<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
( ) 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 May 14, 1998, 15,572,494 of the Registrant's Common Shares of Beneficial
Interest were outstanding.
1
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Prime Group Realty Trust
Form 10-Q/A
INDEX
Part I: Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited) PAGE
<S> <C>
Consolidated Balance Sheets of Prime Group Realty
Trust as of March 31, 1998 and December 31, 1997 3
Consolidated Statement of Income of Prime Group Realty Trust for the
Three Months Ended March 31, 1998 and the Combined Statement of
Operations of the Predecessor Properties (predecessor to Prime Group
Realty Trust) for the Three Months Ended March 31, 1997 4
Consolidated Statement of Cash Flows of Prime Group
Realty Trust for the Three Months Ended March 31, 1998
and the Combined Statement of Cash Flows of the
Predecessor Properties (predecessor to Prime Group
Realty Trust) for the Three Months Ended March 31, 1997 5 - 6
Notes to Consolidated and Combined Financial Statements
of Prime Group Realty Trust and of the Predecessor
Properties (predecessor to Prime Group Realty Trust) 7 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II: Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20 - 22
Signatures 23
</TABLE>
2
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Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
Prime Group Realty Trust
Consolidated Balance Sheets
(000's omitted, except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1998 December 31,
(Restated) 1997
-------------- -------------
<S> <C> <C>
ASSETS
Real estate, at cost:
Land $ 136,974 $ 92,440
Building and improvements 599,123 496,839
-------------- -------------
736,097 589,279
Accumulated depreciation (6,982) (2,338)
-------------- -------------
729,115 586,941
Mortgage note receivable 56,749 56,263
Cash and cash equivalents 9,587 11,969
Tenant receivables 3,978 3,897
Restricted cash-escrows 29,928 3,175
Deferred rent receivable 37,887 37,751
Deferred costs, net 32,203 28,472
Due from affiliates 5,503 5,258
Other 13,293 7,742
-------------- -------------
Total assets $ 918,243 $ 741,468
-------------- -------------
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage notes payable $ 376,613 $ 249,610
Mortgage note payable - Affiliate -- 3,984
Bonds payable 74,450 74,450
Accrued interest payable 1,884 1,245
Accrued real estate taxes 16,920 17,915
Accounts payable and accrued expenses 14,324 13,903
Liabilities for leases assumed 5,398 5,758
Distributions payable 5,956 2,505
Other 4,451 822
-------------- -------------
Total liabilities 499,996 370,192
Minority interests:
Operating Partnership 148,464 147,207
Other 1,000
Shareholders' equity:
Preferred Shares, $.01 par value; 30,000,000 shares authorized, 2,000,000
Series A Cumulative Convertible Preferred Shares issued and outstanding
20 20
Common Shares, $.01 par value; 100,000,000 shares authorized; 15,572,494 and
12,980,000 shares issued and outstanding at March 31, 1998 and December 31,
1997, respectively
156 130
Additional paid-in capital 273,050 225,632
Distributions in excess of earnings (4,443) (1,713)
-------------- -------------
Total shareholders' equity 268,783 224,069
-------------- -------------
Total liabilities and shareholders' equity $ 918,243 $ 741,468
-------------- -------------
-------------- -------------
</TABLE>
See notes to consolidated and combined financial statements.
3
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Prime Group Realty Trust (the Company)
and Predecessor Properties (the Predecessor to the Company)
Consolidated Statement of Income of the Company and
Combined Statement of Operations of the Predecessor
(000's omitted, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------------------------
1998 1997
---------------------- ------------------
PRIME GROUP REALTY PREDECESSOR
TRUST PROPERTIES
(Restated)
<S> <C> <C>
REVENUE
Rental $18,085 $ 7,986
Tenant reimbursements 8,375 4,206
Parking 145 76
Mortgage note interest 1,507 --
Other 639 350
---------------------- ------------------
Total revenue 28,751 12,618
EXPENSES
Property operations 5,056 2,357
Real estate taxes 5,358 2,823
Depreciation and amortization 5,335 3,079
Interest 6,415 6,568
Interest - Affiliates -- 2,930
Financing fees -- 368
Property and asset management fees - Affiliates -- 389
General and administrative 1,396 979
---------------------- ------------------
Total expenses 23,560 19,493
---------------------- ------------------
Income (loss) before minority interest 5,191 (6,875)
Minority interest (1,965) 259
---------------------- ------------------
Net income (loss) 3,226 $(6,616)
------------------
------------------
Net income allocated to preferred shareholders (700)
----------------------
Net income available to common shareholders $ 2,526
----------------------
----------------------
Net income available per weighted-average common share of
beneficial interest - Basic and diluted $ 0.19
----------------------
----------------------
</TABLE>
See notes to consolidated and combined financial statements.
