS
During the period from January 1, 1999 through June 30, 1999, the Company
acquired the following office and industrial properties, and parcels of land
(See "Liquidity and Capital Resources" for a description of the debt terms):
<TABLE>
<CAPTION>
NET ACQUISITION MORTGAGE
RENTABLE COST DEBT
SQ. FT./ (IN MILLIONS) (IN MONTH
PROPERTY LOCATION ACRES (1) MILLIONS) ACQUIRED
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Office:
33 West Monroe Chicago,
Street IL 846,759 $ 101.3 $ 65.0 January
National City
Center (2), Cleveland,
(3),(4) OH 766,965 105.0 63.6 February
Industrial:
901 Technology Libertyville,
Way (4),(5) IL 68,824 4.1 -- January
===================================
1,682,548 $ 210.4 $ 128.6
===================================
Land:
Carol Stream Carol Stream,
Land (5),(6) IL 24.1 Acres 3.2 -- April
- ---------------
-7-
<PAGE>
<FN>
(1) Acquisition cost includes cash paid at closing plus prorations and accrued
real estate taxes.
(2) The Company funded a portion of the acquisition costs with $30.0 million in
advances from its credit facilities.
(3) Acquisition costs and mortgage debt include $2.0 million to adjust an
assumed above market rate mortgage note payable to a current market rate.
(4) This property was acquired from minority interest unit holders of the
Operating Partnership or their affiliates.
(5) Approximately 7.5 acres of the Carol Stream Land (180 Kehoe Blvd.) was sold
on July 8, 1999 and 901 Technology Way was sold on July 14, 1999. See Note
9 regarding disposition of these parcels.
(6) This property was acquired from a board member who is also a minority
interest unit holder, for a total of $3.1 million in common units and $0.1
million in cash. These acquisitions were consummated pursuant to the
Operating Partnership's 1998 commitment (subsequently extended to 1999)
under land purchase obligations established at the Company's initial public
offering.
</FN>
</TABLE>
On July 22, 1998, the Company entered into a purchase agreement, with an
affiliate of an investor in the Operating Partnership, to acquire two office
buildings, IBM Plaza (a 1,354,354 square foot office building located in the
Chicago central business district) and National City Center for an aggregate
purchase price of approximately $357.0 million. On February 5, 1999, the Company
entered into an amended option agreement with the sellers of IBM Plaza and an
amended purchase agreement with the sellers of National City Center (see above).
The option allows the Company to purchase IBM Plaza for $238.0 million
(including an $8.0 million non-refundable option payment) and expires October
31, 1999. If the option is exercised, the purchase of the property must be
completed no later than December 20, 1999.
On February 8, 1999, the Company signed a contract with a buyer pursuant to
which the Company will construct and sell to the buyer a 1,032 space parking
garage, including approximately 4,000 square feet of retail space, on
approximately 22,000 square feet of a 61,302 square foot parcel of land that the
Company had under option to purchase in the Chicago central business district
(see Note 9 regarding acquisition of this parcel). The sales price of the
completed garage is approximately $35.0 million, plus the value of any of the
retail space leased by the Company at the time of sale up to a maximum of $1.75
million. In addition, the Company is entitled to receive an additional $1.0
million from the buyer if, within 15 years after the sale of the parking garage
to the buyer, the Company substantially completes construction of an office
building on the land containing at least 800,000 square feet of office space,
which is occupied by at least one tenant who is not affiliated with the Company.
The Company intends to construct an office building on the land, which it will
lease to third parties. The land parcel for the office building could not be
obtained without obtaining the land for the parking garage and in order to
construct an office building, parking must be provided pursuant to current
zoning requirements.
In March 1999, the option period for a parcel adjacent to one of our development
property sites lapsed. The Company has recorded the related non-refundable
option price of $0.6 million as a loss on land development option in the
statement of income for the six months ended June 30, 1999.
On March 1, 1999, the Company terminated a $160.0 million treasury lock
agreement due to changes in terms and timing of the purchase of an office
building as a result of an amended purchase agreement. This resulted in
approximately $0.6 million on deposit related to the treasury lock agreement
being forfeited at the time of termination. On May 11, 1999, the Company
terminated a $170.0 million treasury lock agreement due to changes in timing of
a planned future securitization of a currently outstanding $170.0 million loan
related to the 77 West Wacker Drive building. The termination resulted in a net
settlement and gain upon termination of $1.2 million which has been included in
other income for the three months ended June 30, 1999. The net gain of $0.6
million from the two terminations has been included as a net gain in other
income in the statement of income for the six months ended June 30, 1999. During
the six months ended June 30, 1999, the Company received net cash settlements of
approximately $15.2 million related to both treasury lock agreements.
On April 13, 1999, the Company modified the terms of the Company's Series A
preferred shares. Under the original terms, the holders of the Series A
preferred shares had certain conversion rights if for two consecutive quarters
(1) the ratio of the Company's debt plus nonconvertible preferred shares divided
by its total market capitalization exceeded 65% or (2) its fixed charges
coverage ratio fell below 1.4. The new agreement eliminates the debt-to-market
capitalization covenant. In exchange, the holders of the Series A preferred
shares were granted the future right to cause the redemption of their shares at
a price of $20.00 per share upon 120 days prior written notice, which redemption
may occur during the period beginning January 15, 2002 and ending January 15,
2004. The Series A preferred shares will continue to pay an annual dividend of
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<PAGE>
$1.50 per share and will continue to be convertible into common shares on a one
for one basis. The Company made a $0.4 million one-time payment as part of this
transaction, which will be amortized, using the straight-line method, through
January 15, 2002 as a preferred dividend. All 2,000,000 outstanding shares of
the Company's Series A preferred shares have been reclassified to redeemable
equity at their aggregate redemption price of $40.0 million, net of the
unamortized transaction fee, in the consolidated balance sheet.
On April 19, 1999, the Company sold approximately 161,710 net rentable square
feet of its 122 South Michigan Avenue office building to National-Louis
University (NLU) for a gross sales price of $14.95 million and consideration,
net of commission, closing costs and a $1.1 million capital improvement
allowance, of $12.1 million. As part of this sale, NLU has also acquired an
undivided 31.56% interest in certain common areas of the property. The Company
will continue to own the remaining 350,659 net rentable square feet of the
building and will be responsible for the management of the entire property. The
sale resulted in a gain of $4.4 million.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income
available per weighted-average common share of beneficial interest for the three
months and six months ended June 30, 1999 and 1998(in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income available
to common shares
before extraordinary
item................ $ 7,025 $ 3,522 $ 10,037 $ 6,048
Extraordinary item... -- (525) -- (525)
============ ============ ============ ===========
Numerator for basic
earnings per share-
income available to
common shares.......
$ 7,025 $ 2,997 $ 10,037 $ 5,523
============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Denominator:
Denominator for
basic earnings
per share -
weighted average
common shares....... 15,135,727 15,572,494 15,133,788 14,383,258
Effect of dilutive
securities:
Employee stock
options...... 73,237 -- 37,749 16,545
============ ============ ============ ============
Denominator for
diluted earnings
per share -
adjusted weighted-
average common
shares and assumed
conversions........ 15,208,964 15,572,494 15,171,537 14,399,803
============ ============ ============ ============
Basic and diluted
earnings available
to common shares per
weighted average
common share:
Net income before
extraordinary item $ 0.46 $ 0.22 $ 0.66 $ 0.42
Extraordinary
item.......... -- (0.03) -- (0.03)
------------ ------------ ------------ ------------
Net income per
common share...... $ 0.46 $ 0.19 $ 0.66 $ 0.39
============ ============ ============ ============
</TABLE>
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<PAGE>
Options to purchase 1,120,333 and 1,122,833 of the Company's common shares were
excluded in the computation of diluted earnings available to common shares for
the three months and six months ended June 30, 1999, respectively, because the
effect would be antidilutive.
The Company had 10,529,839 and 10,280,882 weighted-average common units
outstanding during the three months ended June 30, 1999 and 1998, respectively,
of which 10,349,892 and 9,353,782, respectively, may be converted (on a one for
one basis) into common shares at the option of the unit holders. The Company had
10,428,678 and 10,280,882 weighted-average common units outstanding during the
six months ended June 30, 1999 and 1998, respectively, of which 10,339,202 and
9,353,782, respectively, may be converted into common shares at the option of
the unit holders. The convertible common units were not included in the
computation of diluted earnings per share because the conversion would be
antidilutive.
The Company had 2,000,000 Series A-convertible preferred shares outstanding
during the three months and six months ended June 30, 1999 and 1998 which were
not included in the computations of diluted earnings per share because the
conversion would be antidilutive.
