UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 30, 1999
PRIME GROUP REALTY TRUST
(Exact name of registrant as specified in its charter)
Maryland 1-13589 36-4173047
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization
77 West Wacker Drive, Suite 3900, Chicago Illinois 60601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 917-1300
N/A
(Former name of former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
The Registrant has announced that on September 30, 1999 it has sold a 50% common
interest in 77 West Wacker Drive to the State Teachers Retirement System of
Ohio, as more fully described below. A press release relating to this event was
published on October 6, 1999. The text of the press release is as follows:
Chicago, Illinois, October 6, 1999 - Prime Group Realty Trust (NYSE:PGE) (the
"Company") announced today that it has sold a 50% interest in 77 West Wacker
Drive, a 944,000 square foot Class A office tower located in downtown Chicago,
to the State Teachers Retirement System of Ohio ("STRS Ohio"). The transaction,
which valued the building at a total price of $280 million, resulted in a third
quarter GAAP gain of $46.0 million and produced approximately $83.5 million in
net cash proceeds. The Company also exercised its option to acquire the IBM
Plaza for $238.0 million within the next sixty days to complete a tax-free
exchange with the sales proceeds received from the STRS Ohio transaction.
Commenting on the transaction, Michael W. Reschke, Chairman of the Board,
stated, "77 West Wacker is a world-class asset and is generally considered to be
one of the finest office buildings in the U.S.. Our sale of a 50% interest in
this property is part of our continued strategy to sell all or a portion of our
mature assets and to reinvest the proceeds in higher-yielding, value-add
acquisition and development opportunities. For example, beginning in the year
2000 the IBM Plaza has a 5.8% annual growth rate in net operating income over
the next ten years, compared to a 2.4% annual growth rate in net operating
income for 77 West Wacker. The redeployment of our equity from 77 West Wacker
into IBM Plaza will accelerate our growth in FFO per share in the coming years.
Moreover, the transaction allows us to recapture 80% of our equity in 77 West
Wacker, but yet keep a 50% continued interest in the property, as well as an
exclusive management and leasing contract."
Simultaneous with the closing of the transaction, the existing $170.0 million
first mortgage on the property was refinanced with a new $170.0 million
non-recourse first mortgage provided by a syndicate of German banks. The new
mortgage loan has a five-year term and bears interest at LIBOR plus 1.25%.
The Company and STRS Ohio made the following equity investments in the new joint
venture:
Partner Equity Class Ownership Interest Amount
- - ---------- ------------ ------------------ --------------
STRS Ohio Preferred N/A $ 66,000,000
STRS Ohio Common 50.0% 22,000,000
PGRT Common 50.0% 22,000,000
------------------ --------------
TOTAL 100.0% $ 110,000,000
================== ==============
The preferred equity funded by STRS Ohio provides for a 9.5% cumulative return,
payable quarterly in arrears.
STRS Ohio is a more than $53 billion pension fund that provides services and
benefits to almost 400,000 Ohio educators. Its assets are allocated to various
asset categories including equities, fixed income, real estate, international
and alternative investments. According to Herbert L. Dyer, STRS Ohio executive
director, the pension plan typically acquires properties outright. "This type of
transaction is also beneficial to us for several reasons," Dyer said. "First,
75% of our equity receives a preferred return. Second, it enables us to form a
partnership with a public real estate investment trust that has a demonstrated
track record of developing, leasing and managing assets of this caliber.
Finally, our partner's interest in this property is aligned by its $22 million
common equity piece in the venture."
With the addition of this property, STRS Ohio's real estate investments in the
Chicago area now total $314 million. Overall, STRS Ohio has in excess of $5
billion equity invested in real estate across the country.
Commenting on the transaction, Richard S. Curto, President and Chief Executive
Officer of the Company, stated "The agreed valuation of $296.60 per square foot
is one of the highest ever achieved in Chicago real estate and is consistent
with the trophy status of the property and its tenants. At the present time, 77
West Wacker is 100% leased with two-thirds of its rentable square footage leased
on a long term basis to R.R. Donnelley & Sons Co., Inc., Jones Day Reavis &
Pogue, and First Union Securities, Inc.. Completed in 1992, the building has won
numerous awards in the industry, including the Chicago Sun Times Development of
the Year in 1993."
"Over the past six months, our Company has sold nine industrial properties and
two office properties in three separate transactions, resulting in a total of
$360 million in sales proceeds. After the repayment of mortgage debt, these
transactions produced net cash proceeds of approximately $120.5 million for our
Company. In each of these transactions, the sales price has exceeded not only
our book basis for the asset, but also has exceeded our own internal market
valuation of the asset. These sales are part of our ongoing strategy to realize
the net asset value of our portfolio and to close the gap between net asset
value per share and our current share price", said Curto.