4
<PAGE>
Prime Group Realty Trust (the Company)
and Predecessor Properties (the Predecessor to the Company)
Consolidated Statement of Cash Flows of the Company and
Combined Statement of Cash Flows of the Predecessor
(000's omitted)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------------------------
1998 1997
---------------------- -------------------
PRIME GROUP REALTY PREDECESSOR
TRUST PROPERTIES
(Restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net income(loss) $ 3,226 $(6,616)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of costs for leases assumed (included in rental
revenue) 291 311
Depreciation and amortization 5,335 3,079
Interest added to principal on mortgage note payable -
Affiliate -- 2,758
Standby loan fee-affiliate added to principal on mortgage note
payable - Affiliate -- 130
Minority interest 1,965 (259)
Changes in operating assets and liabilities:
(Increase) decrease in tenant receivables (81) 167
(Increase) decrease in deferred rent receivable (136) 115
(Increase) decrease in other assets (5,987) 410
Increase (decrease) in accrued interest payable 639 (185)
Decrease in accrued real estate taxes (995) (1,149)
Increase (decrease) in accounts payable and accrued expenses 181 (2,842)
Decrease in liabilities for leases assumed (65) (263)
Increase in other liabilities 3,629 1,286
---------------------- -------------------
Net cash provided by (used in) operating activities 8,002 (3,058)
</TABLE>
5
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Prime Group Realty Trust (the Company)
and Predecessor Properties (the Predecessor to the Company)
Consolidated Statement of Cash Flows of the Company and
Combined Statement of Cash Flows of the Predecessor (Continued)
(000's omitted)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------------------------
1998 1997
----------------------- -------------------
PRIME GROUP REALTY PREDECESSOR
TRUST PROPERTIES
(Restated)
<S> <C> <C>
INVESTING ACTIVITIES
Expenditures for real estate $(146,818) $(1,314)
Leasing costs (1,789) (676)
Additions to mortgage note receivable (86) --
Increase in escrow deposits for property acquisitions (26,753) --
(Increase) decrease in due from affiliates (245) 1,857
----------------------- -------------------
Net cash used in investing activities (175,691) (133)
FINANCING ACTIVITIES
Proceeds from the private placement of common shares 47,194 --
Proceeds from mortgage notes payable 155,230 --
Proceeds from mortgage notes payable - Affiliate -- 1,384
Repayment of mortgage notes payable (27,529) (28)
Repayment of mortgage note payable - Affiliate (3,984) --
Financing costs (2,393) --
Decrease in due to affiliates -- (26)
Contributions from minority interest - Other 1,000 --
Distribution to minority interest - Operating partnership (1,706) --
Distributions to partners -- (3)
Dividends paid to preferred shareholders (345) --
Dividends paid to common shareholders (2,160) --
----------------------- -------------------
Net cash provided by financing activities 165,307 1,327
----------------------- -------------------
Net decrease in cash and cash equivalents (2,382) (1,864)
Cash and cash equivalents at beginning of period 11,969 5,573
----------------------- -------------------
Cash and cash equivalents at end of period $ 9,587 $ 3,709
----------------------- -------------------
----------------------- -------------------
</TABLE>
See notes to consolidated and combined financial statements.
6
<PAGE>
Prime Group Realty Trust (the Company)
and Predecessor Properties (the Predecessor to the Company)
Notes to Consolidated and Combined 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 three month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. 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 fiscal year ended December 31, 1997
as filed with the Securities and Exchange Commission on March 31, 1998 ("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 formed in Maryland on July 21, 1997
to succeed and expand the office and industrial real estate business of The
Prime Group, Inc. ("PGI"), which consisted of a portfolio of five office and 17
industrial properties, as well as a parking garage facility and the office and
industrial real estate ownership, acquisition, development, leasing and
management businesses historically conducted by PGI. On November 17, 1997, the
Company completed its initial public offering (the "IPO" or "Offering") of 12.98
million common shares of beneficial interest ("Common Shares") and the private
placement of 2.0 million Series A Cumulative Convertible Preferred Shares
("Preferred Shares") of beneficial interest (the "Preferred Share Private
Placement"). The Company's assets are owned and controlled by, and all of its
operations are conducted through, Prime Group Realty, L.P. (the "Operating
Partnership") and other subsidiaries.
3. INCOME TAXES
Commencing with the period ended December 31, 1997, it is the intent of the
Company to qualify as a real estate investment trust ("REIT") under the Internal
Revenue Code of 1986, as amended. As a REIT, the Company generally will not be
subject to federal income tax to the extent that it distributes at least 95% of
its REIT taxable income to its shareholders. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT in any taxable year, the Company will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate tax rates.
7
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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, 1998 through March 31, 1998 the Company
acquired the following three office properties:
<TABLE>
<CAPTION>
NET MORTGAGE
RENTABLE ACQUISITION DEBT (*)
SQUARE COST (IN (IN MONTH
PROPERTY LOCATION FEET MILLIONS MILLIONS) ACQUIRED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
33 North Dearborn Chicago, IL 302,818 $ 34.3 $18.0 1/98
Commerce Point Arlington Hts., IL 235,269 29.2 20.0 2/98
208 South LaSalle Street Chicago, IL 827,494 61.1 45.8 3/98
---------------------------------------
1,365,581 $124.6 $83.8
---------------------------------------
---------------------------------------
</TABLE>
(*) See "Liquidity and Capital Resources" for a description of the debt terms.