7. SEGMENT REPORTING
The following summarizes the Company's historical segment operating results for
the three months and six months ended June 30, 1999 and 1998 (Amounts in
thousands):
<TABLE>
<CAPTION>
Three months ended June 30, 1999
------------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue......... $ 47,289 $ 7,946 $ 2,034 $ 57,269
Total expenses........ 24,640 4,783 12,930 42,353
------------ ------------ ------------ ------------
Income (loss) before
minority interests... 22,649 3,163 (10,896) 14,916
FFO adjustments:
Real estate
depreciation and
amortization........ 6,225 1,863 -- 8,088
Amortization of costs
for leases assumed.. 246 -- -- 246
Straight-line rental
revenue adjustments. (559) (55) -- (614)
Gain on sale of real
estate.............. (4,357) -- -- (4,357)
Gain on treasury
lock termination.... -- -- (1,172) (1,172)
Net income allocated
to preferred
shareholders........ -- -- (3,030) (3,030)
============ ============ ============ ============
Funds from operations. $ 24,204 $ 4,971 $ (15,098) $ 14,077
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1998
------------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue......... $ 29,587 $ 6,744 $ 592 $ 36,923
Total expenses........ 15,897 3,963 9,848 29,708
------------ ------------ ------------ ------------
Income (loss) before
minority interests... 13,690 2,781 (9,256) 7,215
FFO adjustments:
Real estate
depreciation and
amortization........ 4,340 1,494 -- 5,834
Amortization of costs
for leases assumed.. 275 -- -- 275
Straight line rental
revenue adjustments. (277) (217) -- (494)
Net income allocated
to preferred
shareholders........ -- -- (1,341) (1,341)
============ ============ ============ ============
Funds from operations. $ 18,028 $ 4,058 $ (10,597) $ 11,489
============ ============ ============ ============
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
------------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue......... $ 89,595 $ 14,622 $ 2,131 $ 106,348
Total expenses........ 48,372 8,662 26,330 83,364
------------ ------------ ------------ ------------
Income (loss) before
minority interests... 41,223 5,960 (24,199) 22,984
FFO adjustments:
Real estate
depreciation and
amortization........ 11,998 3,423 -- 15,421
Amortization of
costs for leases
assumed............. 491 -- -- 491
Straight-line
rental revenue
adjustments......... (1,074) (134) -- (1,208)
Gain on sale of
real estate......... (4,357) -- -- (4,357)
Net gain on
treasury lock
terminations........ -- -- (615) (615)
Loss on land
development
option.............. -- -- 600 600
Net income
allocated to
preferred
shareholders........ -- -- (6,030) (6,030)
============ ============ ============ ============
Funds from operations. $ 48,281 $ 9,249 $ (30,244) $ 27,286
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1998
------------------------------------------------------
Corporate/
Operating
Office Industrial Partnership Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue......... $ 52,041 $ 12,688 $ 945 $ 65,674
Total expenses........ 28,324 7,014 17,930 53,268
------------ ------------ ------------ ------------
Income (loss) before
minority interests... 23,717 5,674 (16,985) 12,406
FFO adjustments:
Real estate
depreciation and
amortization........ 7,964 2,885 -- 10,849
Amortization of
costs for leases
assumed............. 566 -- -- 566
Straight line
rental revenue
adjustments......... (67) (455) -- (522)
Net income
allocated to
preferred
shareholders........ -- -- (2,041) (2,041)
============ ============ ============ ============
Funds from operations $ 32,180 $ 8,104 $ (19,026) $ 21,258
============ ============ ============ ============
</TABLE>
-11-
<PAGE>
The following summarizes the Company's segment assets and activity as of June
30, 1999 and December 31, 1998 and for the six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Segment assets:
Office...................................... $ 1,074,253 $ 841,818
Industrial.................................. 196,219 186,817
Corporate/Operating Partnership............. 85,710 135,879
============ ============
Total consolidated assets.................... $ 1,356,182 $ 1,164,514
============ ============
</TABLE>
<TABLE>
<CAPTION>
Six months
ended June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Expenditures for real estate:
Office...................................... $ 161,965 $ 255,178
Industrial.................................. 10,133 1,793
Corporate/Operating Partnership............. 4,703 148
============ ============
Total expenditures for real estate........... $ 176,801 $ 257,119
============ ============
</TABLE>
8. 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, 1998, (i) the
Company had completed the 1998 sales of its common shares and Series B preferred
shares and used the net proceeds to acquire preferred units and common units of
the Operating Partnership, and (ii)the Operating Partnership acquired various
office and industrial properties (eight properties acquired in 1998 and three
properties acquired in 1999) with cash and debt proceeds. The unaudited Pro
Forma Condensed Consolidated Statements of Operations should be read in
conjunction with the historical financial statements contained in the Company's
Form 10-K. In management's opinion, all adjustments necessary to reflect the
effects of the transactions described above 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 transactions described above had occurred at the
dates indicated above, nor do they purport to present the future results of
operations of the Company.
<TABLE>
<CAPTION>
Six months ended
June 30, 1999
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Total revenue (in thousands)................. $ 109,403 $ 93,830
============ ============
Net income available to common
shareholders (in thousands)................ $ 10,193 $ 5,688
============ ============
Earnings per diluted common share............ $ 0.67 $ 0.37
============ ============
</TABLE>
-12-
<PAGE>
9. SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Company acquired and sold the following office
and industrial properties, and parcels of land (See "Liquidity and Capital
Resources" for a description of the debt terms.):
<TABLE>
<CAPTION>
ACQUISITION
NET COST/SALES
RENTABLE PRICE (IN MORTGAGE MONTH
SQ. FT./ MILLIONS) DEBT (IN ACQUIRED
PROPERTY LOCATION ACRES (1) MILLIONS) SOLD
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ACQUIRED
Office:
300 Craig Hillside,
Place(3) IL 163,070 $ 8.6 $ 6.5 July
800-810 Jorie Oakbrook,
Blvd. IL 190,829 29.5 21.0 August
-----------------------------------
Total Office
Acquired 353,899 $ 38.1 $ 27.5
===================================
Land:
Aurora III (4) Aurora, IL 13.5 Acres $ 0.9 $ -- July
300 West
Monroe Street
& 25 and 77
South Wacker
Drive (5) Chicago, IL 1.4 Acres 55.9 28.0 July
===================================
Total Land
Acquired 14.9 Acres $ 56.8 $ 28.0
===================================
SOLD
Office:
941-961 Weigel
Drive Elmhurst, IL 123,077
Industrial:
300 Craig Place Hillside, IL 163,070
306-310 Era Drive Northbrook, IL 36,495
515 Huehl Road/
500 Lindberg
Road Northbrook, IL 201,244
555 Huehl Road Northbrook, IL 74,000
1301 Ridgeview
Drive McHenry, IL 217,600
3818 Grandville/
1200
Northwestern Gurnee, IL 345,232
801 Technology Libertyville,
Way IL 68,824
901 Technology Libertyville,
Way IL 68,824
1001 Technology Libertyville,
Way IL 212,831
---------
Total Office &
Industrial Sold
(2),(6) 1,511,197 $ 89.5 $ 63.2 July
====================================
Land:
180 Kehoe Blvd. Carol Stream,
(7) IL 7.5 Acres $ 1.0 -- July
===================================
- ---------------
<FN>
(1) Acquisition cost includes cash paid at closing plus prorations and accrued
real estate taxes. Sales price is stated net of closing costs and
prorations.
(2) Mortgage debt represents the amount of debt repaid with sales proceeds or
assumed by the purchaser.
(3) This property was purchased from a board member who is also a minority
interest unit holder of the Operating Partnership. The $6.5 million of debt
was assumed by the Company upon acquisition of the property.
(4) The Company has contracts that require it to purchase 132.7 acres over a
three to five year period. Certain minimum installment payments are
required; however, the timing of purchases is at the Company's discretion.
This purchase is a part of these contracts.
-13-
<PAGE>
(5) This property was acquired with two acquisition mortgage loans in the
amounts of $4.0 million and $24.0 million. The $4.0 million loan is secured
by the parcel located at 25 and 77 South Wacker Drive, matures on November
1, 2001, and bears interest at (a) until funding of a construction loan for
the 300 West Monroe Street parcel, the Prime Rate plus 0.5%, and (b)
thereafter at LIBOR plus 2.75%. The $24.0 million loan is secured by the
adjacent parcel located at 300 West Monroe Street, matures on May 1, 2000
and bears interest at the Prime Rate plus 0.5% and has been guaranteed by
the Company. The loans are cross-collateralized.
(6) These properties were sold in a single transaction with a total sales price
of $89.5 million, resulting in a gain of approximately $4.2 million. As
part of the sale, the Company agreed to assume responsibility for leasing
two of the properties for five years, once the existing tenants' leases
expire in 2000 and 2001. The Company's total lease obligation is reduced as
existing tenants renew their leases or as new leases from third parties are
executed for space in the properties. As a result of these commitments, the
gain will be deferred until the tenants either renew their leases or are
replaced. The gain may be reduced by any obligations the Company may incur
as a result of these commitments.
(7) Prime Group Realty Services, Inc., an unconsolidated affiliate, constructed
an office/warehouse facility on this parcel and sold it to the purchaser.
This affiliate leased the land from the Company during the portion of the
construction period in which the Company owned the land.
</FN>
</TABLE>
Under the provisions of one of the Credit Facilities, the Company is obligated
to maintain interest rate contracts on a portion of its variable rate
indebtedness. The Company entered into an interest rate cap agreement in July,
1999 with a financial institution for an original notional amount of $150.0
million at 7.0% during the period from July 1 to October 1, 1999.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- ------- -----------------------------------------------------------------------
OVERVIEW
We are a fully-integrated real estate company providing property management,
leasing, marketing, acquisition, development, redevelopment, construction,
finance and other related services. We intend to qualify as a REIT for federal
income tax purposes. Through the Operating Partnership, we own 26 office
properties containing an aggregate of approximately 7.3 million net rentable
square feet, 40 industrial properties containing an aggregate of approximately
4.9 million net rentable square feet, one retail center and one parking
facility. The properties are located primarily in the Chicago metropolitan area.
In addition, we own a mortgage on an office property containing 728,406 net
rentable square feet. We also own approximately 243.4 acres of developable land
and rights to acquire more than 286.8 additional acres of developable land which
management believes could be developed with approximately 12.1 million rentable
square feet of additional office and industrial space.