"IBM Plaza will have a first year NOI yield of 8.9% and represents a very
attractive investment," said Jeffrey A. Patterson, Executive Vice President and
Chief Investment Officer. "The upside in this asset, resulting from both the
lease-up of 100,000 square feet of vacant space and contractual rent increases
in existing tenant leases is expected to produce a 10-year unleveraged internal
rate of return of 13.5%."
As previously announced, the Company made an $8.0 million option payment on IBM
Plaza on February 5, 1999, which will be applied against the $238.0 million
purchase price at closing. IBM Plaza is a 47-story, Class A office tower
containing 1,354,354 rentable square feet plus an adjacent eleven-story,
902-space parking garage and 6,500 rentable square feet of retail space. Current
rents in the building are below market and a majority of the leases provide for
substantial escalations in net rent over the next ten years. Net of the $20.0
million of value allocated to the parking facility, the Company will acquire IBM
Plaza for $160.96 per rentable square foot, which is approximately 68% of
replacement cost. The acquisition is expected to occur within the next sixty
days.
The Real Estate Investment Banking Group of Deutsche Banc Alex Brown and the
Investment Banking Group of Jones Lang LaSalle Inc. advised the Company on the
77 West Wacker transaction.
Prime Group Realty Trust is a fully-integrated, self-administered, and
self-managed real estate investment trust (REIT) which owns, manages, leases,
develops, and redevelops office and industrial real estate, primarily in the
Chicago metropolitan area. Including the IBM Plaza, the Company's portfolio
consists of 28 office properties, containing an aggregate of 9.4 million net
rentable square feet and 40 industrial properties containing an aggregate of 4.9
million net rentable square feet. The portfolio also includes 248.2 acres of
developable land and rights to acquire more than 281.2 additional acres of
developable land which management believes could be developed with approximately
11.0 million rentable square feet of office and industrial space.
This press release contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that reflect
management's current views with respect to future events and financial
performance. The words "believes", "expects", "anticipates", "estimates" and
similar words or expressions are generally intended to identify forward-looking
statement. Actual results may differ materially from those expected because of
various risks and uncertainties, including but not limited to, changes in
general economic conditions, adverse changes in real estate markets as well as
other risks and uncertainties included from time to time in the Company's
filings with the Securities and Exchange Commission.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
Not applicable.
b) Pro forma financial information
The accompanying unaudited Pro Forma Balance Sheet of Prime Group Realty Trust
is presented as if at June 30, 1999 we had sold a 50% interest in the Property
for $88.0 million (which includes $66.0 million of preferred equity providing a
cumulative preferred return of 9.5% per annum). The unaudited Pro Forma
Consolidated Condensed Statements of Operations for the year ended December 31,
1998 and the six months ended June 30, 1999 are presented as if the above
transaction and the 1998 acquisitions and 1999 acquisitions (see Notes 2 and 3)
occurred as of January 1, 1998. Our unaudited Pro Forma Consolidated Condensed
Financial Statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 1998, our Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 and our Current Report on Form 8-K
dated February 5, 1999 and filed on February 23, 1999. In management's opinion,
all adjustments necessary to reflect the transactions have been made.
Our unaudited Pro Forma Consolidated Condensed Financial Statements are not
necessarily indicative of what the actual results of operations would have been
assuming the disposition of the Property had occurred at January 1, 1998, nor do
they purport to represent our future results of operations. Our Pro Forma
Consolidated Condensed Statement of Operations include our historical operations
(For the period from January 1, 1999 through June 30, 1999 and the period from
January 1, 1998 through December 31, 1998), and the 1999 Acquisitions (For the
period from January 1, 1999 through June 30, 1999 and for the January 1, 1998
through December 31, 1998). The foregoing transactions are described below along
with their pro forma effects on our consolidation.