Concurrently with the closing of the IPO, the Company obtained a secured
revolving credit facility from a group of financial institutions (the "Credit
Facility"). In March 1998, the Credit Facility was amended to provide that the
commitments under the Credit Facility be reduced from $235.0 million to $200.0
million. In April 1998, the Credit Facility was further amended to provide that
the commitments under the Credit Facility be reduced to $190.0 million upon the
earlier of May 15, 1998 or the refinancing of the mortgage note receivable on
the office property known as Continental Towers (see Note 8).
In January 1998, the Company obtained a $15.0 million revolving line of credit
with LaSalle National Bank (the "Line of Credit"). The Line of Credit, which
matures in January 1999 and is subject to a one-year extension at the Company's
option, is collateralized by an industrial property known as 475 Superior
Avenue. Outstanding balances under the Line of Credit bear interest at a rate
equal to LIBOR plus 195 basis points. Generally, the covenants contained in the
Line of Credit are identical to the covenants contained in the Credit Facility.
Concurrently with the closing of the IPO, the Company borrowed $83.5 million in
financing on a short-term basis evidenced by two separate notes (the "New
Mortgage Notes") which were collateralized by first mortgages on certain office
and industrial properties. On March 23, 1998, the Company refinanced one of the
New Mortgage Notes (original principal balance of $27.5 million) with a loan of
$29.4 million which matures on March 23, 2008. Interest on this loan is fixed at
a rate of 6.85% and is payable monthly. The remaining New Mortgage Note
(original principal balance of $56.0 million) was refinanced on May 1, 1998 with
two loans, the first of which is a $47.0 million loan which has principal and
interest payable monthly, using a 30-year amortization
8
<PAGE>
period, with interest fixed at 7.15% and will mature on April 30, 2008. The
second loan is a $14.6 million loan which has interest only payable monthly at
150 basis points over LIBOR or 0.50% plus the greater of (a) the lender's U.S.
prime rate or (b) the Federal Funds Rate plus 1.0% and will mature on April 30,
2000, not including a 6-month extension option. The refinanced notes are
collateralized by first mortgages on certain office and industrial properties.
During the three months ended March 31, 1998, the Company issued 12,500 Common
Shares granted to an officer and a board member of the Company, pursuant to
their employment and a consulting agreements.
On March 25, 1998, the Company completed a private placement of 2.58 million
common shares to institutional investors (the "Private Placement"). The Company
received net proceeds of approximately $47.2 million from the Private Placement,
which were used to fund the acquisition of the office properties located at 208
South LaSalle Street and 122 South Michigan Avenue (an April 1998 acquisition).
On March 30, 1998, the Company entered into a joint venture that acquired an
approximately 67,000 square foot vacant parcel of land located in the Chicago,
Illinois central business district ("Chicago CBD"). The parcel was acquired for
the potential development of a Class A multi-purpose facility, with up to
900,000 square feet of office space, 125,000 square feet of retail space and a
parking garage with a capacity for approximately 250 cars. The Company has
economic control of the joint venture and, therefore, the Company has
consolidated the operations of the joint venture from the date of inception. The
venture entered into a bank loan in the amount of $13.5 million to acquire the
land. Interest is payable monthly at a rate of LIBOR plus 200 basis points. The
note matures in April 1999, not including a six-month extension option. The
other joint venturer's interest has been reflected as minority interest - other
at March 31, 1998.
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
period from January 1, 1998 through March 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Numerator:
Net income available to common shareholders
(in 000's) $ 2,526
-----------
-----------
Denominator:
Denominator for basic earnings per share-
weighted-average common shares 13,180,667
Employee stock options 40,243
-----------
Denominator for diluted earnings per share-
weighted average common shares $13,220,910
-----------
-----------
Basic and diluted available to common shares per weighted-average common
share $ 0.19
-----------
-----------
</TABLE>
Options to purchase 1,160,500 Common Shares at $20.00 per share were outstanding
during the period from January 1, 1998 through March 31, 1998 and options to
purchase 29,500 Common Shares at $20.1875 per share were outstanding during the
period from March 6, 1998 through March 31, 1998.
9
<PAGE>
These options were included in the computation of diluted earnings per share
because the options' exercise price was lower than the average market price of
the common shares and, therefore, the effect would be dilutive.
The Company had 10,265,882 Common Units outstanding during the period from
January 1, 1998 through March 31, 1998, of which 9,338,782 ("Convertible Common
Shares") may be converted into Common Shares, after one year from the completion
of the Offering at the option of the Company. The Convertible Common Units, on a
one for one basis, were not included in the computation of diluted earnings per
share because the conversion would be antidilutive.
The Company had 2,000,000 Preferred Shares outstanding during the period from
January 1, 1998 through March 31, 1998 which were not included in the
computation of diluted earnings per share because the conversion would be
antidilutive.