In terms of net rentable square feet, at June 30, 1999, approximately 81.7% of
our office properties and 85.1% of our industrial properties are located in the
Chicago metropolitan area in prime business locations within established
business communities. The properties located in the Chicago metropolitan area
account for approximately 88.6% of our total rental and tenant reimbursement
revenue for the six months ended June 30, 1999. Our remaining office properties
are located in Cleveland, Ohio; Nashville, Tennessee; Knoxville, Tennessee; and
the Milwaukee, Wisconsin metropolitan areas, and our remaining industrial
properties are located in the Columbus, Ohio metropolitan area. We intend to
continue to invest in the acquisition, development and redevelopment of office
and industrial properties primarily located in the Chicago metropolitan area.
We intend to access multiple sources of capital to fund future acquisition and
development activities. These capital sources may include undistributed cash
flow, borrowings under credit facilities, proceeds from the issuance of
long-term, tax-exempt bonds, joint venture arrangements 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.
CAUTIONARY STATEMENTS
The following discussion and analysis of the consolidated financial condition
and results of operations should be read in conjunction with our Consolidated
Financial Statements and Notes thereto contained herein. Statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," including without limitation the "Year 2000" discussion, include
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 which reflect management's current view with
respect to future events and financial performance. Such forward-looking
statements are subject to certain risks and uncertainties; including, but not
limited to, the effects of future events on our financial performance; the risk
that we may be unable to finance our planned acquisition and development
activities; risks related to the industrial and office industry in which our
properties compete, including the potential adverse impact of external factors
such as inflation, consumer confidence, unemployment rates and consumer tastes
-14-
<PAGE>
and preferences; risks associated with our development activities, such as the
potential for cost overruns, delays and lack of predictability with respect to
the financial returns associated with these development activities; the risk of
a potential increase in market interest rates from current rates; risks
associated with real estate ownership, such as the potential adverse impact of
changes in the local economic climate on the revenues and the value of our
properties; and risks associated with the impact of the Year 2000 issue on the
processing of date-sensitive information by our computerized information systems
as well as our tenants and vendors. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of June 30,
1999.
Among the facts about which we have 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;
- - our ability to reduce various expenses as a percentage of revenues;
- - our continuing ability to pay amounts due to our preferred shareholders
prior to any distribution to our common shareholders; and
- - the continuing availability of our credit facilities.
In addition, historical results and percentage relationships set forth herein
are not necessarily indicative of future operations.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 1999 to the Three Months Ended
June 30, 1998
In analyzing the operating results for the quarter ended June 30, 1999, the
changes in rental and reimbursable income, property operating expenses, real
estate taxes and depreciation and amortization from 1998 are due principally to
the addition of a full three months of operating results for the six properties
acquired in the second quarter of 1998 and the addition of operating results for
the three properties acquired during the first quarter of 1999.
For the three months ended June 30, 1999, rental revenue increased $10.3
million, or 44.1%, to $33.7 million (includes lease termination revenue of $1.2
million), tenant reimbursement income increased $3.5 million, or 34.5%, to $13.5
million, other revenue increased $2.1 million to $4.1 million, or 105.5%,
property operating expenses increased $3.7 million, or 53.9%, to $10.6 million,
real estate tax expense increased $2.9 million, or 42.2%, to $9.8 million and
depreciation and amortization increased $2.4 million, or 39.1%, to $8.7 million
as compared to the three months ended June 30, 1998. The additional office and
industrial properties acquired in 1999 resulted in total rental revenue of $6.4
million, tenant reimbursements income of $2.9 million, property operating
expenses of $2.5 million, real estate tax expense of $2.5 million and
depreciation and amortization of $1.3 million for the three months ended June
30, 1999. Included in other revenue is a gain on the termination of a treasury
lock agreement totaling $1.2 million for the three months ended June 30, 1999
due to events described in "Recent Developments."
Rental revenue, tenant reimbursement income and other revenue for properties
held in both periods increased $3.3 million for the three months ended June 30,
1999 primarily due to six properties acquired during the three months ended June
30, 1998 being owned during the entire three months ended June 30, 1999, lease
termination revenue of $0.6 million and increased occupancy and rental rates at
the other properties. Corresponding property operating expenses increased $1.3
million and depreciation and amortization increased $1.0 million for the three
months ended June 30, 1999 primarily due to the six properties acquired during
three months ended June 30, 1998 being owned during the entire three months
ended June 30, 1999.
Mortgage note interest income increased $0.1 million, or 6.4% to $1.6 million
for the three months ended June 30, 1999 due to additional advances and accrued
interest on the first mortgage note held encumbering the office property known
as 180 North LaSalle.
Interest expense increased $3.5 million, or 43.2%, to $11.5 million during the
three months ended June 30, 1999. The increase was due to new mortgages obtained
on certain of the properties which were acquired in 1999 and 1998 offset by
refinancing of debt on certain existing properties at lower interest rates.
General and administrative expense increased $0.1 million, or 6.6% to $1.8
million for the three months ended June 30, 1999, reflecting costs related to
the growth of the Company.
Income allocated to minority interests increased $0.7 million, or 29.2% to $3.1
million for the three months ended June 30, 1999 due to an increase in income
-15-
<PAGE>
before minority interests of $3.4 million, or 47.2% to $10.6 million. The
increase in income before minority interests is due to a net gain of $0.6
million on the termination of two treasury lock agreements, and additional
properties acquired in 1999 and 1998 and the effects they had on the revenue and
expenses described above.
Gain on sale of real estate increased $2.6 million for the three months ended
June 30, 1999 due to the sale of a portion of a property as more fully described
in "Recent Developments."
Net income increased $5.7 million, or 131.8% to $10.1 million for the three
months ended June 30, 1999 due to the changes in revenue, expenses and minority
interest described above.
Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June
30, 1998.
In analyzing the operating results for the six months ended June 30, 1999, the
changes in rental and reimbursable income, property operating expenses, real
estate taxes and depreciation and amortization from 1998 are due principally to
a full six months of operating results for eight properties acquired in the
first half of 1998 and the additional operating results for the three properties
acquired during the first quarter of 1999.
For the six months ended June 30, 1999, rental revenue increased $24.9 million,
or 59.9%, to $66.3 million (includes lease termination revenue of $4.1 million),
tenant reimbursement income increased $8.0 million, or 43.4%, to $26.4 million,
other revenue increased $3.4 million or 121.5% to $6.2 million, property
operating expenses increased $9.3 million, or 77.9%, to $21.2 million, real
estate tax expense increased $6.9 million, or 56.6%, to $19.1 million and
depreciation and amortization increased $5.1 million, or 43.7%, to $16.6 million
as compared to the six months ended June 30, 1998. The additional office and
industrial properties acquired in 1999 resulted in total rental revenue of $10.6
million, tenant reimbursements income of $4.7 million, property operating
expenses of $4.1 million, real estate tax expense of $4.2 million and
depreciation and amortization of $2.1 million for the six months ended June 30,
1999. Included in other revenue is the net gain on the termination of treasury
lock agreements of $0.6 million for the six months ended June 30,1999 due to
events described in "Recent Developments."
Rental revenue, tenant reimbursement income and other revenue for properties
held in both periods increased $6.6 million for the six months ended June 30,
1999 primarily due to eight properties acquired during the six months ended June
30, 1998, being owned during the entire six months ended June 30, 1999, lease
termination revenue of $4.1 million and increased occupancy and rental rates at
the other properties. Corresponding property operating expenses increased $1.8
million and depreciation and amortization increased $1.3 million for the six
months ended June 30, 1999 primarily due to the eight properties acquired during
the six months ended June 30, 1998 being owned during the entire six months
ended June 30, 1999.
Mortgage note interest income increased $0.1 million, or 3.2% to $3.1 million
for the six months ended June 30, 1999 due to the additional advances on the
first mortgage note held encumbering the office property known as 180 North
LaSalle.
Interest expense increased $7.4 million, or 51.4%, to $21.9 million during the
six months ended June 30, 1999. The increase was due to new mortgages obtained
on certain of the properties which were acquired in 1999 and 1998 offset by
refinancing of debt on certain existing properties at lower interest rates.
General and administrative expense increased $0.8 million, or 25.1% to $3.8
million for the six months ended June 30, 1999, reflecting costs related to the
growth of the Company.
Income allocated to minority interests increased $0.8 million, or 15.7% to $5.1
million for the six months ended June 30, 1999 due to an increase in income
before minority interests of $6.2 million, or 50.0% to $18.6 million. The
increase in income before minority interests is principally due to a net gain of
$0.6 million on the termination of two treasury lock agreements, and additional
properties acquired in 1999 and 1998 and the effects they had on the revenue and
expenses described above.
Gain on sale of real estate increased $2.6 million for the six months ended June
30, 1999 due to the sale of a portion of a property as more fully described in
"Recent Developments."
Net income increased $8.5 million, or 112.4% to $16.1 million for the six months
ended June 30, 1999 due to the changes in revenue, expenses and minority
interests described above.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL CASH FLOWS. We had net cash provided by operating activities of $37.6
million and $17.2 million for the six months ended June 30, 1999 and 1998,
respectively. The $20.4 million increase is primarily due to a $8.5 million
increase in net income, a $5.1 million increase in depreciation and amortization
-16-
<PAGE>
expense, a $0.6 million increase in loss on land development option, a $0.4
million increase in the equity in loss of unconsolidated affiliate, a $2.6
million increase in income allocated to minority interests, a $21.6 million
decrease in other assets, a $0.5 million increase in accrued interest, and a
$4.1 million increase in accrued real estate taxes, offset by a $4.4 million
increase in gain on sale of real estate, a $0.6 million increase in gain on
treasury lock terminations, a $0.5 million decrease in extraordinary items, a
$1.8 million increase in interest income and development costs added to the
mortgage note receivable principal, a $1.7 million increase in tenant
receivables, a $0.5 million increase in deferred rent receivable, a $7.5 million
decrease in accounts payable and accrued expenses, a $0.2 million decrease in
liabilities for leases assumed and a $5.7 million decrease in other liabilities.