<PAGE>
<TABLE>
Prime Group Realty Trust
Pro Forma Condensed Consolidated Balance Sheet
June 30, 1999
(in thousands, except per share data)
(unaudited)
<CAPTION>
Sale of
interest
Prime Group in
Realty 77 W. Wacker Pro Forma
Trust (1) (2) Adjustments As Adjusted
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Real estate, at cost
Land $ 162,665 $ (17,510) $ -- $ 145,155
Building and
improvements 839,295 (132,694) 706,601
Tenant improvements 58,070 (30,019) 28,051
------------ ------------ ------------ ------------
1,060,030 (180,223) -- 879,807
Accumulated
depreciation (38,918) 10,633 (28,285)
------------ ------------ ------------ ------------
1,021,112 (169,590) -- 851,522
Property under
development 75,408 75,408
------------ ------------ ------------ ------------
1,096,520 (169,590) -- 926,930
Mortgage note receivable 72,753 72,753
Cash and cash equivalents 17,858 (983) (3) 83,500 100,375
Tenant receivables, net 11,317 (684) 10,633
Restricted cash escrows 32,354 (2,434) 29,920
Deferred rent receivable 40,270 (32,629) 7,641
Deferred costs, net 35,056 (10,865) 24,191
Loans receivable from
services company 5,728 5,728
Investment In Joint
Venture -- (4) -- --
Other 44,326 44,326
------------ ------------ ------------ ------------
Total assets 1,356,182 (217,185) 83,500 1,222,497
============ ============ ============ ============
Liabilities And Shareholders' Equity
Mortgage notes payable 675,471 (170,000) 505,471
Credit facilities 20,637 20,637
Bonds payable 74,450 74,450
Accrued interest payable 3,378 3,378
Accrued real estate taxes 41,214 (7,897) 33,317
Accounts payable and
accrued expenses 25,906 (25) 25,881
Liabilities for leases
assumed 3,841 3,841
Dividends payable 8,104 8,104
Other 3,750 3,750
------------ ------------ ------------ ------------
Total Liabilities 856,751 (177,922) -- 678,829
Minority Interests 149,618 149,618
--
Preferred Shares 39,670 39,670
Common Shares 151 151
Additional paid-in
capital 320,386 320,386
Distributions in excess
of earnings (10,394) (39,263) (3) 83,500 33,843
------------ ------------ ------------ ------------
Total 1,356,182 (217,185) 83,500 1,222,497
============ ============ ============ ============
</TABLE>
<PAGE>
Prime Group Realty Trust
Adjustment to Pro Forma Consolidated Condensed Balance Sheet
June 30, 1999
(In thousands)
(Unaudited)
(1) Represents Prime Group Realty Trust's consolidated historical balance sheet
as of June 30, 1999. See our Quarterly report on Form 10-Q for the quater
ended June 30, 1999 for additional information.
(2) Represents the removal of 100% of the historical balances of the property
that were sold as of June 30, 1999.
(3) Represents the net proceeds received from the sale of the Property.
(4) Our investment balance in the remaining 50% interest in the Property is
zero at June 30, 1999.
<PAGE>
<TABLE>
Prime Group Realty Trust
Pro Forma Condensed Consolidated Statement of Operations
Six months ended June 30, 1999
(in thousands, except per share data)
(unaudited)
<CAPTION>
Sale of
Prime Group 1999 Interest in
Realty Acquisitions 77 W. Wacker Pro Forma
Trust (1) (3) (4) Adjustments As Adjusted
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental $ 66,332 $ 1,951 $ (10,460) $ -- $ 57,823
Tenant reimbursements 26,385 955 (6,485) 20,855
Mortgage note interest 3,110 -- -- 3,110
Other 6,164 150 (184) (954) (5) 5,176
------------ ------------ ------------ ------------ ------------
Total revenue 101,991 3,055 (17,129) (954) 86,963
Expenses:
Property operations 21,247 929 (2,949) 19,227
Real estate taxes 19,149 740 (3,943) 15,946
Depreciation and
amortization 16,638 390 (3,915) 13,113
Interest 21,923 733 (5,094) 17,562
Loss on land development
option 600 -- -- 600
General and
administrative 3,807 -- -- 3,807
------------ ------------ ------------ ------------ ------------
Total expenses 83,364 2,792 (15,901) -- 70,255
------------ ------------ ------------ ------------ ------------
Income before minority
interests 18,627 263 (1,228) (954) 16,708
Minority Interests (5,139) (6) 782 (4,357)
------------ ------------ ------------ ------------ ------------
Net income 13,488 263 (1,228) (172) 12,351
Net income allocated
to preferred
shareholders (6,030) (6,030)
------------ ------------ ------------ ------------ ------------
Net income (loss)
to common
shareholders $ 7,458 $ 263 $ (1,228) $ (172) $ 6,321
============ ============ ============ ============ ============
Average number of
common shares of
beneficial interest
outstanding 15,172 15,172
============ ============
Earnings per weighted
average common share
of beneficial interest,
basic and diluted:
Net income per common
share of beneficial
interest outstanding $ 0.66 $ 0.42
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
Prime Group Realty Trust
Pro Forma Condensed Consolidated Statement of Operations
Year ended December 31, 1998
(in thousands, except per share data)
(unaudited)
<CAPTION>
Sale of
Prime Group 1998 1999 Interest in
Realty Acquisitions Acquisitions 77 W. Wacker Pro Forma
Trust (1) (2) (3) (4) Adjustments As Adjusted
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental $ 97,212 $ 8,968 $ 23,412 $ (20,471) $ -- $ 109,121
Tenant reimbursements 37,545 2,940 11,453 11,779 40,159
Mortgage note interest 5,866 -- -- 5,866
Other 6,978 560 1,797 (653) (5) 2,091 10,773
------------ ------------ ------------ ------------ ------------ ------------
Total revenue 147,601 12,468 36,662 (32,903) 2,091 165,919