7. 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, 1997, (i) the
Company had completed the Offering, the Preferred Share Private Placement and
the Private Placement and used the net proceeds to acquire Preferred Units and
Common Units of the Operating Partnership, (ii) PGI and other individuals had
contributed certain of their respective properties and operations (the
"Contribution Properties") to the Operating Partnership, (iii) the Operating
Partnership had completed the sale of Common Units to Primestone Joint Venture,
(iv) the Operating Partnership acquired various office and industrial properties
with cash and debt proceeds (the "Acquisition Properties") and a property
management company from various third parties, and (v) the Operating Partnership
repaid debt on certain of the Contribution Properties. The unaudited Pro Forma
Condensed Consolidated Statements of Operations should be read in conjunction
with the unaudited Pro Forma Condensed Consolidated financial statements and all
of 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
Offering, the Preferred Share Private Placement, the Private Placement and other
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 Offering, the Preferred Share Private Placement,
the Private Placement and other transactions described above had occurred at the
dates indicated above, nor do they purport to present the future results of
operations of the Company.
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1998 1997
------- -------
<S> <C> <C>
Total revenue (in 000's) $33,194 $30,534
------- -------
------- -------
Net income (in 000's) $ 3,597 $ 3,983
------- -------
------- -------
Earnings per diluted common share $ 0.19 $ 0.21
------- -------
------- -------
</TABLE>
Pro forma earnings per common share decreased by $0.02 from the three months
ended March 31, 1997 to the three months ended March 31, 1998 primarily due to a
major tenant of the 77 West Wacker Drive building defaulting on their lease in
the second quarter of 1997. This resulted in lower rental income for that space
in the first quarter of 1998 as compared to the first quarter of 1997.
8. SUBSEQUENT EVENTS
In April 1998, the Company acquired the following two office properties:
<TABLE>
<CAPTION>
ACQUISITION
NET RENTABLE COST (IN MORTGAGE DEBT
PROPERTY LOCATION SQUARE FEET MILLIONS) (IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
122 South Michigan Chicago, IL 512,660 $29.7 $ --
2100 Swift Drive Oak Brook, IL 58,000 7.4 5.0
----------- -------- --------
570,660 $37.1 $5.0
----------- -------- --------
----------- -------- --------
</TABLE>
On May 15, 1998, the Company obtained a 7.22% note payable, collateralized by
the Company's mortgage note receivable encumbering a suburban office building
known as Continental Towers, with a principal balance of $75.0 million. The note
matures in 2013, with a prepayment option in 2005, and has monthly payments of
principal and interest, using a 25-year principal amortization payment schedule.
The Company used $70.0 million of the proceeds to repay a portion of the Credit
Facility.
As of May 15, 1998 the Company was party to contracts to acquire the following
two office buildings (the "Pending Acquisitions"):
<TABLE>
<CAPTION>
ESTIMATED
ACQUISITION
NET RENTABLE COST
PROPERTY LOCATION SQUARE FEET (IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Two Century Centre Schaumburg, IL 217,960 $34.6
6400 Shafer Court Rosemont, IL 167,495 21.4
----------- -----------
385,455 $56.0
----------- -----------
----------- -----------
</TABLE>
The Company expects to complete the Pending Acquisitions by mid-1998; however,
the purchase of the Pending Acquisitions is subject to the Company's completion
of due diligence and the satisfaction of other customary closing conditions and
there can be no assurance that any or all of the Pending Acquisitions will be
completed.
On May 1, 1998, the Company filed a registration statement with the Securities
and Exchange Commission for the proposed registration of $125.0 million of the
Company's preferred stock.
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is a fully-integrated real estate company providing property
management, leasing, marketing, acquisition, development, redevelopment,
construction, finance and other related services. As of March 31, 1998, the
Company expects to qualify as a REIT for federal income tax purposes. The
Company (through the Operating Partnership) owns 21 office properties ("Office
Properties") containing an aggregate of approximately 4.7 million net rentable
square feet, 45 industrial properties ("Industrial Properties") containing an
aggregate of approximately 5.8 million net rentable square feet, one retail
center and one parking facility. The properties are located primarily in the
Chicago metropolitan area. As of March 31, 1998, the Office Properties and the
Industrial Properties generated 76.6% and 23.4%, respectively, of the Company's
annualized net rent. In addition, the Company owns a mortgage on an office
property containing 728,406 net rentable square feet. The Company also owns
approximately 85.0 acres (including a development site containing approximately
67,000 square feet located in the Chicago CBD held by a joint venture with a
third party) and has rights to acquire approximately 157 acres of developable
land (including rights to acquire a development site located in the Chicago CBD
containing approximately 58,000 square feet), which management believes could be
developed with approximately 3.0 million square feet of additional office space
and over 4.4 million square feet of additional industrial space primarily in the
Chicago metropolitan area.
In terms of net rentable square feet, approximately 91.7% of the Office
Properties and 87.4% of the 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 93.7% of the Company's annualized net rent. The remaining Office
Properties are located in Nashville, Tennessee; Knoxville, Tennessee; and the
Milwaukee, Wisconsin metropolitan areas, and the remaining Industrial Properties
are located in the Columbus, Ohio metropolitan area. The Company intends to
continue to invest in the acquisition, development and redevelopment of office
and industrial properties primarily located in the Chicago metropolitan area.