The primary uses of cash for investing activities during the three months ended
June 30, 1999 included: (i) costs associated with the development and
construction of four office buildings and one industrial facility aggregating
231,896 square feet and 242,088 square feet, respectively, which are expected to
be available for occupancy during the second half of 1999; (ii) costs associated
with the build-out of tenant space; and (iii) costs for pre-development
activities associated with future developments. We had net cash used in
investing activities of $168.9 million and $267.3 million for the six months
ended June, 1999 and 1998, respectively. The $98.4 million decrease in net cash
used in investing activities from the six months ended June 30, 1998 through the
six months ended June 30, 1999 was primarily due to a $20.8 million decrease in
restricted cash escrows and a $2.4 million net repayment of loans from the
services company, an $80.3 million decrease in expenditures for real estate and
equipment, principally related to property acquisitions and development, offset
by a $13.2 million increase in proceeds from the sales of real estate, a $10.0
million increase in option deposits, a $7.7 million increase in advances on the
mortgage note receivable and a $0.6 increase in leasing costs.
The primary uses of cash for financing activities during the three months ended
June 30, 1999 were (i) principal repayments on notes payable of $2.8 million,
(ii) preferred and common stock distributions of $16.2 million, (iii)
distributions to minority interests (including distributions to limited partners
of the Operating Partnership) of $7.0 million, and (iv) financing costs of $2.9
million. Such uses were partially offset by proceeds from new borrowings of
$116.7 million and $15.3 million of deposits returned on treasury lock
agreements. We had net cash provided by financing activities of $102.6 million
and $251.3 million for the six months ended June 30, 1999 and 1998,
respectively. The $148.7 million decrease in net cash provided by financing
activities from the six months ended June 30, 1998 through the six months ended
June 30, 1999 was due to, (i) a $1.3 million decrease in financing costs, (ii) a
$15.3 million increase in deposits recovered on treasury lock agreements, (iii)
$20.6 million in net proceeds from the credit facilities, (iv) a $213.4 million
decrease in the repayment of mortgage notes payable, offset by a $245.9 million
decrease in proceeds from mortgage notes payable, (v) a $1.0 million decrease in
contributions from minority interests, (vi) a $95.3 million decrease in net
proceeds from the sale of Series B - preferred shares, a $47.2 million decrease
in net proceeds from a private placement and (vii) a $9.5 million increase in
distributions to preferred shareholders, common shareholders and minority
interests.
LIQUIDITY. Net cash provided from operations represents the primary source
of liquidity to fund distributions, debt service and recurring capital costs. In
order to qualify as a REIT for federal income tax purposes, we must distribute
95% of our REIT's taxable income (excluding capital gains) annually.
Accordingly, we currently intend to continue to make, but are not contractually
bound to make, regular quarterly distributions to holders of our common
shares/units and our preferred shares. We have established annual distribution
rates as follows: $1.35 per annum per common share/unit, 7.5% per annum ($1.50
per share) for each Series A Preferred Share and 9% per annum ($2.25 per share)
for each Series B Preferred Share.
CREDIT FACILITIES. Our credit facilities, with a maximum loan availability
totaling $90.0 million, have been provided by various financial institutions,
and are collateralized by first mortgages on certain properties owned by the
Operating Partnership. Subject to our compliance with the applicable loan
covenants, the credit facilities may be used to provide funds for acquisitions
and development activities and to provide the replacement letters of credit for
the $26.9 million of tax-exempt bonds. At June 30, 1999, $20.6 million was drawn
on credit facilities and $26.9 million was used to provide letters of credit for
the tax-exempt bonds, leaving $42.5 in the aggregate unused.
PROPERTY SALES. Subsequent to June 30, 1999, we sold certain office and
industrial properties and used a portion of the net proceeds to acquire other
office properties and land parcels. We may use the remaining proceeds and the
sale of other properties to fund future acquisitions.
On April 19, 1999, we sold approximately 161,710 net rentable square feet of our
122 South Michigan Avenue office building to National-Louis University (NLU) for
a gross sales price of $14.95 million and consideration, net of commission,
closing costs and a capital improvement allowance, of $12.1 million. As part of
this sale, NLU has also acquired an undivided 31.56% interest in certain common
areas of the property. We will continue to own the remaining 350,659 net
rentable square feet of the building and will be responsible for the management
of the entire property. The sale resulted in a gain of $4.4 million for the six
months ended June 30, 1999.
-17-
<PAGE>
On July 8, 1999, we sold approximately 7.5 acres of land to Antunes Properties,
L.L.C. for a purchase price of $1.0 million. Prime Group Realty Services, Inc.,
an unconsolidated affiliate, constructed an office/warehouse facility on this
parcel and sold it to Antunes Properties, L.L.C. This affiliate leased the land
from the Company during the portion of the construction period in which the
Company owned the land.
On July 14, 1999, we sold nine industrial properties and one office property in
a single transaction with a total purchase price of $89.5 million.
INDEBTEDNESS. We have financed a portion of our acquisitions with proceeds
from mortgage notes payable from various financial institutions, with fixed and
variable interest rates and maturities from 1999 through 2013. We believe that
our properties have excess value that may be utilized for additional mortgage
borrowing or debt securitizations.
Under the provisions of one of the Credit Facilities, we are obligated to
maintain interest rate contracts on a portion of our variable rate indebtedness.
We entered into an interest rate cap agreement in July, 1999 with a financial
institution for an original notional amount of $150.0 million at 7.0% during the
period from July 1 to October 1, 1999.
In connection with our recent acquisitions and development, we obtained the
following new indebtedness during 1999:
<TABLE>
<CAPTION>
ORIGINAL
PRINCIPAL
BALANCE (IN MATURITY
COLLATERAL (1),(2) LOCATION MILLIONS) INTEREST RATE DATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
33 West Monroe Chicago, IL $ 65.0 LIBOR + 2.0% 1/02
increasing
to 2.15%
in 1/00
National City
Center (3),(4) Cleveland, OH 63.6 6.75% 4/01
122 S. Michigan Chicago, IL 14.0 LIBOR + 3.0% 5/04
National City
Center (8) Cleveland, OH 10.0 LIBOR + 4.5% 10/99
25 and 77 South
Wacker (9) Chicago, IL 4.0 (5) 11/01
300 West Monroe (9) Chicago, IL 24.0 Prime Rate + 0.5% 5/00
Pine Meadows
Corporate Center Libertyville,
(6),(9) IL 2.2 (6) 2/01
2000 USG Drive (9) Libertyville,
IL 4.2 (7) 2/01
800-810 Jorie Blvd.
(3),(9) Oakbrook, IL 21.0 LIBOR + 2.0% 8/02
<FN>
(1) All of the loans are subject to various financial and other operating
covenants and are collateralized by mortgages on the properties, unless
otherwise indicated.
(2) Interest is payable monthly, with principal due at maturity, unless
otherwise indicated.
(3) Principal and interest payable monthly through maturity.
(4) Consists of two assumed notes of $52.9 million and $8.7 million, with
actual interest rates of 8.50% and 7.55%, respectively. These interest
rates are in excess of the market rate at the acquisition date, which we
estimated to be 6.75%. As a result, we have recorded an additional $2.0
million of principal to reflect the imputed interest rate of 6.75% over the
term of the notes.
(5) Until the funding of a construction loan related to the 300 West Monroe
parcel, Prime Rate plus 0.5%, and thereafter LIBOR plus 2.75%.
(6) One $8.7 million construction loan commitment, of which $1.1 million has
been disbursed at LIBOR plus 2.25%, and one $9.4 million construction loan
commitment, of which $1.1 million has been disbursed at LIBOR plus 2.5%.
(7) A $6.3 million construction loan commitment, of which $4.2 million has been
disbursed at LIBOR plus 2.25%.
(8) This loan is collateralized by a pledge of a portion of the ownership
interests in the entity that owns the property.
(9) This loan has been guaranteed by the Company.
</FN>
</TABLE>
DEBT REPAYMENTS. Our aggregate indebtedness was $770.5 million and $593.2
million at June 30, 1999 and December 31, 1998, respectively. At June 30, 1999,
-18-
<PAGE>
such indebtedness had a weighted average maturity of 6.5 years and bore interest
at a weighted average interest rate of 6.77% per annum. At June 30, 1999, $343.4
million, or 44.6%, of such indebtedness bore interest at fixed rates and $427.1
million, or 55.4% of such indebtedness, including $74.4 million of tax-exempt
bonds, bore interest at variable rates.
In connection with the sale of nine industrial properties and one office
property on July 14, 1999, mortgage debt of $63.2 million was repaid with sales
proceeds or assumed by the purchaser.
FUTURE DEBT AND EQUITY OFFERINGS. We filed a shelf registration statement
on Form S-3 with the Securities and Exchange Commission, which was declared
effective on June 8, 1999, to register up to $500.0 million of our equity and
debt securities for future sale at prices and on terms to be determined at the
time of offering.