Expenses:
Property operations 29,598 3,661 11,908 (5,867) 39,200
Real estate taxes 25,077 2,587 8,881 (5,927) 30,618
Depreciation and
amortization 25,447 1,320 4,944 (7,784) 23,927
Interest 30,901 1,714 11,816 (2,773) 41,658
General and
administrative 5,712 -- -- 5,712
------------ ------------ ------------ ------------ ------------ ------------
Total expenses 116,735 9,283 37,549 (22,451) -- 141,115
------------ ------------ ------------ ------------ ------------ ------------
Income before minority
interests 30,866 3,185 (887) (10,452) 2,091 24,803
Minority Interests (9,368) (6) 4,132 (5,434)
------------ ------------ ------------ ------------ ------------ ------------
Net income(loss) 21,498 3,185 (887) (10,452) 6,223 19,567
Net income allocated to
preferred shareholders (7,971) (7) (4,029) (5,236)
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)
available to common
shareholders 13,527 3,185 (887) (10,452) 2,194 (12,000)
============ ============ ============ ============ ============ ============
Average number of
common shares of
beneficial interest
outstanding 14,863 14,863 14,863
============ ============ ============
Earnings per weighted
average common share
of beneficial interest,
basic and diluted:
Net income per common
share of beneficial
interest outstanding $ 0.91 $ 0.15 $ 0.51
============ ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
Prime Group Realty Trust
Adjustment to Pro Forma Consolidated Condensed Statements of Operations
Six Months Ended June 30, 1999 and Year Ended December 31, 1998
(In thousands, except per share amounts)
(Unaudited)
(1) Represents Prime Group Realty Trust's historical operations for the periods
presented. See our Quarterly report on Form 10-Q for the quarter ended June
30, 1999, our Annual Report on Form 10-K for the fiscal year ended December
31, 1998, and our Current Report on Form 8-K dated February 5, 1999 for
additional information.
(2) For the year ended December 31, 1998, represents the historical operations
of the properties we purchased in 1998 (1998 Acquisitions) prior to our
date of acquisition. The following are the properties we acquired in 1998:
Property Month
Acquired
- - ---------------------------------------------------------- ---------
33 North Dearborn Street January
Commerce Point February
208 South LaSalle Street March
122 South Michigan Avenue April
2100 Swift Drive April
6400 Shafer Court May
Two Century Centre June
2000 York Road June
(3) For the six months ended June 30, 1999 and the year ended December 31,
1998, represents the historical operations of the properties we purchased
in 1999 (1999 Acquisitions) prior to our date of acquisition based upon our
ownership of these properties.
Property Month
Acquired
---------------------------------------------------------- ----------
33 West Monroe Street January
National City Center February
901 Technology Way February
901 Technology Way was a newly constructed building, therefore, it had no
historical operations to report.
For the year ended December 31, 1998, represents the historical operations
of the 1999 Acquisitions under the previous owners.
The amounts reflected for all revenue line items, property operations and
real estate tax expenses represent the historical operations of the
previous owners. The amounts reflected for depreciation amortization and
interest expense are based upon our ownership of these properties.
(4) Represents the removal of 100% of the historical operations of the Property
under our ownership.
(5) Represents our share of the historical operations of the Property under the
ownership structure of the newly formed joint venture.
(6) Represents the adjustment to reflect the minority interests' share of
income before minority interest and extraordinary items added by the 1999
Acquisitions.
This current report on Form 8-K contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
When used in this report, the words "believes", "expects", "anticipates",
"estimates", "projects", and similar words and expressions are generally
intended to identify forward-looking statements. Statements that describe
our future strategic plans, goals, objectives, or expectations are also
forward-looking statements. Readers of this report are cautioned that any
forward-looking statements, including those regarding the intent, belief,
or current expectations of our Company or management, are not guarantees of
future performance, results or events and involve risks and uncertainties,
and that actual results and events may differ materially from those in the
forward-looking statements as a result of various factors, including but
not limited to (i) general economic conditions in the markets in which we
operation, (ii) competitive pressures within the industry and/or the
markets in which we operation, (iii) the effect of future legislation or
regulatory changes on our operations and (iv) other factors described from
time to time in our filings with the Securities and Exchange commission.
The forward-looking statements included in this report are made only as of
the date hereof. We undertake no obligation to update such forward-looking
statements to reflect subsequent events of circumstances.
c) Exhibits
None
SIGNATURE
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
/s/ William M. Karnes
William M. Karnes
Executive Vice President and
Chief Financial Officer
Date: October 15, 1999