The Company intends to access multiple sources of capital to fund future
acquisition and development activities. These capital sources may include
undistributed cash flow, borrowings under certain acquisition facilities,
proceeds from the issuance of long-term, tax-exempt bonds, 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 in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain 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
the Company's financial performance; the risk that the Company may be unable to
finance its planned acquisition and development
12
<PAGE>
activities; risks related to the industrial and office industry in which the
Company's properties compete, including the potential adverse impact of external
factors such as inflation, consumer confidence, unemployment rates and consumer
tastes and preferences; risks associated with the Company's 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; and 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 the Company's properties.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 OF THE COMPANY TO THE THREE
MONTHS ENDED MARCH 31, 1997 OF THE PREDECESSOR PROPERTIES
In analyzing the operating results for the quarter ended March 31, 1998, the
changes in rental and tenant reimbursements income, property operating expenses,
real estate taxes and depreciation and amortization from 1997 are due
principally to the addition of operating results from properties contributed and
acquired as part of the Company's IPO as well as properties acquired after the
IPO through March 31, 1998.
The Predecessor Properties consisted of five office properties, 17 industrial
properties, as well as a parking garage facility. At the time of the IPO, 11
additional office properties, 28 additional industrial properties and one retail
center were contributed or acquired. After the date of the IPO and through March
31, 1998, the Company acquired five additional office properties and the first
mortgage note encumbering one office property as described in the footnotes to
the Company's Form 10-K.
For the three months ended March 31, 1998, rental revenue increased $10.1
million, or 126.3%, to $18.1 million, tenant reimbursement income increased $4.2
million, or 100.0%, to $8.4 million, property operating expenses increased $2.7
million, or 112.5%, to $5.1 million, real estate tax expense increased $2.5
million, or 89.3%, to $5.4 million and depreciation and amortization increased
$2.3 million, or 74.2%, to $5.3 million as compared to the three months ended
March 31, 1997. The additional office and industrial properties resulted in
increased rental revenue of $10.6 million, tenant reimbursements income of $4.3
million, property operating expenses of $2.5 million, real estate tax expense of
$2.5 million and depreciation and amortization of $2.3 million for the three
months ended March 31, 1998. Rental revenue and tenant reimbursement income for
the Predecessor Properties decreased $0.5 million and $0.1 million,
respectively, for the three months ended March 31, 1998, due to a major tenant
of the 77 West Wacker Drive building defaulting on their lease in the second
quarter of 1997. Property operating expenses, real estate tax expense and
depreciation and amortization for the Predecessor Properties for the three
months ended March 31, 1998 remained consistent with the same period in 1997.
Mortgage note interest income increased by $1.5 million due to the acquisition
of the first mortgage note encumbering the property known as 180 North LaSalle.
Interest expense had a net decrease of $3.1 million, or 32.6%, to $6.4 million
during the three months ended March 31, 1998. The decrease was due to an $8.8
million decrease as a result of the repayment of debt with proceeds from the
13
<PAGE>
Company's IPO, offset by an increase of $5.7 million due to mortgages obtained
on certain of the properties which were contributed or acquired after the IPO,
as well as a Credit Facility and Line of Credit borrowings used to fund property
acquisitions.
General and administrative expense increased $0.4 million, or 40.0%, to $1.4
million during the three months ended March 31, 1998, representing the expenses
associated with the corporate functions of the Company.
Income allocated to minority interest increased $2.2 million to $2.0 million for
the three months ended March 31, 1998 due to an increase in income before
minority interest of $12.1 million, or 175.4%, to $5.2 million and a change in
the ownership structure from the three months ended March 31, 1997. The increase
in income before minority interest is due to the additional properties either
contributed or acquired and the effects they had on revenue and expenses
described above. The change in ownership structure is due to the effects of the
IPO.
Net income increased $9.8 million to $3.2 million for the three months ended
March 31, 1998 due to the changes in revenue, expenses and minority interest
described above.
LIQUIDITY AND CAPITAL RESOURCES
THE CREDIT FACILITY. As of March 31, 1998, the Company has a Credit
Facility of $200.0 million from BankBoston, N.A. and Prudential Securities
Credit Corporation ("PSCC"), an affiliate of Prudential Securities Incorporated.
Borrowings under the Credit Facility are available to fund acquisitions and
development activities and to provide letters of credit for the $26.0 million of
Tax-Exempt Bonds. The Credit Facility, which matures on November 17, 2000, is
collateralized by the 77 West Wacker Building, all of the properties located in
Tennessee and was secured by a pledge of the Company's mortgage note receivable
on Continental Towers until May 15, 1998 when the Company repaid $70.0 million
of the Credit Facility in connection with obtaining the $75.0 million loan
collateralized Continental Towers described below. Concurrently with the loan
transaction, the Credit Facility was reduced to $190.0 million.
The Credit Facility, at the Company's election, bears interest on Eurodollar
loans at a floating rate based on a spread over the Eurodollar rate equal to 120
to 150 basis points, depending upon the Company's applicable leverage ratio, or
the higher of BankBoston's prime rate or the federal funds rate plus 50 basis
points. Notwithstanding the foregoing, the Credit Facility was amended to
provide that for the period from December 15, 1997 through February 14, 1998,
the spread over the Eurodollar rate applicable to Eurodollar loans was equal to
175 basis points and for the period from February 15, 1998 through May 15, 1998,
such spread was equal to 200 basis points. Borrowings under the Credit Facility
may be repaid at any time, without penalty, except for the costs related to the
breakage of the Eurodollar rate loan, if any. The Credit Facility requires
monthly payments of interest only on prime rate and Eurodollar rate loans.