CAPITAL IMPROVEMENTS. Our properties require periodic investments of
capital for tenant-related capital improvements. During 1998, our tenant
improvements and leasing commissions averaged $18.04 per square foot of newly
leased office space, $3.85 per square foot of renewal leased office space, and
$4.53 per square foot of newly leased industrial space. Our estimated annual
cost of recurring tenant improvements and leasing commissions is approximately
$8.6 million based upon average annual square feet for leases expiring during
the years ending December 31, 1999 and 2000. Our cost of general capital
improvements to our properties average approximately $3.0 million annually based
upon an estimate of $0.26 per square foot.
LIQUIDITY REQUIREMENTS. We expect to meet our short-term liquidity
requirements through net cash provided by operations and refinancings of
maturing debt. We expect to meet our long-term liquidity requirements for the
funding of property development, property acquisitions, tenant improvements and
other non-recurring capital improvements through a combination of net cash from
operations, long-term secured and unsecured indebtedness (including the credit
facilities), joint ventures, property sales and the issuance of additional
equity and debt securities. There can be no assurance that we will be successful
in obtaining the required amount of funds for these items or that the terms of
capital raising activities, if any, will be as favorable as we have experienced
in prior periods. The terms of the credit facilities and our preferred shares
impose restrictions on our ability to incur indebtedness and issue additional
preferred shares.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations, as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), an alternative
measure of performance of an equity REIT. Funds from Operations is defined by
NAREIT to mean net income (loss) determined in accordance with GAAP, excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization (other than amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustment for
unconsolidated partnerships and joint ventures. We believe that in order to
facilitate a clear understanding of the combined historical operating results of
the Company, Funds from Operations should be examined in conjunction with net
income as presented in the unaudited financial statements included elsewhere in
this Form 10-Q. The following table represents the unaudited calculation of our
Funds from Operations for the three months and six months ended June 30,1999 and
1998:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
-------------------------- --------------------------
(IN THOUSANDS) 1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income allocated to
common shareholders.... $ 7,025 $ 2,997 $ 10,037 $ 5,523
Adjustments to reconcile
to Funds from Operations:
Real estate
depreciation and
amortization........ 8,088 5,834 15,421 10,849
Amortization of costs
for leases assumed.. 246 275 491 566
Straight-line
rental revenue...... (614) (494) (1,208) (522)
Gain on sale of
real estate......... (4,357) -- (4,357) --
Net gain on treasury
lock terminations... (1,172) -- (615) --
Loss on land
development option.. -- -- 600 --
Minority interests... 4,861 2,352 6,917 4,317
Extraordinary loss... -- 525 -- 525
------------ ------------ ------------ ------------
Funds from Operations(1) $ 14,077 $ 11,489 $ 27,286 $ 21,258
============ ============ ============ ============
-19-
<PAGE>
- ---------------
<FN>
(1) We compute Funds from Operations in accordance with standards established
by the Board of Governors of NAREIT in its March 1995 White Paper (with the
exception that we report rental revenues on a cash basis (e.g., based on
contractual lease terms), rather than a straight-line GAAP basis, which we
believe results in a more accurate presentation of its actual operating
activities), which may differ from the methodology for calculating Funds
from Operations used by other certain office and/or industrial REITs and,
accordingly, may not be comparable to such other REITs. As a result of our
reporting rental revenues on a contractual basis, contractual rent
increases may cause reported Funds from Operations to increase. Further,
Funds from Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
repayment obligations, or other commitments and uncertainties. Funds from
Operations should not be considered as an alternative to net income (loss),
as an indication of our performance or to cash flows as a measure of
liquidity or the ability to pay dividends or make distributions.
</FN>
</TABLE>
IMPACT OF YEAR 2000
- -------------------
OVERVIEW OF Y2K PROBLEM
The Year 2000 or "Y2K" problem refers to the inability of many existing computer
programs to properly recognize a year that begins with "20" instead of the
familiar "19." If left uncorrected, many computer programs having time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. The failure to accurately recognize the year 2000 and other key dates
could result in a variety of problems from day miscalculation to the failure of
entire systems.
THE YEAR 2000 PROGRAM
In mid 1998, we formed a Year 2000 committee for the purpose of creating a
program (the "Program") to identify, understand and address the myriad of issues
associated with the Y2K problem. Our committee is comprised of representatives
from senior management and various departments including accounting, legal,
operations, and information systems. Due to the wide ranging implications of the
Y2K problem, management decided to carry out the Program in multiple phases over
the remainder of 1999. What follows is a description of the activities that have
been or are expected to be conducted in each phase of the Program, including a
summary of the results obtained to date and a time table for completion.
Although many of the phases of the Program are being carried out simultaneously,
the various phases will be discussed separately.
PHASE ONE - ASSESSING OUR Y2K READINESS
The initial step in assessing our Y2K readiness consisted of conducting a study
to identify any systems that were date sensitive and, accordingly, could have
potential Y2K problems. The study included an examination of information
technology and non-information technology systems at our home and area offices
and at our properties. The initial step of identifying systems has been
completed by our information services department, property managers and building
engineers through a combination of physical inspections, and information
interviews with our employees and contact with vendors.
After identifying systems that could have a potential Y2K problem, we determined
which of the systems actually have Y2K issues. Much of the required information
is within the exclusive control of our vendors and manufacturers, who are being
contacted through standard form letters and telephone calls requesting
information. Our property managers are each responsible for gathering
information on the Y2K compliance of specific property systems. In addition to
examining our systems for compliance, we continue to assess the progress of the
Building Owners and Managers Association ("BOMA") and other industry leaders
that are monitoring the compliance efforts of the major utility and
telecommunications companies. The following is a summary of the Phase One
results obtained to date.
BUILDING MANAGEMENT SYSTEMS
We have identified three categories of building management systems in which we
have the most exposure to potential Y2K problems. These categories include:
- Building automation (e.g. energy management, HVAC, fire and life
safety)
- Security card access
- Elevator
In late 1998, our property staff began gathering data on the equipment in all of
our buildings. By the end of the second quarter of 1999, a preliminary Y2K
compliance study of the building management systems outlined above was completed
for all our buildings. Following review of such studies, management expects to
be able to determine our state of readiness as to the building management
systems. Management is in the process of reviewing this study and addressing any
issues identified by it.
-20-
<PAGE>
INFORMATION SYSTEMS
We have identified five categories of information systems in which we have the
most exposure to potential Y2K Problems. These categories include:
- Accounting and property management
- Network operating systems
- Desktop hardware and software
- Secondary systems
- Telecommunication systems
ACCOUNTING AND PROPERTY MANAGEMENT
We currently have two accounting and property management systems that are not
Y2K compliant. We have selected a new accounting and property management
software system that will be implemented company wide under the following time
table:
- Installation of new software and testing - Third and Fourth Quarter
1999
- Full Y2K compliance - Fourth Quarter 1999
NETWORK OPERATING SYSTEMS
We believe that network operating servers are currently compliant.
DESKTOP SOFTWARE
We have reviewed all of our desktop systems and software applications, and
believe that they are compliant.
SECONDARY INFORMATION SYSTEMS
Our "secondary" information systems include, but are not limited to: human
resources, fixed-asset systems, and forecasting modeling software, which
provides projections on property returns and other items. We also reviewed
internally developed software, such as our budget program and tenant-services
system. We have reviewed all of our secondary information systems and feel these
systems are Y2K compliant.
TELECOMMUNICATION SYSTEMS
We believe that some of our telecommunication systems may not be Y2K compliant.
We are currently assessing these systems and, where material, plan to replace,
modify or upgrade these systems as appropriate, by the end of the third quarter
of 1999.
PHASE TWO - DETERMINING THE COST OF ACHIEVING Y2K READINESS AND IMPLEMENTING THE
Y2K ACTION PLAN
We initiated a comprehensive corporate wide plan in mid-1998 to replace our
financial and operational systems by the beginning of the fourth quarter of 1999
in order to facilitate our future growth and to improve operational controls. We
anticipate the total cost of this effort will be $3.5 million to $4.0 million
and will have the additional benefit of making our financial and operational
systems Y2K compliant. Of the total project costs, we estimate approximately
$3.2 million to $3.7 million is attributable to the purchase and implementation
of new software and equipment which will be capitalized and the remainder
related to the assessment, modifications to existing hardware and software, and
training which will be expensed as incurred. We have incurred approximately $1.8
million of the total estimated costs as of June 30, 1999.
PHASE THREE - ASSESSING OUR RISKS OF NON-COMPLIANCE
We do not believe that the impact of the Y2K problem will have a material
adverse effect on our financial condition and results of operations. Such belief
is based on our analysis of the risks related to both our own potential Y2K
problems discussed above and our assessment of the Y2K problems of our vendors,
suppliers and customers.
FAILURE OF BUILDING MANAGEMENT SYSTEMS
We believe that the Y2K risks to our financial condition and operation
associated with a failure of building management systems is immaterial due to
the fact that each of our properties have, for the most part, separate building
management systems. Accordingly, a Y2K problem that is experienced at one
building should have no effect on our other buildings. In addition, based upon
our study results received to date, we believe that we will have sufficient time
to correct those system problems within our control before the year 2000. We
have been testing building systems at several of our buildings sites and will
continue throughout the remainder of 1999.