Eurodollar rate loans may be for periods of between 30 and 180 days. At March
31, 1998 borrowings under the Credit Facility bore interest at a
weighted-average rate equal to 7.6%.
14
<PAGE>
The Company's ability to borrow under the Credit Facility is subject to the
Company's ongoing compliance with a number of financial and other covenants. The
Credit Facility, except under certain circumstances, limits the Company's
ability to make distributions in excess of 90% of its annual Funds from
Operations.
Since the IPO, the Credit Facility has been amended from time to time to, among
other things, modify the loan commitments and the interest rate payable
thereunder, and the Company has obtained several limited waivers from the
lenders under the Credit Facility in connection with certain acquisitions.
NEW MORTGAGE NOTES. The Company borrowed $83.5 million aggregate principal
amount under the New Mortgage Notes. PSCC provided the original New Mortgage
Notes financing on a short-term basis. The New Mortgage Notes consist of two
separate notes secured, respectively, by first mortgages on certain office and
industrial properties. Prior to their refinancing, interest on the New Mortgage
Notes was fixed at 7.19% (a rate equal to seven-year U.S. Treasury Notes, plus
1.27%). On March 23, 1998, the Company refinanced one of the New Mortgage Notes
(original principal balance of $27.5 million) with a loan of $29.4 million,
which matures on March 23, 2008. Interest on this loan accrues at a rate of
6.85% and is payable monthly. The remaining New Mortgage Note (original
principal balance of $56.0 million) was refinanced on May 1, 1998 with two
loans, the first of which is a $47.0 million loan which has principal and
interest payable monthly, using a 30-year amortization period, with interest
fixed at 7.15% and will mature on April 30, 2008. The second loan is a $14.6
million loan which has interest only payable monthly at 150 basis points over
LIBOR or 0.50% plus the greater of (a) the lender's U.S. prime rate or (b) the
Federal Funds rate plus 1.0% and will mature on April 30, 2001, plus a 6 month
extention option. The refinanced notes are collateralized by first mortgages on
certain office and industrial properties.
1998 MORTGAGE NOTES. The Company obtained a variable rate mortgage note
payable, collateralized by a Chicago CBD office property, with a principal
balance of $18.0 million. The note bears interest at LIBOR plus 165 basis
points, with monthly interest only payments. The note matures in 2001. The
Company obtained a 7.15% mortgage note payable, collateralized by a suburban
office property, with a principal balance of $20.0 million. The note matures in
2008 and has monthly principal and interest payments, using a 30-year principal
amortization payment schedule.
The Company obtained a 7.785% mortgage note payable, collateralized by a
downtown office property, with a principal balance of $45.8 million. The note
matures in 2013 and has monthly principal and interest, using a 30-year
principal amortization payment schedule.
On May 15, 1998, the Company obtained a 7.22% note payable, collateralized by
the Company's note receivable encumbering a suburban office building known as
Continental Towers, with a principal balance of $75.0 million. The note matures
in 2013, with a prepayment option in 2005, and has monthly payments of principal
and interest, using a 25-year principal amortization payment schedule. The
Company used $70.0 million of the proceeds to repay a portion of the Credit
Facility.
The Company obtained a $15.0 million revolving line of credit with LaSalle
National Bank (the "Line of Credit"). The Line of Credit, which matures in
January 1999 and is subject to a one-year extension at the Company's option,
15
<PAGE>
is collateralized by an industrial property known as 475 Superior Avenue.
Outstanding balances under the Line of Credit bear interest at a rate equal to
LIBOR plus 195 basis points. Generally, the covenants contained in the Line of
Credit are identical to the covenants contained in the Credit Facility.
LETTERS OF CREDIT. The Company has refinanced $48.5 million of letters of
credit that provided credit enhancements on certain of the Company's bonds
payable from the Credit Facility to a separate financing facility provided by a
financial institution (the "New LOC's"). The New LOC's have a quarterly fee of
1.4% of the face amount of the letters of credit and are collateralized by
mortgages on certain industrial and office properties and a $5.0 million cash
collateral account.
16
<PAGE>
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES. The Company expects to meet
its short-term liquidity requirements generally through its working capital and
net cash provided by operations. The properties require periodic investments of
capital for tenant-related capital expenditures and for general capital
improvements. Over the past three years, the Company's recurring tenant
improvements and leasing commissions for the Predecessor Properties averaged
$4.47 per square foot of leased space and $0.40 per square foot of leased
industrial space per year. The Company expects that the average annual cost of
recurring tenant improvements and leasing commissions will be approximately $3.6
million based on an average annual square footage for which leases expire during
the period from April 1, 1998 through March 31, 2001. The Company expects the
cost of general capital improvements to the properties to average approximately
$0.9 million annually based upon an estimate of $0.08 per square foot.