In the event we do experience a failure of essential building management systems
at one or more of our buildings, whether due to a failure of one of our systems
or an interruption of utilities, management believes that the individual tenant
leases will protect us from claims of constructive eviction or other remedies
-21-
<PAGE>
that could result in a termination of lease rights. It is also our belief that
most of our leases eliminate, limit or quantify the rights of a tenant to
receive an abatement under such circumstances. Although there is always a risk
of claims being brought on a non-contractual basis (e.g. in tort), it is our
belief that our efforts to identify and solve Y2K problems will minimize such
risk. We have also attempted to allocate the risk of non-compliance to the
vendors and manufacturers of the building management and information systems by
establishing standard riders and addenda to be attached to new contracts for
systems using time sensitive data.
FAILURE OF INFORMATION SYSTEMS
Since our major source of income is rental payments under long term leases, the
failure of key information systems is not expected to have a material adverse
effect on our financial condition and results of operations. Even if we were to
experience problems with the information systems, the payment of rent under the
leases would not be excused. In addition, we expect to correct those information
system problems within our control before the year 2000, thereby minimizing or
avoiding the increased cost of correcting problems after the fact.
THE Y2K PROBLEMS OF OUR VENDORS
The success of our business is not closely tied to the operations of any one
manufacturer, vendor or supplier. Accordingly, if any of our manufacturers,
vendors or suppliers ceases to conduct business due to Y2K related problems, we
expect to be able to contract with alternate providers without experiencing any
material adverse effect on our financial condition and results of operations.
THE Y2K PROBLEMS OF OUR CUSTOMERS
Due to our broad customer/tenant base, the success of our business is not
closely tied to the success of any particular tenant. Accordingly, we believe
that there should not be a material adverse effect on our financial condition
and results of operations if any one of our tenants ceases to conduct business
(and pay rent) due to Y2K related problems.
DOOMSDAY SCENARIO
We are aware that it is generally believed that the world's Y2K problem, if
uncorrected, may result in an economic crisis of global proportions. We are
unable to determine whether such predictions are true or false. As mentioned
above, we expect that the nature of our income (rent from good credit tenants
under long-term leases ) should serve as a hedge against any short term
disruptions of business. However, if the doomsday scenarios prove true, we
assume that all companies (including ours) will experience the effects in one
way or another.
PHASE FOUR - DEVELOPING CONTINGENCY PLANS
We are currently preparing a contingency plan that is expected to be completed
by the end of the third quarter of 1999.
INFLATION
- ---------
Substantially all of our office and industrial leases require tenants to pay, as
additional rent, a portion of any increases in real estate taxes and operating
expenses over a base amount. In addition, many of the office and industrial
leases provide for fixed increases in base rent or indexed escalations (based on
the Consumer Price Index or other measures). We believe that inflationary
increases in expenses will be offset, in part, by the expense reimbursements and
contractual rent increases described above.
As of June 30, 1999, approximately $427.1 million of our outstanding
indebtedness (including our Credit Facilities) was subject to interest at
floating rates and future indebtedness may also be subject to floating rate
interest.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
The following table provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates. For our mortgage note receivable, mortgage notes payable, credit
facilities and bonds payable, the table presents principal cash flows, including
principal amortization, and related weighted-average interest rates by expected
maturity dates as of June 30, 1999.
-22-
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity
Principal amount by Expected Maturity
Average Interest Rate
1999 2000 2001 2002 2003 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Mortgage notes
receivable (1).. -- -- -- -- -- $ 72.8 $ 72.8
Fixed rate....... -- -- -- -- -- 9.64%
Liabilities:
Mortgage notes
payable (2):
Fixed rate..... $ 3.0 $ 6.4 $ 63.0 $ 4.5 $ 4.8 $ 261.7 $ 343.4
Average
interest rate. 7.19% 7.24% 7.14% 7.29% 7.29% 7.29%
Variable rate.... $200.5 $ 53.2 $ 20.0 $ 65.0 -- $ 14.0 $ 352.7
Average interest
rate (3),(4).... 6.66% 7.14% 7.18% 7.63% -- 7.90%
Bonds payable (2):
Variable rate... -- -- -- -- -- $ 74.4 $ 74.4
Average interest
rate (3)....... -- -- -- -- -- 5.0%
- ---------------
<FN>
(1) See Note 2 to our consolidated financial statements in our Form 10-K for
the year ended December 31, 1998 for additional information.
(2) See Note 4 to our consolidated financial statements in our Form 10-K for
the year ended December 31, 1998 for additional information. The bonds are
credit enhanced with letters of credit provided under credit facilities
which expire in November, 2000 and March, 2002.
(3) Based upon the rates in effect at June 30, 1999. The weighted-average
interest rate on our mortgage notes payable, credit facilities, and bonds
payable at June 30, 1999 were 6.7%, 7.0%, and 5.0%, respectively. If
interest rates on our variable rate debt increased by one percentage point,
our annual interest expense would increase by approximately $4.3 million.
(4) The Company entered into an interest rate cap agreement with a financial
institution for an original notional amount of $150.0 million at 7.0%
during the period from July 1 to October 1, 1999.
</FN>
</TABLE>
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 AND USE OF PROCEEDS
- ------- -----------------------------------------
On April 13, 1999, the Company contractually modified the terms of the Company's
Series A preferred shares. Under the original terms, the holders of the Series A
preferred shares had the right to cause the Company to redeem their shares at a
price of $20 per share if for two consecutive quarters (1) the ratio of the
Company's debt plus nonconvertible preferred shares divided by its total market
capitalization exceeded 65% or (2) its fixed charges coverage ratio fell below
1.4. In addition, under the original terms, the failure to satisfy either of
these covenants for two consecutive quarters would have placed restrictions on
the Company's ability to incur debt or issue preferred equity. The new agreement
eliminates the debt to market capitalization covenant. In exchange, the holders
of the Series A preferred shares were granted the future right to cause the
redemption of their shares at a price of $20.00 per share upon 120 days prior
written notice, which redemption may occur during the period beginning January
15, 2002 and ending January 15, 2004. The Series A preferred shares will
continue to pay an annual dividend of $1.50 per share and will continue to be
convertible into common shares on a one for one basis subject to customary
anti-dilution adjustments. The Company made a $0.4 million one-time payment as
part of this transaction, which will be amortized, using the straight-line
method, through January 15, 2002. As of April 13, 1999, all 2,000,000
outstanding shares of the Company's Series A preferred shares were reclassified
to redeemable equity at their aggregate redemption price of $40.0 million, net
of the unamortized transaction fee of $0.37 million, in the consolidated balance
sheet.
-23-
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ------- -------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
The Company's annual Meeting of Shareholders was held on May 19, 1999. At the
meeting, shareholders voted on (i) the re-election of two trustees; (ii)
approval of the First Amendment to the Company's Share Incentive Plan, which
increases the number of shares available under the Plan from 1,850,000 shares to
2,540,000 shares; and (iii) ratification of the appointment of Ernst & Young LLP
as the Company's independent auditors for 1999. Voting on each such matter was
as follows:
<TABLE>
<CAPTION>
Votes Votes Withheld/ Broker
For Against Abstentions Non-Votes
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Re-election of Trustees:
Richard S. Curto 13,670,390 --- 42,485 0
Christopher J. Nassetta 13,670,390 --- 42,485 0
2. Authorization of First
Amendment to Share
Incentive Plan 13,364,888 336,521 11,466 0
3. Ratification of Auditors: 13,700,329 6,736 5,810 0
</TABLE>
ITEM 5. OTHER INFORMATION
- ------- -----------------
None.
-24-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits:
Exhibit
Number Description
- --------- ----------------------------------------------------------------------
3.1 Amendment No. 21 to the Amended and Restated Agreement of Limited
Partnership dated as of April 15, 1999 as filed as an exhibit to
Amendment No. 1 to the Company's Registration Statement on Form S-3
(No. 333-70369) and incorporated herein by reference.
3.2 Amendment No. 22 to the Amended and Restated Agreement of Limited
Partnership dated as of April 22, 1999 as filed as an exhibit to
Amendment No. 1 to the Company's Registration Statement on Form S-3
(No. 333-70369) and incorporated herein by reference.
3.3 Amendment No. 23 to the Amended and Restated Agreement of Limited
Partnership dated as of May 15, 1999 as filed as an exhibit to
Amendment No. 1 to the Company's Registration Statement on Form S-3
(No. 333-70369) and incorporated herein by reference.
3.4 Amendment No. 24 to the Amended and Restated Agreement of Limited
Partnership dated as of June 15, 1999.
10.1 First Amendment to Series A Preferred Securities Purchase Agreement,
dated as of April 13, 1999, among Security Capital Preferred Growth
Incorporated, Prime Group Realty Trust and Prime Group Realty, L.P. as
filed as an exhibit to the Company's Form 8-K dated April 13, 1999
(filed on April 15, 1999, File No. 001-13589) and incorporated herein
by reference.
12.1 Computation of ratios of earnings to combined fixed charges and
preferred share distributions.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
We filed the following report on Form 8-K: Form 8-K dated April 13, 1999 (filed
on April 15, 1999; File No. 001-13589) relating to a permanent waiver by the
sole holder of the Company's Series A Preferred Shares of the Debt-to-Market
Capitalization Covenant contained in the Company's charter documents.
-25-
<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: August 13, 1999 /s/ Richard S. Curto
--------------- --------------------
Richard S. Curto
President and Chief Executive Officer
Date: August 13, 1999 /s/ William M. Karnes
--------------- ----------------------
William M. Karnes
Executive Vice President and
Chief Financial Officer
-26-
Exhibit 3.4
AMENDMENT NO. 24 TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF PRIME GROUP REALTY, L.P.
This AMENDMENT NO. 24 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF PRIME GROUP REALTY, L.P. (this "Amendment") is made as of June
15, 1999 by Prime Group Realty Trust, a Maryland real estate investment trust
("PGRT"), as the Managing General Partner of Prime Group Realty, L.P., a
Delaware limited partnership (the "Partnership"), and on behalf of the other
Partners (as hereinafter defined). Capitalized terms used but not otherwise
defined herein shall have the meanings given to such terms in the Amended and
Restated Agreement of Limited Partnership of the Partnership, dated as of
November 17, 1997, by and among PGRT and the other parties signatory thereto, as
amended thereafter (as so amended, the "Limited Partnership Agreement").
W I T N E S S E T H:
WHEREAS, pursuant to Section 4.3.C. of the Limited Partnership Agreement,
the Managing General Partner may raise all or any portion of Additional Funds
required by the Partnership for the acquisition of additional properties by
accepting additional Capital Contributions, including the issuance of Common
Units for Capital Contributions that consist of property or interests in
property;
WHEREAS, pursuant to that certain Exchange Agreement dated as of December
15, 1997 by and between H Group LLC, a Delaware limited liability company
("HG"), and the Partnership (the "Exchange Agreement"), HG agreed, among other
things, to grant to the Partnership an option (the "First Option") to exchange
the Underlying Option (as defined in the Exchange Agreement) for 220,000 Common
Units of Limited Partner Interest (subject to adjustment pursuant to the terms
of the Exchange Agreement), which grant of the First Option contemplated the
transfer by the Partnership to HG of 5,000 Common Units of Limited Partner
Interest on the date thereof and, subject to the terms of the First Option,
5,000 Common Units of Limited Partner Interest (subject to adjustment pursuant
to the terms of the Exchange Agreement) on the 15th day of each month thereafter
(each such transfer a "First Option Maintenance Transfer") for such number of
months set forth in the Exchange Agreement;
WHEREAS, the Partnership has agreed to the terms of the grant by HG of the
First Option set forth in the Exchange Agreement and desires to effect the First
Option Maintenance Transfer due on June 15, 1999;
WHEREAS, HG was admitted to the Partnership as an Additional Limited
Partner as of December 15, 1997 pursuant to Amendment No. 2 to the Limited
Partnership Agreement;
WHEREAS, the Partners desire to amend the Limited Partnership Agreement to
reflect the increase in outstanding Common Units resulting from the issuance of
Common Units to HG in connection with the First Option Maintenance Transfer due
on June 15, 1999; and
WHEREAS, pursuant to Article 11 of the Limited Partnership Agreement, the
Managing General Partner may consent (i) to the transfer of the interest of a
Limited Partner to a permitted transferee and (ii) to the admission of such
permitted transferee as a Substituted Limited Partner;
WHEREAS, Warren H. John was admitted to the Partnership as an Additional
Limited Partner as of January 16, 1998 pursuant to that certain Acknowledgment
by Substituted Limited Partner dated as of January 16, 1998 by Warren H. John to
PGRT, as Managing General Partner of the Partnership;
WHEREAS, the Partners desire to amend the Limited Partnership Agreement to
reflect the transfer of 37,259.0 Common Units (the "Units") owned by Warren H.
John to Warren H. John, Trustee of the Warren H. John Trust dated December 18,
1998 (the "Trust");
WHEREAS, Sections 2.4 and 12.3 of the Limited Partnership Agreement
authorize, among other things, the Managing General Partner, as true and lawful
agent and attorney-in fact, to execute, swear to, acknowledge, deliver, file and
record this Amendment on behalf of each Partner that has executed the Limited
Partnership Agreement and on behalf of the Partnership.
NOW, THEREFORE, for good and adequate consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
-1-
<PAGE>
SECTION 1. ACCEPTANCE OF CAPITAL CONTRIBUTION IN EXCHANGE FOR COMMON UNITS.
(a) PGRT, as Managing General Partner and on behalf of the Partnership, hereby
accepts the grant of the rights consisting of the First Option during the
nineteenth month of the term of the First Option from HG as a Capital
Contribution having a value on the date hereof of $100,000, in exchange for
6209.0 Common Units of Limited Partner Interest which are hereby issued by the
Partnership to HG pursuant to Section 4.3.C. of the Limited Partnership
Agreement, and which are evidenced by Common Unit Certificate No. 46 of the
Partnership.
(b) Each of the Common Units of Limited Partner Interest issued to HG
pursuant to this Section 1 shall have the same terms and provisions of the
Common Units of Limited Partner Interest issued by the Partnership on November
17, 1997 except that (i) the Exchange Rights relating thereto may be exercised
at any time after December 15, 1999 (as opposed to November 17, 1998) and (ii)
such Common Units of Limited Partner Interest will be subject to the
Registration Rights Agreement dated as of December 15, 1997 by and among PGRT,
the Partnership and HG as opposed to the Registration Rights Agreement entered
into by PGRT and the Partnership on November 17, 1997.
SECTION 2. ACCEPTANCE OF THE TRUST AS A SUBSTITUTED LIMITED PARTNER. The
Trust having furnished to the Managing General Partner certain information,
including an executed Acknowledgment and Agreement of Substituted Limited
Partner, a true and correct copy of which is attached hereto as Exhibit 1, the
Managing General Partner hereby consents to Warren H. John's transfer of the
Units to the Trust and to the admission of the Trust as a Substituted Limited
Partner.
SECTION 3. AMENDMENT OF EXHIBIT A TO THE LIMITED PARTNERSHIP AGREEMENT.
Exhibit A to the Limited Partnership Agreement is hereby amended and restated to
reflect the aforementioned change(s) by deleting Exhibit A attached thereto in
its entirety, and by attaching in lieu thereof a replacement exhibit in the form
of Exhibit A attached hereto. From and after the effectiveness of this
Amendment, the amended and restated Exhibit A attached hereto shall be the only
Exhibit A to the Limited Partnership Agreement, unless and until it is hereafter
further amended.
SECTION 4. REFERENCE TO AND EFFECT ON THE LIMITED PARTNERSHIP AGREEMENT.
A. The Limited Partnership Agreement is hereby deemed to be amended to the
extent necessary to effect the matters contemplated by this Amendment. Except as
specifically provided for hereinabove, the provisions of the Limited Partnership
Agreement shall remain in full force and effect.
B. The execution, delivery and effectiveness of this Amendment shall not
operate (i) as a waiver of any provision, right or obligation of the Managing
General Partner, the other General Partner or any Limited Partner under the
Limited Partnership Agreement except as specifically set forth herein or (ii) as
a waiver or consent to any subsequent action or transaction.
SECTION 5. APPLICABLE LAW. This Amendment shall be construed in accordance
with and governed by the laws of the State of Delaware, without regard to the
principles of conflicts of law.
[signature page follows]
-2-
<PAGE>
AMENDMENT NO. 24 TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF PRIME
GROUP REALTY, L.P.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
MANAGING GENERAL PARTNER:
-------------------------
PRIME GROUP REALTY TRUST, a
Maryland real estate investment trust
/s/ William M. Karnes
---------------------
Name: William M. Karnes
Title: Executive Vice President
LIMITED PARTNERS:
-----------------
Each Limited Partner hereby executes
this Amendment to the Limited
Partnership Agreement.
By: PRIME GROUP REALTY TRUST, a
Maryland real estate investment
trust, as attorney-in fact
/s/ William M. Karnes
---------------------
Name: William M. Karnes
Title: Executive Vice President
-3-
<PAGE>
<TABLE>
EXHIBIT A*/
Partners, Number of Units and Capital Contributions
<CAPTION>
Number of Capital
Managing General Partner Common Units Contribution
- ---------------------------------- ----------------- -----------------
<S> <C> <C>
Prime Group Realty Trust 15,136,488 **/
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Richard S. Curto
James F. Hoffman
General Partner
- ----------------------------------
The Nardi Group, L.L.C. 927,100 $ 18,542,000
c/o Stephen J. Nardi
4100 Madison Street
Hillside, IL 60162
Limited Partners
- ----------------------------------
The Nardi Group, L.L.C. 210,813 $ 3,143,009
c/o Stephen J. Nardi
4100 Madison Street
Hillside, IL 60162
Edward S. Hadesman 388,677 $ 7,773,540
Trust Dated May 22, 1992
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Grandville/Northwestern 9,750 $ 195,000
Management Corporation
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Carolyn B. Hadesman 54,544 $ 1,090,880
Trust Dated May 21, 1992
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
- --------------------
<FN>
*/ As amended by Amendment No. 24 to the Amended and Restated Agreement of
Limited Partnership of Prime Group Realty, L.P.
**/ This amount shall be inserted by the Managing General Partner.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
EXHIBIT A - CONT'D
Partners, Number of Units and Capital Contributions
<CAPTION>
Number of Capital
Limited Partners (Cont'd) Common Units Contribution
- ---------------------------------- ----------------- -----------------
<S> <C> <C>
Lisa Hadesman 1991 Trust 169,053 $ 3,381,060
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Cynthia Hadesman 1991 Trust 169,053 $ 3,381,060
c/o Edward S. Hadesman
2500 North Lakeview, Unit 1401
Chicago, IL 60614
Tucker B. Magid 33,085 $ 661,700
545 Ridge Road
Highland Park, IL 60035
Frances S. Shubert 28,805 $ 576,100
511 Lynn Terrace
Waukegan, IL 60085
Grandville Road Property, Inc. 7,201 $ 144,020
c/o Ms. Frances S. Shubert
511 Lynn Terrace
Waukegan, IL 60085
Sky Harbor Associates 62,149 $ 1,242,980
c/o Howard I. Bernstein
6541 North Kilbourn
Lincolnwood, IL 60646
Jeffrey A. Patterson 110,000 $ 2,200,000
c/o Prime Group Realty Trust
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Primestone Investment Partners, L.P. 7,944,893 **/
c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Paul A. Roehri
Prime Group VI, L.P. 304,097 $ 6,050,500
c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Michael W. Reshcke
Robert J. Rudnik
H Group LLC 108,348 $ 1,800,000
c/o Heitman Financial Ltd.