The Company expects to meet its long-term liquidity requirements for the funding
of property development, property acquisitions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness (including the
Credit Facility), joint venture agreements and the issuance of additional equity
securities from the Company. The terms of the Credit Facility and the
Convertible Preferred Shares impose restrictions on the Company's ability to
incur indebtedness and issue additional preferred shares.
HISTORICAL CASH FLOWS
The Company had net cash provided by (used in) operating activities of $8.0
million and ($3.1) million for the three months ended March 31, 1998 and 1997,
respectively. The $11.3 million increase is primarily due to a $9.8 million
increase in net income, a $2.2 million increase in depreciation and amortization
expense, a $2.2 million increase in income allocated to minority interest, a
$0.8 million increase in accrued interest, a $3.3 million increase in accounts
payable and accrued expenses, and a $2.3 million increase in other liabilities,
offset by a $2.9 million decrease in interest expense and fees added to
principal on mortgage note payable-affiliate and a $6.4 million increase in
other assets.
The Company had net cash provided by (used in) investing activities of ($175.7)
million and $0.1 million for the three months ended March 31, 1998 and 1997,
respectively. The $175.8 million increase in net cash used in investing
activities from the period ended March 31, 1997 through the period ended March
31, 1998 was primarily due to an $145.5 increase in expenditures for real estate
and equipment, principally related to the acquisition of five properties during
the period November 17, 1997 to March 31, 1998, $26.8 million in escrow deposits
for future acquisitions, a $2.2 million net increase in advances to affiliates
and $1.2 million in leasing costs.
The Company had net cash provided by financing activities of $165.3 million and
$1.3 million for the three months ended March 31, 1998 and 1997, respectively.
The $163.8 million increase in net cash provided by financing activities from
the period ended March 31, 1997 through the period ended March 31, 1998 was due
to net proceeds of $47.2 million from the Private Placement, net proceeds from
mortgage notes payable of $123.7 million and additional minority interest
contributions of $1.0 million, offset by distributions to preferred
shareholders, common shareholders and minority interest of $4.2 million.
17
<PAGE>
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. The Company believes 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 (loss) as presented in the unaudited financial statements
included elsewhere in this Form 10-Q. The following table represents the
unaudited calculation of the Company's Funds from Operations for the three
months ended March 31,1998:
18
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS) PRO FORMA (1) ACTUAL
------------- --------
<S> <C> <C>
Net income allocated to common shareholders $ 2,897 $2,526
Adjustments to reconcile to Funds from Operations:
Real estate depreciation and amortization 5,467 5,015
Amortization of costs for leases assumed 291 291
Straight-line rental revenue (28) (28)
Minority interest 2,254 1,965
------------- --------
Funds from Operations (2) $10,881 $9,769
------------- --------
------------- --------
</TABLE>
(1) The pro forma calculation of Funds from Operations of the Company is
presented as if, at January 1, 1998, (i) the Company had completed the
Preferred Share Private Placement and the Private Placement and used
the net proceeds to acquire Preferred Units and Common Units of the
Operating Partnership, (ii) the Operating Partnership had acquired the
various office and industrial properties acquired during the three
months ended March 31, 1998 and (iii) the Operating Partnership repaid
certain indebtedness. The unaudited pro forma calculation of Funds from
Operations should be read in conjunction with unaudited Pro Forma
Condensed Consolidated financial statements contained in the Company's
Form 10-K. In management's opinion, all adjustments necessary to
reflect the effects of the Preferred Share Private Placement have been
made.
(2) The Company computes 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 the company reports rental revenues on a
cash basis (e.g., based on contractual lease terms), rather than a
straight-line GAAP basis, which the Company believes 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 the Company's
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 the Company's
performance or to cash flows as a measure of liquidity or the ability
to pay dividends or make distributions.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
19
<PAGE>
On March 25, 1998, the Company issued and sold 2,579,994
Common Shares to institutional investors for $19.375 per
share, or an aggregate consideration of approximately $50.0
million.
On March 31, 1998, the Company issued (i) 10,000 Common Shares
to William M. Karnes pursuant to the terms of Mr. Karnes'
employment agreement with the Company and (ii) 2,500 Common
Shares to Stephen J. Nardi pursuant to the terms of Mr.
Nardi's consulting agreement with the Company.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
20
<PAGE>
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
3.1* Articles of Amendment and Restatement of Declaration of Trust of Prime
Group Realty Trust as filed as an exhibit to the Company's 1997 Annual
Report on Form 10-K and incorporated herein by reference
3.2* Amended and Restated Bylaws of Prime Group Realty Trust as filed as an
exhibit to the Company's 1997 Annual Report on Form 10-K and
incorporated herein by reference.
3.3* Amended and Restated Agreement of Limited Partnership of Prime Group
Realty, L.P. (the "Amended and Restated Agreement of Limited
Partnership") as filed as an exhibit to the Company's 1997 Annual
Report on Form 10-K and incorporated herein by reference.