180 N. LaSalle
Suite 3600
Chicago, IL 60601
Attn: Norman Perlmutter
Ray R. Grinvalds 5,216 $ 104,320
217 Deer Valley Drive
Barrington, IL 60010
Warren H. John, as Trustee of the
Warren H. John 37,259 $ 745,180
Trust dated December 18, 1998
1730 N. Clark Street
Chicago, IL 60614
- --------------------
**/ This amount shall be inserted by the Managing General Partner.
</TABLE>
-5-
<PAGE>
<TABLE>
EXHIBIT A - CONT'D
Partners, Number of Units and Capital Contributions
<CAPTION>
Number of Capital
Limited Partners (Cont'd) Common Units Contribution
- ---------------------------------- ----------------- -----------------
<S> <C> <C>
Prime Group Realty Trust 2,000,000 **/
77 West Wacker Drive Convertible
Suite 3900 Preferred
Chicago, IL 60601 Units
Attn: Richard S. Curto
James F. Hoffman
Prime Group Realty Trust 4,000,000 **/
77 West Wacker Drive Series B
Suite 3900 Preferred
Chicago, IL 60601 Units
Attn: Richard S. Curto
James F. Hoffman
- --------------------
**/ This amount shall be inserted by the Managing General Partner.
</TABLE>
-6-
<TABLE>
Exhibit 12.1
Prime Group Realty Trust and The Predecessor
Statements Regarding Computation of Ratios of Earnings
to Combined Fixed Charges and Preferred Share Distributions
(Dollars in Thousands)
<CAPTION>
Prime Group Realty Trust - Historical
------------------------------------------------------------------------------------
Period
from
Three months ended Six months ended Year November 17,
June 30, June 30, ended through
-------------------------- ------------------------ December 31, December 31,
1999 1998 1999 1998 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before preferred
share distributions and
minority interests per
the consolidated financial
statements................ $ 14,916 $ 7,215 $ 22,984 $ 12,406 $ 30,866 $ 1,427
Interest expense........... 11,545 8,061 21,923 14,476 30,901 1,680
Amortization of debt
issuance costs............ 619 358 1,093 639 1,230 140
============ ============ ============ ============ ============ ============
Earnings $ 27,080 $ 15,634 $ 46,000 $ 27,521 $ 62,997 $ 3,247
============ ============ ============ ============ ============ ============
Fixed charges:
Interest expense........... $ 11,545 $ 8,061 $ 21,923 $ 14,476 $ 30,901 $ 1,680
Capitalization of
interest expense......... 1,607 384 2,994 464 2,498 --
Amortization of debt
issuance costs........... 619 358 1,093 639 1,230 140
Preferred share
distributions............ 3,030 1,341 6,030 2,041 7,971 345
============ ============ ============ ============ ============ ============
Total fixed charges......... $ 16,801 $ 10,144 $ 32,040 $ 17,620 $ 42,600 $ 2,165
============ ============ ============ ============ ============ ============
Ratio of earnings to
combined fixed charges
and preferred share
distributions.............. 1.61 1.54 1.44 1.56 1.48 1.50
============ ============ ============ ============ ============ ============
Excess of earnings to
combined fixed charges
and preferred share
distributions.............. $ 10,279 $ 5,490 $ 13,960 $ 9,901 $ 20,397 $ 1,082
============ ============ ============ ============ ============ ============
Funds from operations:
Funds from operations...... $ 14,077 $ 11,489 $ 27,286 $ 21,258 $ 46,762 $ 3,619
Interest expense........... 11,545 8,061 21,923 14,476 30,901 1,680
Amortization of debt
issuance costs............ 619 358 1,093 639 1,230 140
Preferred share
distributions............. 3,030 1,341 6,030 2,041 7,971 345
============ ============ ============ ============ ============ ============
Adjusted funds from
operations................. $ 29,271 $ 21,249 $ 56,332 $ 38,414 $ 86,864 $ 5,784
============ ============ ============ ============ ============ ============
Fixed charges:
Interest expense........... $ 11,545 $ 8,061 $ 21,923 $ 14,476 $ 30,901 $ 1,680
Capitalization of
interest expense.......... 1,607 384 2,994 464 2,498 --
Amortization of debt
issuance costs............ 619 358 1,093 639 1,230 140
Preferred share
distributions............. 3,030 1,341 6,030 2,041 7,971 345
============ ============ ============ ============ ============ ============
Total fixed charges......... $ 16,801 $ 10,144 $ 32,040 $ 17,620 $ 42,600 $ 2,165
============ ============ ============ ============ ============ ============
Ratio of funds from
operations to combined
fixed charges and
preferred share
distributions.............. 1.74 2.09 1.76 2.18 2.04 2.67
============ ============ ============ ============ ============ ============
Excess of funds from
operations to combined
fixed charges and
preferred share
distributions.............. $ 12,470 $ 11,105 $ 24,292 $ 20,794 $ 44,264 $ 3,619
============ ============ ============ ============ ============ ============
-1-
</TABLE>
<PAGE>
<TABLE>
Prime Group Realty Trust and The Predecessor
Statements Regarding Computation of Ratios of Earnings
to Combined Fixed Charges and Preferred Share Distributions
(Dollars in Thousands)
<CAPTION>
Predecessor - Historical
------------------------------------------------
Period from
January 1,
1999 through Year ended December 31,
November 16, ----------------------------------------
1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Earnings:
Loss before preferred
share distributions
and minority interests
per the combined
financial statements...... $ (29,050) $ (31,417) $ (29,576) $ (22,062)
Interest expense........... 34,417 37,217 36,234 33,387
Amortization of debt
issuance costs............ 630 594 1,148 714
============ ============ ============ ============
Earnings $ 5,997 $ 6,394 $ 7,806 $ 12,039
============ ============ ============ ============
Fixed charges:
Interest expense........... $ 34,417 $ 37,217 $ 36,234 $ 33,387
Capitalization of
interest expense.......... -- -- -- --
Amortization of debt
issuance costs............ 630 594 1,148 714
Preferred share
distributions............. -- -- -- --
============ ============ ============ ============
Total fixed charges $ 35,047 $ 37,811 $ 37,382 $ 34,101
============ ============ ============ ============
Ratio of earnings to
combined fixed charges
and preferred share
distributions.............. -- -- -- --
============ =========== ============== ============
Deficit of earnings to
combined fixed charges
and preferred share
distributions.............. $ (29,050) $ (31,417) $ (29,576) $ (22,062)
============ ============ ============ ============
Funds from operations:
Funds from operations...... $ (14,461) $ (17,367) $ (12,733) $ (12,930)
Interest expense........... 34,417 37,217 36,234 33,387
Amortization of debt
issuance costs............ 630 594 1,148 714
Preferred share
distributions............. -- -- -- --
============ ============ ============ ============
Adjusted funds from
operations................. $ 20,586 $ 20,444 $ 24,649 $ 21,171
============ ============ ============ ============
Fixed charges:
Interest expense........... $ 34,417 $ 37,217 $ 36,234 $ 33,387
Capitalization of
interest expense.......... -- -- -- --
Amortization of debt
issuance costs............ 630 594 1,148 714
Preferred share
distributions............. -- -- -- --
============ ============ ============ ============
Total fixed charges......... $ 35,047 $ 37,811 $ 37,382 $ 34,101
============ ============ ============ ============
Ratio of funds from
operations to combined
fixed charges and preferred
share distributions........ -- -- -- --
============ ============ ============ ============
Deficit of funds from
operations to combined
fixed charges and preferred
share distributions........ $ (14,461) $ (17,367) $ (12,733) $ (12,930)
============ ============ ============ ============
-2-
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,858
<SECURITIES> 0
<RECEIVABLES> 130,068
<ALLOWANCES> 0
<INVENTORY> 111,736 <F1>
<CURRENT-ASSETS> 0
<PP&E> 1,135,438
<DEPRECIATION> (38,918)
<TOTAL-ASSETS> 1,356,182
<CURRENT-LIABILITIES> 235,811 <F2>
<BONDS> 810,188
0
40
<COMMON> 151
<OTHER-SE> 309,992
<TOTAL-LIABILITY-AND-EQUITY> 1,356,182
<SALES> 0
<TOTAL-REVENUES> 106,348
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 68,358 <F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,923
<INCOME-PRETAX> 16,067
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,067
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.66
<FN>
<F1>Amount includes restricted cash escrows ($32,354), net deferred costs
($35,056), and other assets ($44,326).
<F2>Amount includes accrued interest payable ($3,378), accrued real estate taxes
($41,214), accounts payable and accrued expenses ($25,906), liabilities for
leases assumed ($3,841), dividends payable ($8,104), other liabilities
($3,750) and minority interests of ($149,618).
<F3>Amount includes property operations ($21,247), real estate taxes ($19,149),
depreciation and amortization ($16,638), loss on land development option
($600), general and administrative expenses ($3,807) and minority interests
allocation ($6,917).
</FN>
</TABLE>