3.4* Amendment No. 1 to the Amended and Restated Agreement of Limited
Partnership dated as of December 15, 1998 as filed as an exhibit to
Amendment No. 1 to the Company's Registration Statement on Form S-11
(No. 333-51599) as filed with the Securities and Exchange Commission
on May 14, 1998 and incorporated herein by reference
3.5* Amendment No. 2 to the Amended and Restated Agreement of Limited
Partnership dated as of December 15, 1998 as filed as an exhibit to
Amendment No. 1 to the Company's Registration Statement on Form S-11
(No. 333-51599) as filed with the Securities and Exchange Commission
on May 14, 1998 and incorporated herein by reference
3.6* Amendment No. 3 to the Amended and Restated Agreement of Limited
Partnership dated as of January 15, 1998 as filed as an exhibit to
Amendment No.1 to the Company's Registration Statement on Form S-11
(No. 333-51599) as filed with the Securities and Exchange Commission
on May 14, 1998 and incorporated herein by reference
3.7* Amendment No. 4 to the Amended and Restated Agreement of Limited
Partnership dated as of February 13, 1998 as filed as an exhibit to
Amendment No. 1 to the Company's Registration Statement on Form S-11
(No. 333-51599) as filed with the Securities and Exchange Commission
on May 14, 1998 and incorporated herein by reference
3.8* Amendment No. 5 to the Amended and Restated Agreement of Limited
Partnership dated as of March 13, 1998 as filed as an exhibit to
Amendment No. 1 to the Company's Registration Statement on Form S-11
(No. 333-51599) as filed with the Securities and Exchange Commission
on May 14, 1998 and incorporated herein by reference.
3.9* Amendment No. 6 to the Amended and Restated Agreement of Limited
Partnership dated as of March 25, 1998 as filed as an exhibit to
Amendment No. 1 to the Company's Registration Statement on Form S-11
(No. 333-51599) as filed with the Securities and Exchange Commission
on May 14, 1998 and incorporated herein by reference.
10.1* Amendment No. 2 to the Credit Facility dated as of March 16, 1998
21
<PAGE>
as filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-11 (No. 333-51599) as filed with the
Securities and Exchange Commission on May 14, 1998 and incorporated
herein by reference.
10.2* Amendment No. 3 to the Credit Facility dated as of March 30, 1998 as
filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-11 (No. 333-51599) as filed with the Securities
and Exchange Commission on May 14, 1998 and incorporated herein by
reference.
10.3* Purchase Agreement dated as of March 25, 1998 between Prime Group
Realty Trust and the purchasers thereto as filed as an exhibit to
Amendment No.1 to the Company's Registration Statement on Form S-11
(No. 333-51599) as filed with the Securities and Exchange Commission
on May 14, 1998 and incorporated herein by reference.
10.4* Registration Rights Agreement dated as of March 25, 1998 between Prime
Group Realty Trust and the other parties thereto as filed as an
exhibit to Amendment No. 1 to the Company's Registration Statement on
Form S-11 (No. 333-51599) as filed with the Securities and Exchange
Commission on May 14, 1998 and incorporated herein by reference.
10.5* Limited Liability Company Agreement of Prime/Beitler Development
Company, L.L.C. dated as of March 30, 1998 between Penny Beitler
L.L.C. and Prime Group Realty, L.P. as filed as an exhibit to
Amendment No.1 to the Company's Registration Statement on Form S-11
(No. 333-51599) as filed with the Securities and Exchange Commission
on May 14, 1998 and incorporated herein by reference
.......................
* Previously Filed
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K and Form 8-K/A
relating to the acquisition of certain real estate properties and the
required financial information: Form 8-K on January 14, 1998; Form
8-K/A on February 27, 1998; Form 8-K on March 6, 1998 and Form 8-K/A
on March 30, 1998.
22
<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: May 14, 1999
/s/ Richard S. Curto
-----------------
Richard S. Curto
President and Chief Executive
Officer
Date: May 14, 1999 /s/ William M. Karnes
-----------------
William M. Karnes
Executive Vice President and
Chief Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,587
<SECURITIES> 0
<RECEIVABLES> 98,614
<ALLOWANCES> 0
<INVENTORY> 80,927<F1>
<CURRENT-ASSETS> 0
<PP&E> 736,097
<DEPRECIATION> 6,982
<TOTAL-ASSETS> 918,243
<CURRENT-LIABILITIES> 198,397<F2>
<BONDS> 451,063
0
20
<COMMON> 156
<OTHER-SE> 268,607
<TOTAL-LIABILITY-AND-EQUITY> 918,243
<SALES> 0
<TOTAL-REVENUES> 28,751
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,110<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,415
<INCOME-PRETAX> 3,226
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,226
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
<FN>
<F1>Amount includes restricted cash escrows ($29,928), net deferred costs ($32,203)
and other assets ($13,293).
<F2>Amount includes accrued interest payable ($1,884), accrued real estate taxes
($16,920), accounts payable and accrued expenses ($14,324), liabilities for
leases assumed ($5,398), dividends payable ($5,956), other liabilities
($4,451) and minority interests of ($149,464).
<F3>Amount includes property operations ($5,056), real estate taxes ($5,358),
depreciation and amortization ($5,335), general and administrative expenses
($1,396) and minority interest allocation of ($1,965).
</FN>
</TABLE>
